UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] 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 0-9109 Commission file number 0-9110
MEDITRUST CORPORATION MEDITRUST OPERATING COMPANY
(Exact name of registrant as specified in its charter) (Exact name of registrant as specified in it charter)
DELAWARE DELAWARE
(State or other jurisdiction of incorporation or (State or other jurisdiction of incorporation or
organization) organization)
95-3520818 95-3419438
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
909 HIDDEN RIDGE, SUITE 600 909 HIDDEN RIDGE, SUITE 600
IRVING, TX 75038 IRVING, TX 75038
(Address of principal executive offices including (Address of principal executive offices including
zip code) zip code)
(214) 492-6600 (214) 492-6600
(Registrant's telephone number, including area code) (Registrant's telephone number, including area code)
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 [ ]
The number of shares outstanding of each of the issuers' classes of common
stock, as of the close of business on October 26, 2000, were:
Meditrust Corporation: 143,450,079
Meditrust Operating Company: 142,144,702
THE MEDITRUST COMPANIES
FORM 10-Q
INDEX
PAGE(S)
Part I. Financial Information
Item 1. Financial Statements
The Meditrust Companies
Combined Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999 1
Combined Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 (unaudited) and 1999
(unaudited) 2
Combined Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 (unaudited) and 1999
(unaudited) 3
Meditrust Corporation
Consolidated Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999 4
Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 (unaudited) and 1999 5
(unaudited)
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 (unaudited) and 1999 (unaudited) 6
Meditrust Operating Company
Consolidated Balance Sheets as of September 30, 2000 (unaudited)
and December 31, 1999 7
Consolidated Statements of Operations for the three and nine
months ended September 30, 2000 (unaudited) and 1999
(unaudited) 8
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 (unaudited) and 1999 (unaudited) 9
Notes to Combined Consolidated Financial Statements (unaudited) 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 25
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 43
Item 6. Exhibits and Reports on Form 8-K 44
Signatures 45
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(IN THOUSANDS) 2000 1999
------------------- --------------------
(unaudited)
ASSETS
Real estate investments, net $ 3,396,330 $ 4,672,659
Cash and cash equivalents 30,722 7,220
Fees, interest and other receivables 96,421 79,042
Goodwill, net 463,597 480,673
Other assets, net 174,863 228,163
------------------- --------------------
Total assets $ 4,161,933 $ 5,467,757
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Notes payable, net $ 1,013,474 $ 1,144,406
Convertible debentures, net 136,896 185,468
Bank notes payable, net 446,541 1,154,182
Bonds and mortgages payable, net 46,604 113,382
------------------- --------------------
Total indebtedness 1,643,515 2,597,438
Accounts payable, accrued expenses and other liabilities 153,266 197,106
------------------- --------------------
Total liabilities 1,796,781 2,794,544
------------------- --------------------
Commitments and contingencies - -
Shareholders' equity:
Meditrust Corporation Preferred Stock, $.10 par value;
6,000 shares authorized; 701 shares issued and outstanding at
September 30, 2000 and December 31, 1999 70 70
Paired Common Stock, $.20 combined par value; 500,000 shares
authorized; 142,127 and 141,015 paired shares issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively 28,425 28,203
Additional paid-in-capital 3,656,920 3,654,358
Unearned compensation (4,522) (6,760)
Accumulated other comprehensive income (loss) (5,518) 4,468
Distributions in excess of net income (1,310,223) (1,007,126)
------------------- --------------------
Total shareholders' equity 2,365,152 2,673,213
------------------- --------------------
Total liabilities and shareholders' equity $ 4,161,933 $ 5,467,757
=================== ====================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
1
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
---------------------------- -----------------------------
Revenue:
Hotel $ 160,455 $ 160,297 $ 473,267 $ 471,105
Rental 27,299 40,198 87,697 125,719
Interest 22,807 34,333 83,797 104,166
Other - 894 - 1,750
---------------------------- -----------------------------
210,561 235,722 644,761 702,740
---------------------------- -----------------------------
Expenses:
Interest 45,841 59,256 152,618 184,599
Depreciation and amortization 42,500 33,277 113,329 101,359
Amortization of goodwill 5,689 5,099 17,076 15,946
General and administrative 12,093 6,522 35,907 24,440
Hotel operations 87,224 75,047 241,327 213,090
Rental property operations 7,525 9,151 22,326 26,872
Loss (gain) on sale of assets and mortgage repayments 126,362 (179) 130,725 (12,463)
Provision for impairment on real estate assets 91,306 - 152,432 -
Provision for loss on equity securities - - 39,076 -
Other 9,825 1,025 30,945 40,228
---------------------------- -----------------------------
428,365 189,198 935,761 594,071
---------------------------- -----------------------------
Income (loss) from continuing operations before benefit from
income taxes and extraordinary item (217,804) 46,524 (291,000) 108,669
Income tax benefit - (135) - (508)
---------------------------- -----------------------------
Income (loss) from continuing operations before extraordinary item (217,804) 46,659 (291,000) 109,177
Discontinued operations:
Gain (loss adjustment) on disposal of Santa Anita, net - 1,086 - 2,961
Gain (loss adjustment) on disposal of Cobblestone Golf Group, net - 15,558 - 18,552
---------------------------- -----------------------------
Income (loss) before extraordinary item (217,804) 63,303 (291,000) 130,690
Extraordinary gain on early extinguishment of debt - - 1,403 -
---------------------------- -----------------------------
Net income (loss) (217,804) 63,303 (289,597) 130,690
Preferred stock dividends (4,500) (3,938) (13,500) (11,814)
---------------------------- -----------------------------
Net income (loss) available to Paired Common shareholders $ (222,304) $ 59,365 $ (303,097) $ 118,876
============================ =============================
Basic earnings per Paired Common Share:
Income (loss) from continuing operations $ (1.56) $ 0.30 $ (2.15) $ 0.68
Discontinued operations - 0.12 - 0.15
Extraordinary gain - - 0.01 -
---------------------------- -----------------------------
Net income (loss) $ (1.56) $ 0.42 $ (2.14) $ 0.83
============================ =============================
Diluted earnings per Paired Common Share:
Income (loss) from continuing operations $ (1.56) $ 0.30 $ (2.15) $ 0.68
Discontinued operations - 0.12 - 0.15
Extraordinary gain - - 0.01 -
---------------------------- -----------------------------
Net income (loss) $ (1.56) $ 0.42 $ (2.14) $ 0.83
============================ =============================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
2
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS) 2000 1999
------------------ --------------
Cash Flows from Operating Activities:
Net (loss) income $ (289,597) $ 130,690
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation of real estate 98,124 94,062
Goodwill amortization 17,076 15,946
Loss (gain) on sale of assets 130,725 (33,976)
Shares issued for compensation 269 133
Gain on early extinguishment of debt (2,183) -
Other depreciation, amortization and other items, net 22,576 28,169
Other non cash items 209,782 2,839
------------------ --------------
Cash Flows from Operating Activities
Available for Distribution 186,772 237,863
Net change in other assets and liabilities of discontinued operations - (4,227)
Net change in other assets and liabilities (29,599) (65,639)
------------------ --------------
Net cash provided by operating activities 157,173 167,997
------------------ --------------
Cash Flows from Financing Activities:
Purchase of treasury stock - (103,269)
Proceeds from borrowings on bank notes payable 252,000 871,000
Repayment of bank notes payable (967,359) (1,453,911)
Repayment of notes payable (130,408) (12,500)
Repayment of convertible debentures (48,115) -
Equity offering and debt issuance costs - (1,137)
Principal payments on bonds and mortgages payable (59,120) (12,416)
Dividends to shareholders (13,500) (209,648)
Proceeds from exercise of stock options - 318
------------------ --------------
Net cash used in financing activities (966,502) (921,563)
------------------ --------------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding (28,463) (117,464)
Investment in real estate mortgages and development funding (161) (30,797)
Prepayment proceeds and principal payments received on real estate mortgages 668,085 99,221
Net proceeds from sale of assets 229,386 507,450
Payment of costs related to prior year asset sales (25,879) -
Working capital and notes receivable advances, net of repayments and collections,
and other items (10,137) 2,074
------------------ --------------
Net cash provided by investing activities 832,831 460,484
------------------ --------------
Net increase (decrease) in cash and cash equivalents 23,502 (293,082)
Cash and cash equivalents at:
Beginning of period 7,220 305,456
------------------ --------------
End of period $ 30,722 $ 12,374
================== ==============
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K and for the year
ended December 31, 1999, are an integral part of these financial statements.
3
MEDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(IN THOUSANDS) 2000 1999
--------------------- ---------------------
(unaudited)
ASSETS
Real estate investments, net $ 3,376,723 $ 4,652,631
Cash and cash equivalents 30,694 5,779
Fees, interest and other receivables 76,159 59,004
Goodwill, net 434,747 451,240
Due from Meditrust Operating Company 60,607 30,525
Other assets, net 124,005 175,870
--------------------- ---------------------
Total assets $ 4,102,935 $ 5,375,049
===================== =====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Notes payable, net $ 1,013,474 $ 1,144,406
Convertible debentures, net 136,896 185,468
Bank notes payable, net 446,541 1,154,182
Bonds and mortgages payable, net 46,604 113,382
--------------------- ---------------------
Total indebtedness 1,643,515 2,597,438
Accounts payable, accrued expenses and other liabilities 89,489 139,833
--------------------- ---------------------
Total liabilities 1,733,004 2,737,271
--------------------- ---------------------
Commitments and contingencies - -
Shareholders' equity:
Preferred Stock, $.10 par value; 6,000 shares authorized;
701 shares issued and outstanding at September 30, 2000 and
December 31, 1999 70 70
Common Stock, $.10 par value; 500,000 shares authorized; 143,432
and 142,320 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 14,343 14,232
Additional paid-in-capital 3,589,613 3,586,994
Unearned compensation (3,708) (6,104)
Accumulated other comprehensive income (loss) (5,518) 4,468
Distributions in excess of net income (1,210,685) (948,018)
--------------------- ---------------------
2,384,115 2,651,642
Due from Meditrust Operating Company (1,056) (736)
Note receivable - Meditrust Operating Company (13,128) (13,128)
--------------------- ---------------------
Total shareholders' equity 2,369,931 2,637,778
--------------------- ---------------------
Total liabilities and shareholders' equity $ 4,102,935 $ 5,375,049
===================== =====================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
4
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
-------------------------- ------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
--------------------------- -----------------------------
Revenue:
Rent from Meditrust Operating Company $ 74,291 $ 73,279 $ 219,812 $ 218,849
Rental 27,299 40,198 87,697 125,719
Interest 22,793 34,310 83,721 104,081
Interest from Meditrust Operating Company 160 - 444 -
Royalty from Meditrust Operating Company 5,574 3,917 15,717 11,507
Hotel operating revenue 2,865 3,078 8,557 9,435
Other - 894 - 1,750
--------------------------- -----------------------------
132,982 155,676 415,948 471,341
--------------------------- -----------------------------
Expenses:
Interest 45,684 59,245 152,243 184,446
Interest to Meditrust Operating Company - 224 - 1,813
Depreciation and amortization 37,528 31,425 101,910 95,693
Amortization of goodwill 5,495 4,989 16,493 15,394
General and administrative 5,582 2,364 15,404 11,513
Hotel operations 1,420 1,512 3,987 3,462
Rental property operations 7,525 9,151 22,326 26,872
Loss (gain) on sale of assets and mortgage repayments 126,369 (179) 131,702 (12,463)
Provision for impairment on real estate assets 91,306 - 152,432 -
Provision for loss on equity securities - - 39,076 -
Other 9,825 7 30,945 8,712
--------------------------- -----------------------------
330,734 108,738 666,518 335,442
--------------------------- -----------------------------
Income (loss) from continuing operations before
extraordinary item (197,752) 46,938 (250,570) 135,899
Discontinued operations:
Gain (loss adjustment) on disposal of Santa Anita, net - - - 6,655
Gain (loss adjustment) on disposal of Cobblestone Golf
Group, net - 16,282 - 25,721
--------------------------- -----------------------------
Income (loss) before extraordinary item (197,752) 63,220 (250,570) 168,275
Extraordinary gain on early extinguishment of debt - - 1,403 -
--------------------------- -----------------------------
Net income (loss) (197,752) 63,220 (249,167) 168,275
Preferred stock dividends (4,500) (3,938) (13,500) (11,814)
--------------------------- -----------------------------
Net income (loss) available to Common shareholders $ (202,252) $ 59,282 $ (262,667) $ 156,461
=========================== =============================
Basic earnings per Common Share:
Income (loss) from continuing operations $ (1.41) $ 0.30 $ (1.85) $ 0.86
Discontinued operations - 0.12 - 0.22
Extraordinary gain - - 0.01 -
--------------------------- -----------------------------
Net income (loss) $ (1.41) $ 0.42 $ (1.84) $ 1.08
=========================== =============================
Diluted earnings per Common Share:
Income (loss) from continuing operations $ (1.41) $ 0.30 $ (1.85) $ 0.86
Discontinued operations - 0.12 - 0.22
Extraordinary gain - - 0.01 -
--------------------------- -----------------------------
Net income (loss) $ (1.41) $ 0.42 $ (1.84) $ 1.08
=========================== =============================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
5
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS) 2000 1999
----------------- --------------------
Cash Flows from Operating Activities:
Net income (loss) $ (249,167) $ 168,275
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation of real estate 97,613 91,770
Goodwill amortization 16,493 15,394
Loss (gain) on sale of assets and mortgage repayments 131,702 (44,839)
Shares issued for compensation 269 107
Gain on early extinguishment of debt (2,183) -
Other depreciation, amortization and other items, net 11,668 20,109
Other non cash items 209,782 (3,357)
----------------- --------------------
Cash Flows from Operating Activities Available for Distribution 216,177 247,459
Net change in other assets and liabilities (58,767) (48,999)
----------------- --------------------
Net cash provided by operating activities 157,410 198,460
----------------- --------------------
Cash Flows from Financing Activities:
Purchase of treasury stock - (101,303)
Proceeds from borrowings on bank notes payable 252,000 871,000
Repayment of bank notes payable (967,359) (1,453,911)
Repayment of notes payable (130,408) (12,500)
Repayment of convertible debentures (48,115) -
Equity offering and debt issuance costs - (1,137)
Intercompany lending, net 1,094 4,216
Principal payments on bonds and mortgages payable (59,120) (12,416)
Dividends to shareholders (13,500) (209,648)
Proceeds from exercise of stock options - 312
----------------- --------------------
Net cash used in financing activities (965,408) (915,387)
----------------- --------------------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding (28,381) (116,353)
Investment in real estate mortgages and development funding (161) (30,797)
Prepayment proceeds and principal payments received on real estate mortgages 668,085 99,221
Payment of costs related to prior year asset sales (25,879) -
Net proceeds from sale of real estate 229,386 481,187
Working capital and notes receivable advances, net of repayments and collections,
and other items (10,137) 2,074
----------------- --------------------
Net cash provided by investing activities 832,913 435,332
----------------- --------------------
Net increase (decrease) in cash and cash equivalents 24,915 (281,595)
Cash and cash equivalents at:
Beginning of period 5,779 292,694
----------------- --------------------
End of period $ 30,694 $ 11,099
================= ====================
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
6
MEDITRUST OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(IN THOUSANDS) 2000 1999
-------------------- -------------------
(unaudited)
ASSETS
Cash and cash equivalents $ 28 $ 1,441
Fees, interest and other receivables 20,262 20,038
Other current assets, net 13,076 12,643
-------------------- -------------------
Total current assets 33,366 34,122
Investment in common stock of Meditrust Corporation 37,581 37,581
Goodwill, net 28,850 29,433
Property, plant and equipment, less accumulated depreciation
of $7,388 and $2,572, respectively 53,642 51,669
Other non-current assets 3,747 8,009
-------------------- -------------------
Total assets $ 157,186 $ 160,814
==================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 27,245 $ 20,803
Accrued payroll and employee benefits 26,484 21,452
Accrued expenses and other current liabilities 5,609 10,030
Due to Meditrust Corporation 85,250 54,820
-------------------- -------------------
Total current liabilities 144,588 107,105
Note payable to Meditrust Corporation 13,128 13,128
Other non-current liabilities 4,439 4,988
-------------------- -------------------
Total liabilities 162,155 125,221
-------------------- -------------------
Commitments and contingencies - -
Shareholders' equity (deficit):
Common Stock, $.10 par value; 500,000 shares authorized; 142,127
and 141,015 shares issued and outstanding at September 30, 2000 and
December 31, 1999, respectively 14,213 14,102
Additional paid-in-capital 104,757 104,814
Unearned compensation (814) (656)
Distributions in excess of net income (99,538) (59,108)
-------------------- -------------------
18,618 59,152
Due to Meditrust Corporation (23,587) (23,559)
-------------------- -------------------
Total shareholders' equity (deficit) (4,969) 35,593
==================== ===================
Total liabilities and shareholders' equity (deficit) $ 157,186 $ 160,814
==================== ===================
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
7
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended Nine months ended
September 30, September 30,
---------------------------------- --------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 2000 1999
---------------------------------- --------------------------------
Revenue:
Hotel $ 157,590 $ 157,219 $ 464,710 $ 461,670
Interest 14 23 76 85
Interest from Meditrust Corporation - 224 - 1,813
---------------------------------- --------------------------------
157,604 157,466 464,786 463,568
---------------------------------- --------------------------------
Expenses:
Hotel operations 85,804 73,535 237,340 209,628
Depreciation and amortization 4,972 1,852 11,419 5,666
Amortization of goodwill 194 110 583 552
Interest and other 157 11 375 153
Interest to Meditrust Corporation 160 - 444 -
General and administrative 6,511 4,158 20,503 12,927
Royalty to Meditrust Corporation 5,574 3,917 15,717 11,507
Rent to Meditrust Corporation 74,291 73,279 219,812 218,849
Gain on asset sales (7) - (977) -
Other - 1,018 - 31,516
---------------------------------- --------------------------------
177,656 157,880 505,216 490,798
---------------------------------- --------------------------------
Loss from continuing operations before benefit for income
taxes (20,052) (414) (40,430) (27,230)
Income tax benefit - (135) - (508)
---------------------------------- --------------------------------
Loss from continuing operations (20,052) (279) (40,430) (26,722)
Discontinued operations:
Loss adjustment on disposal of Santa Anita, net - 1,086 - (3,694)
Loss adjustment on disposal of Cobblestone Golf Group,
net - (724) - (7,169)
---------------------------------- --------------------------------
Net income (loss) $ (20,052) $ 83 $ (40,430) $ (37,585)
================================== ================================
Basic earnings per Common Share:
Loss from continuing operations $ (0.14) $ 0.00 $ (0.29) $ (0.19)
Discontinued operations - - - (0.07)
---------------------------------- --------------------------------
Net loss $ (0.14) $ 0.00 $ (0.29) $ (0.26)
================================== ================================
Diluted earnings per Common Share:
Loss from continuing operations $ (0.14) $ 0.00 $ (0.29) $ (0.19)
Discontinued operations - - - (0.07)
---------------------------------- --------------------------------
Net loss $ (0.14) $ 0.00 $ (0.29) $ (0.26)
================================== ================================
The accompanying notes, together with the Notes to the
Combined Consolidated Financial Statements contained within the
Companies' Form 10-K for the year ended December 31, 1999, are an integral
part of these financial statements.
8
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS) 2000 1999
----------------------------------------
Cash Flows from Operating Activities:
Net loss $ (40,430) $ (37,585)
Adjustments to reconcile net loss to net cash used in operating activities:
Goodwill amortization 583 552
Loss (gain) on sale of assets and disposal of discontinued operations (977) 10,863
Shares issued for compensation - 26
Other depreciation and amortization and other items 11,419 10,352
Other non-cash items - 6,196
Net change in other assets and liabilities of discontinued operations - (4,227)
Net change in other assets and liabilities 29,168 (16,640)
----------------------------------------
Net cash used in operating activities (237) (30,463)
----------------------------------------
Cash Flows from Financing Activities:
Purchase of treasury stock - (1,966)
Intercompany borrowing (lending), net (1,094) (4,216)
Proceeds from stock option exercises - 6
----------------------------------------
Net cash used in financing activities (1,094) (6,176)
----------------------------------------
Cash Flows from Investing Activities:
Capital improvements to real estate (82) (1,111)
Net proceeds from sale of assets - 26,263
----------------------------------------
Net cash provided by (used in) investing activities (82) 25,152
----------------------------------------
Net decrease in cash and cash equivalents (1,413) (11,487)
Cash and cash equivalents at:
Beginning of period 1,441 12,762
----------------------------------------
End of period $ 28 $ 1,275
========================================
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
9
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted in this Form 10-Q in accordance with the Rules
and Regulations of the Securities and Exchange Commission (the "SEC").
In the opinion of Meditrust Corporation ("Realty") and Meditrust Operating
Company and subsidiaries ("Operating Company" or "Operating" and collectively
with Realty the "Companies" or "The Meditrust Companies"), the accompanying
unaudited combined consolidated financial statements reflect all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
financial position as of September 30, 2000, the results of operations for each
of the three and nine month periods ended September 30, 2000 and 1999, and cash
flows for each of the nine month periods ended September 30, 2000 and 1999. The
results of operations for the nine-month period ended September 30, 2000, are
not necessarily indicative of the results which may be expected for any other
interim period or for the entire year.
Also in the opinion of Realty, Operating Company and The Meditrust Companies,
the disclosures contained in this Form 10-Q are adequate to make the information
presented not misleading. See the Companies' Joint Annual Report on Form 10-K
for the year ended December 31, 1999, for additional information relevant to
significant accounting policies followed by the Companies.
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 subsidiaries,
including unincorporated partnerships and joint ventures, after the elimination
of all significant intercompany accounts and transactions.
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.
RECLASSIFICATION
Certain reclassifications have been made to the 1999 presentation to conform to
the 2000 presentation.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Details of other non-cash items:
(IN THOUSANDS) NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
2000 1999
-----------------------------------
Provision for assets held for sale $ 24,853 $ -
Provision for assets held for use 56,147 -
Provision for loss on real estate mortgages and loans receivable 71,432 -
Provision for loss on equity securities 39,076 -
Straight line rent (966) (3,357)
Provision for loss on receivables 4,577 -
Provision for restructuring expenses 10,812 2,198
Accelerated amortization of unearned compensation 3,851 -
Write-off of software development costs - 3,998
-----------------------------------
$ 209,782 $ 2,839
================== ===============
10
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SUPPLEMENTAL CASH FLOW INFORMATION, CONTINUED
Details of interest paid and non-cash investing and financing transactions:
THE MEDITRUST COMPANIES:
NINE MONTHS ENDED
SEPTEMBER 30,
----------------- ----------------
(IN THOUSANDS) 2000 1999
----------------- ----------------
Interest paid during the period $ 174,527 $ 207,415
Interest capitalized during the period 676 6,284
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3) 53,900 -
Retirements and write-offs of project costs (11,390) (7,722)
Accumulated depreciation and provision for impairment of
assets sold 95,885 17,570
Debt assumed by buyer of Cobblestone Golf Group - 5,637
Increase in real estate mortgages net of
participation reduction 150 373
Allowance for loan losses on prepaid mortgages 46,149 -
Change in market value of equity securities (49,062) 8,354
MEDITRUST CORPORATION:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
(IN THOUSANDS) 2000 1999
-----------------------------------
Interest paid during the period $ 174,167 $ 206,810
Interest capitalized during the period 516 5,832
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3) 53,900 -
Retirements and write-offs of project costs (11,390) (7,722)
Accumulated depreciation and provision for impairment of
assets sold 95,885 17,570
Debt assumed by buyer of Cobblestone Golf Group - 5,637
Increase in real estate mortgages net of
participation reduction 150 373
Allowance for loan losses on prepaid mortgages 46,149 -
Change in market value of equity securities (49,062) 8,354
MEDITRUST OPERATING COMPANY:
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
(IN THOUSANDS) 2000 1999
-----------------------------------
Interest paid during the period $ 360 $ 605
Interest capitalized during the period 160 452
11
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS
The following is a summary of the Companies' real estate investments:
SEPTEMBER 30, DECEMBER 31,
(IN THOUSANDS) 2000 1999
---------------------------------
Land $ 437,121 $ 444,523
Buildings and improvements, net of accumulated depreciation
of $332,484 and $259,777 and other provisions of $64,703 and $12,330 2,635,828 2,876,418
Real estate mortgages and loans receivable, net of a valuation
allowance of $57,698 and $32,415 223,387 1,059,920
Assets held for sale, net of accumulated depreciation of $9,152 and
$27,565 and other provisions of $39,579 and $71,266 99,994 291,798
---------------------------------
$ 3,396,330 $ 4,672,659
=================================
During the nine months ended September 30, 2000, the Companies provided net
funding of $4,039,000 for ongoing construction of healthcare facilities
committed to prior to November 1998. The Companies also provided net funding of
$24,424,000 for capital improvements related to the lodging segment. In
addition, the Companies provided $161,000 for ongoing construction of mortgaged
facilities already in the portfolio.
The Companies received $668,085,000 in principal payments on mortgages
receivable during the nine months ended September 30, 2000 comprised of:
- $6,026,000 of monthly principal amortization
- $1,586,000 in partial principal prepayments, and
- $660,473,000 in principal payments on mortgages (with a real
estate net book value of $757,800,000, net of reserves of
$46,149,000 previously recorded by the Companies, and related
working capital and interest receivables with a net book value
of $30,742,000) received as a result of real estate asset
transactions entered into by the Companies pursuant to the
Five Point Plan. These transactions resulted in a net loss of
$128,069,000.
Also during the nine months ended September 30,2000, the Companies sold 42
facilities comprised of real estate and other assets with net book values of
$285,751,000 (net of previously recorded impairment reserves of $63,149,000) and
$1,168,000, respectively. Net proceeds on these transactions amounted to
$283,286,000 and consisted of:
- $229,386,000 in cash
- $7,661,000 of assumed debt, and
- $46,239,000 of subordinated indebtedness due in 2005, net of a
discount of $5,855,000 (on the difference between the 9.0%
stated rate of interest and the 12.0% imputed interest rate).
These transactions resulted in a net loss of $3,633,000.
Total reserves and impairments of real estate assets recorded during the nine
months ended September 30, 2000, were $152,432,000. As of September 30, 2000,
the total reserves and impairments balance is $161,980,000.
12
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
(IN THOUSANDS)
Net book value of investment in real estate assets at December 31, 1999, net $ 4,672,659
Lodging
Funding of capital improvements 24,424
Depreciation expense and write-offs (79,848)
Healthcare
Amortization of principal (6,026)
Construction loan funding 161
Partial principal prepayments (1,586)
Net book value of mortgages repaid (757,800)
Provision for loss on mortgages (71,432)
Other adjustments to mortgages 150
Construction funding 4,039
Depreciation expense (18,681)
Provision for loss on assets held for sale (24,853)
Provision for loss on assets held for use (56,147)
Net book value of real estate assets sold (285,751)
Other adjustments to real estate investments (2,979)
------------------
Net book value of investment in real estate assets at September 30, 2000, net $ 3,396,330
==================
The activity in the valuation allowance for real estate investments for the nine
months ended September 30, 2000 is summarized as follows:
Buildings Real estate
(IN THOUSANDS) and improvements mortgages and Assets held
loans receivable for sale Total
------------------- ------------------ ------------------- ------------------
Balance at December 31, 1999 $ 12,330 $ 32,415 $ 71,266 $ 116,011
Provision recorded 56,147 71,432 24,853 152,432
Transfers to assets held for sale (3,700) - 3,700 -
Provision applied to sales or prepayments - (46,149) (63,149) (109,298)
Other adjustments (74) - 2,909 2,835
------------------- ------------------ ------------------- ------------------
Balance at September 30, 2000 $ 64,703 $ 57,698 $ 39,579 $ 161,980
=================== ================== =================== ==================
13
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
Portfolio by Operator
(IN THOUSANDS, EXCEPT NUMBER OF Gross Net Book # of % of # of # of
PROPERTIES AND PERCENTAGES) Investment Value Properties Portfolio Mortgages Properties Leases Properties
---------------- -------------- ----------- ----------- ----------- ------------ ------- ----------
Sun Healthcare Group, Inc. $ 407,079 $ 325,118 41 29.8% $ 30,430 4 $294,688 37
Alterra 161,592 150,115 57 13.8% - - 150,115 57
Other Non-Public Operators 118,998 111,798 13 10.2% 85,566 10 26,232 3
Harborside 103,360 92,940 18 8.5% 15,975 4 76,965 14
Balanced Care Corporation 93,502 91,858 19 8.4% 36,754 7 55,104 12
Tenet Healthcare/Iasis 65,650 56,589 1 5.2% - - 56,589 1
CareMatrix Corporation 50,658 49,498 4 4.5% 35,658 3 13,840 1
Integrated Health Services, Inc. 50,973 37,365 10 3.4% - - 37,365 10
Genesis Health Ventures, Inc. 35,639 33,668 8 3.1% 18,439 4 15,229 4
Assisted Living Concepts 31,487 28,587 16 2.6% - - 28,587 16
Other Public Operators 29,725 27,288 4 2.5% 7,050 1 20,238 3
ARV Assisted Living, Inc. 28,982 26,459 4 2.4% - - 26,459 4
Life Care Centers of America, Inc. 26,212 26,212 2 2.4% 26,212 2 - -
HealthSouth 25,001 25,001 2 2.3% 25,001 2 - -
Paramount Real Estate Services 9,756 9,085 1 0.9% - - 9,085 1
---------------- -------------- ----------- ----------- ----------- ------------ ---------- -------
1,238,614 1,091,581 200 100% 281,085 37 810,496 163
Valuation Allowance - (161,980) - (57,698) - (104,282) -
---------------- -------------- ----------- ----------- ------------ ---------- -------
1,238,614 929,601 200 $ 223,387 37 $ 706,214 163
=========== ============ ========== =======
Lodging:
La Quinta Companies 2,661,332 2,466,729 300
---------------- -------------- -----------
$ 3,899,946 $ 3,396,330 500
================ ============== ===========
Companies in the assisted living sector of the healthcare industry operate
approximately 9.1% of the net book value of Realty's total real estate
investments (and approximately 28.4% of the healthcare portfolio), while
companies in the long term sector approximate 18.8% of the net book value of
Realty's total real estate investments (and approximately 58.5% of the heathcare
portfolio).
Realty monitors credit risk for its healthcare portfolio by evaluating a
combination of publicly available financial information, information provided by
the operators themselves and information otherwise available to Realty. The
financial condition and ability of these healthcare operators to meet their
rental and other obligations will, among other things, have an impact on
Realty's revenues, net income (loss), funds available from operations and its
ability to make distributions to its shareholders. The operations of the long-
term care (skilled nursing) companies have been negatively impacted by changes
in Medicare reimbursement rates (PPS), increases in labor costs, increased
leverage and certain other factors. In addition, any failure by these operators
to effectively conduct their operations could have a material adverse effect on
their business reputation or on their ability to enlist and maintain patients in
their facilities.
Operators of assisted living facilities are experiencing fill-up periods of a
longer duration and are being impacted by concerns regarding the potential of
over-building, increased regulation and the use of certain accounting practices.
Accordingly, many of these operators have announced decreased earnings or
anticipated earnings shortfalls and have experienced a significant decline in
their stock prices. These factors have had a detrimental impact on the liquidity
of some assisted living operators, which has caused their growth plans to
decelerate and may have a negative effect on their operating cash flows.
14
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
Operators in Bankruptcy
As of September 30, 2000, the Companies have exposure to four operators who have
filed for protection under Chapter 11: Sun Healthcare Group, Inc. ("Sun"),
Mariner Health Group ("Mariner"), Integrated Health Services, Inc.
("Integrated"), and Genesis Health Ventures, Inc. ("Genesis"). The following
table describes the number of facilities, net assets by lease/mortgage and the
lease/mortgage income for each of the four operators that have filed for Chapter
11.
Summary of Investments with Operators in Chapter 11
(IN THOUSANDS, EXCEPT FOR Nine Months Ended
NUMBER OF FACILITIES) Leases Mortgages September 30, 2000
---------------------------- ------------------------------ -----------------------------
Total Rental Interest
Operator Date filed Facilities Facilities Net Assets Facilities Net Assets Income Income
-------- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
Sun(4) 10/14/99 41 37 $299,077 4 $30,430 $35,881 - (1)
Mariner 1/18/00 2 1 6,918 1 7,050 733 - (2)
Integrated 2/2/00 10 10 37,365 N/A N/A 4,716 N/A
Genesis 6/26/00 8 4 15,229 4 18,439 1,239 978 (3)
---------- ---------------------------- ------------------------------ -----------------------------
Totals 61 52 $358,589 9 $55,919 $42,569 $978 (3)
=========== ============================ ============================== =============================
(1) No interest payments related to the Sun mortgages have been
received since October 14, 1999 and, accordingly, these
mortgages were placed on non-accrual status.
(2) No interest payments related to the Mariner mortgage were
received and, accordingly, this mortgage was placed on
non-accrual status.
(3) No interest payments related to Genesis have been received
since June 1, 2000 and, accordingly, such mortgages have been
placed on non-accrual status.
(4) Net lease assets include straight-line rent receivables of
$4,389,000.
The Companies continue to monitor its operators that have filed for Chapter
11. The Companies have not come to any definitive agreement with any of these
operators to date. In the event any of its leases are successfully rejected
through the course of the bankruptcy proceedings, the Companies intend to
transition the operations of these facilities to other operators.
Management has initiated various actions to protect the Companies' interests
under its leases and mortgages, including the drawdown and renegotiation of
certain escrow accounts and agreements. While the earnings capacity of certain
facilities has been reduced and the reductions may extend to future periods,
management believes that it has recorded appropriate accounting impairment
provisions based on its assessment of current circumstances. However, upon
changes in circumstances, including but not limited to, possible foreclosure or
lease termination, there can be no assurance that the Companies' investments in
healthcare facilities would not be written down below current carrying value
based upon estimates of fair value at such time.
Impairment of real estate assets
During the nine months ended September 30, 2000, the Companies classified
certain assets as held for sale based on management having the authority and
intent of entering into commitments for sale transactions expected to close in
the next twelve months. Based on estimated net sale proceeds, the Companies
recorded a provision for loss on assets held for sale of $24,853,000. In
addition, the Companies recorded a provision of $56,147,000 on real estate
assets held for use where current facts, circumstances and analysis indicate
that the assets might be impaired. Also, during the nine months ended September
30, 2000, the Companies sold assets for which impairments of $63,149,000 had
been previously recorded.
As of September 30, 2000, the Companies have an impairment allowance of
$39,579,000 related to assets held for sale and $64,703,000 pertaining to
properties where management believes that a reduction in the assets' cost basis
is appropriate based on an assessment of current circumstances, including but
not limited to, the amount of debt maturing in 2001 and prices realized on
recent healthcare asset sales.
15
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
Impairment of mortgage loans
During the nine months ended September 30, 2000, the Companies recorded a
provision for loss related to the mortgage portfolio of $71,432,000. Also during
the nine months ended September 30, 2000, mortgage loan receivables, which had
previously provided provisions of $46,149,000, were prepaid. As of September 30,
2000, the Companies have $57,698,000 in loan valuation reserves primarily
relating to mortgage loans in the portfolio.
The Companies continue to evaluate the assets in its healthcare portfolio as
well as to pursue an orderly disposition of a significant portion of its
healthcare assets. There can be no assurance if or when sales will be completed
or whether such sales will be completed on terms that will enable the Companies
to realize the full carrying value of such assets.
4. INDEBTEDNESS
During the nine months ended September 30, 2000, the Companies had the following
debt activity:
Bonds and
(IN THOUSANDS) Notes Payable, Convertible Bank Notes Mortgages Payable,
Net Debentures, Net Payable, Net Net Total
----------------- -------------------- -------------------- -------------------- ------------------
December 31, 1999 $1,144,406 $185,468 $1,154,182 $113,382 $2,597,438
Repayment of principal (130,408) (48,115) (967,359) (59,120) (1,205,002)
Borrowings - - 252,000 - 252,000
Debt assumed by third
party, (note 3) - - - (7,661) (7,661)
Gain on debt repurchases (1,463) (720) - - (2,183)
Amortization of debt
issuance costs and other 939 263 7,718 3 8,923
----------------- -------------------- -------------------- -------------------- ------------------
September 30, 2000 $1,013,474 $136,896 $446,541 $46,604 $1,643,515
================= ==================== ==================== ==================== ==================
During the nine months ended September 30, 2000, the Companies repaid
$87,375,000 of notes payable. In addition, the Companies repurchased $43,033,000
of notes payable, resulting in a gain on early extinguishment of debt of
$1,463,000.
During the nine months ended September 30, 2000, the Companies repurchased
$13,281,000 of convertible debentures, which resulted in a gain on early
extinguishment of debt of approximately $720,000. In addition, the Companies'
convertible debentures maturing on July 1, 2000 with a balance of $34,834,000
were repaid.
During the nine months ended September 30, 2000, the Companies repaid
approximately $917,359,000 on the revolving tranche commitment (Tranche A) and
$50,000,000 on its term note (Tranche D) of its bank notes payable and borrowed
$252,000,000 on Tranche A. The Tranche A revolver commitment has a zero balance
at September 30, 2000. Effective September 5, 2000, the $850,000,000 revolver
commitment was reduced to $400,000,000. Approximately $362,000,000 on the
Tranche A revolving commitment (net of outstanding letters of credit) was
available at September 30, 2000 at the Companies' option of the base rate
(11.5%) or LIBOR plus 2.875% (approximately 9.6% total rate at September 30,
2000).
During the nine months ended September 30, 2000, the Companies repaid mortgages
of $51,845,000 and prepaid mortgages of $14,936,000 of which $7,661,000 was
assumed by a third party. These prepayments resulted in total penalties of
$780,000, and are reported as an offset to the gain on early extinguishment of
debt. Therefore, net gain on early extinguishment of debt is $1,403,000.
16
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INDEBTEDNESS, CONTINUED
Effective September 5, 2000, the Companies reached a fourth agreement with its
bank group to further amend the Credit Agreement. The fourth amendment provided
for, among other things:
- changes in the definition of the minimum tangible net worth
covenant
_ limitations on cash and cash equivalents held
- limitations on capital expenditures
- a reduction in the Tranche A revolving loan commitment from
$850,000,000 to $400,000,000, and
- the allowance of an optional prepayment of $50,000,000 on the
Tranche D term loan.
In addition, the fourth amendment specifies when and how the proceeds of certain
future asset sales are to be applied against any outstanding balances on
Tranches A and D.
Effective September 7, 2000, the Companies cancelled $50,000,000 of its interest
rate swap agreement. At September 30, 2000, the Companies were fixed rate payors
of 5.7% under an interest rate swap agreement with an underlying notional amount
of $450,000,000 and received a variable rate of 6.6%. Differentials in the
swapped amounts are recorded as adjustments to interest expense of the
Companies.
5. SHAREHOLDERS' EQUITY
As of September 30, 2000, the following classes of Preferred Stock, Excess Stock
and Series Common Stock were authorized; no shares were issued or outstanding at
either September 30, 2000 or December 31, 1999:
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.
During the nine months ended September 30, 2000, 1,000,000 restricted shares of
the Companies' common stock were issued to key employees under The Meditrust
Corporation 1995 Share Award Plan and The Meditrust Operating Company 1995 Share
Award Plan (collectively known as the "Share Award Plan"). During June 2000,
50,000 restricted shares were forfeited and thus cancelled and retired. Also,
pursuant to amendments to certain employment and severance agreements, vesting
periods for 390,000 restricted shares were accelerated from the original vesting
periods to vest between July 2000 and December 2000. This resulted in
approximately $1,390,000 of accelerated amortization of unearned compensation in
the three months ended September 30, 2000.
Under the Share Award Plan, participants are entitled to cash dividends and
voting rights on their respective restricted shares. Restrictions generally
limit the sale or transfer of shares during a restricted period, not to exceed
three years. Participants vest in the restricted shares granted upon the
earliest of six months to three years after the date of issuance, upon achieving
the performance goals as defined, or as the Boards of Directors may determine.
Unearned compensation was charged for the market value of the restricted shares
on the date of grant and is being amortized over the restricted period. The
unamortized unearned compensation value is reflected as a reduction of
shareholders' equity in the accompanying consolidated and combined consolidated
balance sheets.
6. COMPREHENSIVE INCOME (LOSS) AND OTHER ASSETS
Realty has an investment in Nursing Home Properties Plc ("NHP Plc"), a property
investment group which specializes in the financing, through sale leaseback
transactions, of nursing homes located in the United Kingdom. The investment
includes approximately 26,606,000 shares of NHP Plc, representing an ownership
interest in NHP Plc of 19.99% of which Realty has voting rights with respect to
9.99%.
17
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. COMPREHENSIVE INCOME (LOSS) AND OTHER ASSETS, CONTINUED
During the nine months ended September 30, 2000, the market value of this
investment significantly decreased below the Companies' initial cost. In
accordance with Financial Accounting Standard Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
the Companies are required to determine whether a decline in fair value of an
investment accounted for as "an available for sale security" is
other-than-temporary. Further guidance in Staff Accounting Bulletin Topic 5M
("SAB 5M") suggests that the decline is other-than-temporary if, among other
factors, the decline in market value persists for a period over six months and
the decline is in excess of 20% of cost. As a result, Realty determined the
decline was other-than-temporary at June 30, 2000, adjusted the cost basis of
its investment in NHP Plc to fair value and recorded a charge to earnings for
the impairment of the investment in NHP Plc of $39,076,000 based on the
difference between the Companies' cost of $57,204,000 and the market value as of
June 30, 2000 of $18,128,000. The market value of NHP Plc as of September 30,
2000 was $12,561,000. The decrease of $5,567,000 from the market value as of
June 30, 2000 is reflected as a reduction of shareholders' equity. Management
will continue to evaluate this investment.
As of September 30, 2000, Realty owns 1,081,000 shares of stock and warrants to
purchase 5,000 shares of stock in Balanced Care Corporation ("BCC"), a
healthcare operator. The stock and warrants have a current market value of
$1,154,000. The difference between current market value and the cost of the BCC
investment is recorded as an unrealized gain of $49,000, in shareholders' equity
in the accompanying balance sheet.
The following is a summary of the Companies' comprehensive income (loss):
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------- --------------------
(IN THOUSANDS) 2000 1999
-------------------- --------------------
Net income (loss) $ (289,597) $ 130,690
Other comprehensive income (loss)
Unrealized holding gains (losses) arising during the period (49,062) 8,354
Reclassification adjustment for losses recognized in net loss 39,076 -
-------------------- --------------------
Comprehensive income (loss) $ (299,583) $ 139,044
==================== ====================
Other assets include investments in NHP Plc and BCC, La Quinta intangible
assets, and the Telematrix non-compete agreement, furniture, fixtures and
equipment, and other receivables.
7. DISTRIBUTIONS PAID TO SHAREHOLDERS
On March 31, 2000, Realty paid a dividend of $0.5625 per depository share of
preferred stock to holders of record on March 15, 2000 of its 9.00% Series A
Cumulative Redeemable Preferred Stock. On March 31, 2000, Realty also paid a
quarterly dividend at a rate of 9.00% per annum on the liquidation preference of
$25,000 per share to the holder of the 9.00% Series B Cumulative Redeemable
Convertible Preferred Stock.
On June 30, 2000, Realty paid a dividend of $0.5625 per depository share of
preferred stock to holders of record on June 15, 2000 of its 9.00% Series A
Cumulative Redeemable Preferred Stock. On June 30, 2000, Realty also paid a
quarterly dividend at a rate of 9.00% per annum on the liquidation preference of
$25,000 per share to the holder of the 9.00% Series B Cumulative Redeemable
Convertible Preferred Stock.
On September 30, 2000, Realty paid a dividend of $0.5625 per depository share of
preferred stock to holders of record on September 15, 2000. On September 30,
2000, Realty also paid a quarterly dividend at a rate of 9.00% per annum on the
liquidation preference of $25,000 per share to the holder of the 9.00% Series B
Cumulative Redeemable Convertible Preferred Stock.
18
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. OTHER EXPENSES
During the nine months ended September 30, 2000, the Companies recorded
approximately $30,945,000 in other expenses related to the items described
below.
In January 2000, the Companies executed a separation and consulting agreement
with the Chief Executive Officer, President and Treasurer of Realty pursuant to
which Realty made a cash payment of approximately $9,500,000 (including
consulting fees), converted 155,000 restricted paired common shares into
unrestricted paired common shares (which resulted in approximately $2,500,000 of
accelerated amortization of unearned compensation) and continued certain
medical, dental and other benefits.
Also in January 2000, the Companies announced that the Meditrust corporate
headquarters would be moved to Dallas, Texas and that changes would be made
to the management team. As a result, in June 2000, the Boards of Directors
approved a plan to reduce the number of employees by 14 as of December 31,
2000, including four officers. The reduction is primarily in the financial
and legal groups of the Companies' Needham, Massachusetts offices.
Accordingly, during the nine months ended September 30, 2000, the Companies
recorded $12,202,000 ($4,890,000 in the third quarter) for severance related
expenses expected to be incurred to terminate those employees. The Companies
plan to further reduce staff over the next two years with the intention of
consolidating the remaining healthcare operations in Dallas, Texas by
December 31, 2002. As part of the plan to close the Needham office,
additional severance and other payments are expected in the future. In
addition, the Companies recorded a charge of $3,142,000 related to
accelerated amortization of debt issuance costs and certain other expenses
associated with the early repayment of debt and the reduction of the
Companies' revolving credit facility.
During the nine months ended September 30, 2000, the Companies recorded
provisions and other expenses of approximately $4,645,000 ($1,843,000 in the
third quarter) on receivables related to real estate assets and other
receivables management considers uncollectible. The Companies also recorded
approximately $1,245,000 ($50,000 in the third quarter) of bad debt recoveries
during the nine months ended September 30, 2000 related to receivables
written-off in prior years.
The Companies also incurred approximately $279,000 of professional fees during
the nine month period ended September 30, 2000 related to implementation of the
Five Point Plan.
During the nine months ended September 30, 1999, the Companies recorded
approximately $40,228,000 in other expenses related to the items described
below.
On May 10, 1999, the Companies entered into a separation agreement with the
former Director and Chairman of the Companies and Chief Executive Officer and
Treasurer of Meditrust Operating Company. Under the terms of this separation
agreement, the Companies made severance payments totaling $25,000,000 in cash
and continued certain life insurance benefits. The Companies established a
Special Committee of the Boards of Directors of Realty and Operating Company
(the "Special Committee") to evaluate this executive's employment contract and
whether such severance or other payments were appropriate. Based on the results
of the evaluation and recommendation of the Special Committee, the Boards of
Directors concluded that the separation agreement was in the long-term best
interest of the shareholders of the Companies and approved the separation
agreement.
The Companies incurred approximately $11,230,000 of non-recurring costs
($1,025,000 during the three months ended September 30, 1999) associated with
the development and implementation of the comprehensive restructuring plan
adopted in November 1998 (the "1998 Plan"). These costs primarily relate to the
early repayment and modification of certain debt and other advisory fees related
to the 1998 Plan and the separation agreement discussed in the paragraph above.
During the nine months ended September 30, 1999, the Companies recorded a charge
of approximately $3,998,000 to write off certain internal and external software
development costs related to a front desk system under development for the
lodging division based on La Quinta's management decision to abandon the
project.
19
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE
COMBINED CONSOLIDATED EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------------------------- -----------------------------------
2000 1999 2000 1999
------------------- ------------------- ----------------- -----------------
Income (loss) from continuing operations before $ (217,804) $ 46,659 $ (291,000) $ 109,177
extraordinary item
Preferred stock dividends (4,500) (3,938) (13,500) (11,814)
------------------ ----------------- --------------- ---------------
Income (loss) from continuing operations before
extraordinary item available to common
shareholders $ (222,304) $ 42,721 $ (304,500) $ 97,363
================== ================= =============== ===============
Weighted average outstanding shares of paired
common stock 142,121 141,100 141,596 143,379
Dilutive effect of stock options - - - -
------------------ ----------------- --------------- ---------------
Dilutive potential paired common stock 142,121 141,100 141,596 143,379
================== ================= =============== ===============
Earnings per share:
Basic $ (1.56) $ .30 $ (2.15) $ .68
Diluted $ (1.56) $ .30 $ (2.15) $ .68
Options to purchase 8,042,000 and 4,768,000 paired common shares at prices
ranging from $2.44 to $36.46 were outstanding during the three and nine months
ended September 30, 2000 and 1999, 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 paired common shares or because the inclusion
would result in an antidilutive effect in periods where a loss was incurred. The
options, which expire on dates ranging from October 2001 to September 2010, were
still outstanding at September 30, 2000.
Convertible debentures outstanding for the three months ended September 30, 2000
and 1999 of 4,765,000 and 6,540,000 paired common shares, respectively, are not
included in the computation of diluted EPS because the inclusion would result in
an antidilutive effect.
Convertible debentures outstanding for the nine months ended September 30, 2000
and 1999 of 5,235,000 and 6,540,000 paired common shares, respectively, are not
included in the computation of diluted EPS because the inclusion would result in
an antidilutive effect.
In addition, convertible preferred stock for the three and nine months ended
September 30, 2000 of 2,680,000 paired common shares are not included in the
computation of diluted EPS because the inclusion would result in antidilution.
20
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE, CONTINUED
MEDITRUST CORPORATION EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------------- ----------------------------------
2000 1999 2000 1999
----------------- ----------------- ---------------- -----------------
Income (loss) from continuing operations before $ (197,752) $ 46,938 $ (250,570) $ 135,899
extraordinary item
Preferred stock dividends (4,500) (3,938) (13,500) (11,814)
----------------- ----------------- ------------- ----------------
Income (loss) from continuing operations before
extraordinary item available to common
shareholders $ (202,252) $ 43,000 $ (264,070) $ 124,085
----------------- ----------------- ------------- ----------------
Weighted average outstanding shares of
common stock 143,426 142,405 142,901 144,684
Dilutive effect of stock options - - - -
----------------- ----------------- ------------- ----------------
Dilutive potential common stock 143,426 142,405 142,901 144,684
----------------- ----------------- ------------- ----------------
Earnings per share:
Basic $ (1.41) $ .30 $ (1.85) $ .86
Diluted $ (1.41) $ .30 $ (1.85) $ .86
Options to purchase 2,474,000 and 3,097,000 paired common shares at prices
ranging from $3.31 to $36.46 were outstanding during the three and nine months
ended September 30, 2000 and 1999, 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 paired common shares or because the inclusion
would result in an antidilutive effect in periods where a loss was incurred. The
options, which expire on dates ranging from October 2001 to September 2010, were
still outstanding at September 30, 2000.
Convertible debentures outstanding for the three months ended September 30, 2000
and 1999 of 4,765,000 and 6,540,000 paired common shares, respectively, are not
included in the computation of diluted EPS because the inclusion would result in
an antidilutive effect.
Convertible debentures outstanding for the nine months ended September 30, 2000
and 1999 of 5,235,000 and 6,540,000 paired common shares, respectively, are not
included in the computation of diluted EPS because the inclusion would result in
an antidilutive effect.
In addition, convertible preferred stock for the three and nine months ended
September 30, 2000 of 2,680,000 paired common shares are not included in the
computation of diluted EPS because the inclusion would result in antidilution.
MEDITRUST OPERATING COMPANY EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------------- ------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
Loss from continuing operations $ (20,052) $ (279) $ (40,430) $ (26,722)
------------- ------------- ------------- -------------
Weighted average outstanding shares of common
stock 142,121 141,100 141,596 143,379
Dilutive effect of stock options - - - -
------------- ------------- ------------- -------------
Dilutive potential common stock 142,121 141,100 141,596 143,379
------------- ------------- ------------- -------------
Earnings per share:
Basic $ (.14) $ .00 $ (.29) $ (.19)
Diluted $ (.14) $ .00 $ (.29) $ (.19)
21
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE, CONTINUED
Options to purchase 5,568,000 and 1,671,000 paired common shares at prices
ranging from $2.44 to $16.06 were outstanding during the three and nine months
ended September 30, 2000 and 1999, 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 paired common shares or because the inclusion
would result in an antidilutive effect in periods where a loss was incurred. The
options, which expire on dates ranging from December 2008 to September 2010 for
the three months ended September 30, 2000 and dates ranging from July 2007 to
September 2010 for the nine months ended September 30, 2000, were still
outstanding at September 30, 2000.
Convertible debentures outstanding for the three months ended September 30, 2000
and 1999 of 4,765,000 and 6,540,000 paired common shares, respectively, are not
included in the computation of diluted EPS because the inclusion would result in
an antidilutive effect.
Convertible debentures outstanding for the nine months ended September 30, 2000
and 1999 of 5,235,000 and 6,540,000 paired common shares, respectively, are not
included in the computation of diluted EPS because the inclusion would result in
an antidilutive effect.
In addition, convertible preferred stock for the three and nine months ended
September 30, 2000 of 2,680,000 paired common shares are not included in the
computation of diluted EPS because the inclusion would result in antidilution.
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 September 30, 2000. 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.
10. TRANSACTIONS BETWEEN REALTY AND OPERATING COMPANY
Operating Company leases hotel facilities from Realty and its subsidiaries. The
hotel facility lease arrangements between Operating Company and Realty are for a
five year term (beginning July 1998), include base and additional rent
provisions and require Realty to assume costs attributable to property taxes and
insurance.
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.
Periodically, Realty and Operating Company issue shares under the Share Award
Plan. Amounts due from Realty and Operating Company in connection with awards of
shares under the Share Award Plan are shown as a reduction of shareholders'
equity in the accompanying consolidated balance sheets of Realty and Operating
Company, respectively.
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.
11. SEGMENT REPORTING
MEASUREMENT OF SEGMENT PROFIT OR LOSS
The Companies evaluate performance based on contribution from each reportable
segment. The Companies define contribution 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 certain 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 at current market prices, as if the transactions were to
third parties.
22
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. SEGMENT REPORTING, CONTINUED
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.
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS) 2000 1999 2000 1999
-------------------------------- --------------------------------
Lodging:
Room revenue $ 148,042 $ 153,083 $ 437,859 $ 443,142
Guest services and other 7,698 7,214 23,376 27,963
Operating expenses (84,209) (75,047) (234,157) (213,090)
General and administrative expenses (7,067) (4,164) (22,039) (12,946)
Rental property operating costs (7,467) (6,950) (21,711) (20,375)
-------------------------------- --------------------------------
Lodging Contribution 56,997 74,136 183,328 224,694
-------------------------------- --------------------------------
Healthcare:
Rental income 27,299 40,198 87,697 125,719
Interest income 22,807 34,333 83,797 104,166
Rental property operating costs (58) (2,201) (615) (6,497)
General and administrative expenses (3,896) (2,358) (10,804) (11,494)
-------------------------------- --------------------------------
Healthcare Contribution 46,152 69,972 160,075 211,894
-------------------------------- --------------------------------
Other:(a)
Revenue 4,715 - 12,032 -
Operating Expense (3,015) - (7,170) -
General Administrative (1,130) - (3,064) -
-------------------------------- --------------------------------
Other Contribution 570 - 1,798 -
-------------------------------- --------------------------------
Combined Contribution 103,719 144,108 345,201 436,588
-------------------------------- --------------------------------
Reconciliation to Combined Consolidated
Financial Statements:
Interest expense, net 45,841 59,256 152,618 184,599
Depreciation and amortization 42,500 33,277 113,329 101,359
Amortization of goodwill 5,689 5,099 17,076 15,946
Loss (gain) on sale of assets 126,362 (179) 130,725 (12,463)
Other income - (894) - (1,750)
Provision for impairment on real 91,306 - 152,432 -
estate assets
Provision for loss on equity securities - - 39,076 -
Other expenses 9,825 1,025 30,945 40,228
-------------------------------- --------------------------------
321,523 97,584 636,201 327,919
-------------------------------- --------------------------------
Income (loss) from continuing
operations before benefit for
income taxes and extraordinary item (217,804) 46,524 (291,000) 108,669
Income tax benefit - (135) - (508)
-------------------------------- --------------------------------
Income (loss) from continuing
operations before extraordinary item (217,804) 46,659 (291,000) 109,177
Gain (loss adjustment) on disposal of
discontinued operations - 16,644 - 21,513
-------------------------------- --------------------------------
Income (loss) before extraordinary item (217,804) 63,303 (291,000) 130,690
Extraordinary gain on early
extinguishment of debt - - 1,403 -
-------------------------------- --------------------------------
Net income (loss) (217,804) 63,303 (289,597) 130,690
Preferred stock dividends (4,500) (3,938) (13,500) (11,814)
-------------------------------- --------------------------------
Net income(loss) available to Paired
Common shareholders $(222,304) $ 59,365 $ (303,097) $ 118,876
================================ ================================
(a) Other contribution includes Telematrix, a provider of telephones, software
and equipment for the lodging industry, acquired in October 1999.
23
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. SUBSEQUENT EVENTS
On September 7, 2000, the Boards of Directors approved the granting of
approximately 740,000 restricted shares of the Companies' paired common stock to
certain employees. In addition, five members of the Companies' Board of
Directors were granted a total of 125,000 restricted paired shares under the
Companies' existing stock incentive plans as well as options to purchase a total
of 375,000 paired shares. These grants were approved by a disinterested director
after a review of the grants and discussions with an external compensation
consulting firm and the Companies' outside counsel. The restricted paired shares
had not been issued at September 30, 2000. Accordingly, these restricted paired
shares are not included in the calculation of earnings per share for the quarter
ended September 30, 2000. The options granted on September 7, 2000, along with
all options granted to employees during the quarter were considered in the
earnings per share calculation as described in Note 9 "Earning Per Share".
On October 23, 2000, the Board of Directors approved the termination of the La
Quinta Retirement Plan ("the Plan"), a defined benefit plan and the La Quinta
Supplemental Executive Retirement Plan. These terminations will be effective
December 31, 2000. The Company expects to make a final contribution to the Plan
prior to the distribution of its assets to the participants. The amount of this
final contribution is expected to be approximately $1,000,000. The termination
will result in cash contribution savings of approximately $1,800,000 per year
going forward.
In addition, the Board of Directors also approved enhancements to benefits
provided to employees under the La Quinta Inns 401(K) Plan. These enhancements
include an increase in La Quinta's match of employee contributions and a change
in vesting requirements which allow employees more favorable vesting terms.
On November 2, 2000, Sun Healthcare Group, Inc. filed a motion with the US
Bankruptcy Court which, among other things, seeks to reject two leases
between Sun and Realty and challenges certain cross-default provisions
applicable to those leases. The Companies are presently evaluating this
motion.
24
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN MATTERS DISCUSSED HEREIN MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. THE MEDITRUST COMPANIES (THE
"COMPANIES"), CONSISTING OF MEDITRUST CORPORATION ("REALTY") AND MEDITRUST
OPERATING COMPANY ("OPERATING"), INTEND SUCH FORWARD-LOOKING STATEMENTS TO BE
COVERED BY THE SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING STATEMENTS, AND ARE
INCLUDING THIS STATEMENT FOR PURPOSES OF COMPLYING WITH THESE SAFE HARBOR
PROVISIONS. ALTHOUGH THE COMPANIES BELIEVE THE FORWARD-LOOKING STATEMENTS ARE
BASED ON REASONABLE ASSUMPTIONS, THE COMPANIES CAN GIVE NO ASSURANCE THAT THEIR
EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR CONTEMPLATED BY THE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING, WITHOUT
LIMITATION, GENERAL ECONOMIC AND REAL ESTATE CONDITIONS, THE CONDITIONS OF THE
CAPITAL MARKETS IN GENERAL, THE IDENTIFICATION OF SATISFACTORY PROSPECTIVE
BUYERS FOR HEALTHCARE RELATED ASSETS OF THE COMPANIES AND THE AVAILABILITY OF
FINANCING FOR SUCH PROSPECTIVE BUYERS, THE AVAILABILITY OF FINANCING FOR THE
COMPANIES' CAPITAL INVESTMENT PROGRAM, INTEREST RATES, COMPETITION FOR HOTEL
SERVICES AND HEALTHCARE FACILITIES IN A GIVEN MARKET, THE SATISFACTION OF
CLOSING CONDITIONS TO PENDING TRANSACTIONS, IF ANY, DESCRIBED IN THIS FORM 10-Q,
THE ENACTMENT OF LEGISLATION FURTHER IMPACTING THE COMPANIES' STATUS AS A PAIRED
SHARE REAL ESTATE INVESTMENT TRUST ("REIT") OR REALTY'S STATUS AS A REIT, THE
FURTHER IMPLEMENTATION OF REGULATIONS GOVERNING PAYMENTS TO, AS WELL AS THE
FINANCIAL CONDITIONS OF OPERATORS OF, REALTY'S HEALTHCARE RELATED ASSETS,
INCLUDING THE FILING FOR PROTECTION UNDER THE US BANKRUPTCY CODE BY ANY
OPERATORS OF THE COMPANIES' HEALTHCARE ASSETS, THE IMPACT OF THE PROTECTION
OFFERED UNDER THE US BANKRUPTCY CODE FOR THOSE OPERATORS WHO HAVE ALREADY FILED
FOR SUCH PROTECTION AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE FILINGS OF
REALTY AND OPERATING WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING,
WITHOUT LIMITATION, THOSE RISKS DESCRIBED IN ITEM 7 OF THE JOINT ANNUAL REPORT
ON FORM 10-K ENTITLED "CERTAIN FACTORS YOU SHOULD CONSIDER" BEGINNING ON PAGE 67
THEREOF.
OVERVIEW
The basis of presentation includes Management's Discussion and Analysis of
Financial Condition and Results of Operations for the combined and separate
registrants under the Securities and Exchange Act of 1934, as amended.
Management of the Companies believes that the combined presentation is most
informative to the reader.
GENERAL
Consistent with certain components of the Five Point Plan of Reorganization
("the Five Point Plan") which called for orderly disposition of a significant
portion of healthcare assets and substantial reduction in debt, the Companies
completed healthcare asset sales and received mortgage repayments totaling
approximately $1.0 billion during 2000 and have applied substantially all of the
proceeds toward reduction of total indebtedness of $2.6 billion at December 31,
1999 to $1.6 billion at September 30, 2000. After transactions completed through
September 30, 2000, the net book value of Meditrust's remaining healthcare
assets is $929,601,000.
Also, consistent with the plan to focus on the lodging division, the Companies
have made certain changes in the executive management team and are in the
process of transitioning the financial and legal functions of its healthcare
operations from the Needham, Massachusetts office with the intention of
consolidating its remaining healthcare operations in Dallas, Texas by December
31, 2002.
On April 17, 2000, Francis W. ("Butch") Cash joined the Companies as President
and Chief Executive Officer. In addition, in June 2000 the Companies appointed
David L. Rea as Chief Financial Officer of Meditrust Operating Company and
Stephen L. Parker as Senior Vice President of Marketing. As part of the
initiation of a franchise program for the La Quinta brand, the Companies
appointed Allan Tallis as Executive Vice President Chief Development Officer.
25
THE MEDITRUST COMPANIES--COMBINED RESULTS OF OPERATIONS
The Companies earn revenue by (i) owning and operating 230 La Quinta Inns and 70
La Quinta Inn & Suites; (ii) leasing 163 healthcare assets under long-term
triple net leases in which the rental rate is generally fixed with annual
escalators; and (iii) providing mortgage financing for 37 healthcare facilities
in which the interest is generally fixed with annual escalators subject to
certain conditions. The Meditrust Companies reported a net loss available to
paired shareholders of $222,304,000 or $1.56 per diluted common share for the
quarter ended September 30, 2000, compared to net income of $59,365,000 or $.42
per diluted common share for the third quarter of 1999. For the nine months
ended September 30, 2000, The Meditrust Companies reported a net loss available
to paired common shareholders of $303,097,000 or $2.14 per diluted share
compared to net income of $118,876,000 or $.83 per diluted share for the same
period in 1999.
COMBINED RESULTS OF SEGMENT OPERATIONS
The Companies' operations are managed as two major segments: Lodging and
Healthcare. The following table summarizes contribution by operating segment for
the three and nine-month periods ended September 30, 2000 and 1999. The
Companies consider contribution from each operating segment to include revenue
from each business, less operating expenses, rental property operating expenses
and general and administrative expenses. Certain income or expenses of a
non-recurring or unusual nature are not included in the operating segment
contribution.
Summary of Operations
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------------------------------------------------------------------------
(IN THOUSANDS)
Revenue:
Lodging $ 155,740 $ 160,297 $ 461,235 $ 471,105
Healthcare 50,106 74,531 171,494 229,885
Other 4,715 - 12,032 -
--------------------------------------------------------------------------------
Total 210,561 234,828 644,761 700,990
Operating Expenses:
Lodging 98,743 86,161 277,907 246,411
Healthcare 3,954 4,559 11,419 17,991
Other 4,145 - 10,234 -
--------------------------------------------------------------------------------
Total 106,842 90,720 299,560 264,402
Contributions:
Lodging, net 56,997 74,136 183,328 224,694
Healthcare, net 46,152 69,972 160,075 211,894
Other 570 - 1,798 -
--------------------------------------------------------------------------------
Total Contributions $ 103,719 $ 144,108 $ 345,201 $ 436,588
================================================================================
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The combined contribution from operating segments was $103,719,000 for the three
month period ended September 30, 2000, compared to $144,108,000 for the three
month period ended September 30, 1999, a decrease of $40,389,000 or 28.0%. The
decline in the combined contribution is the result of the sale of healthcare
assets and weak operating performance in the lodging segment. The total
contribution is comprised of revenues of $210,561,000 and $234,828,000 for the
three month periods ended September 30, 2000 and 1999; respectively, and total
operating expenses of $106,842,000 and $90,720,000 for the three month periods
ended September 30, 2000 and 1999, respectively.
Lodging provided a contribution of $56,997,000 during the three months ended
September 30, 2000, a decrease of $17,139,000 or 23.1%, from the comparable
prior year period. Lodging operations were negatively impacted during the
quarter due to a number of company specific issues as well as industry
conditions (as noted below). Management is in the process of addressing many of
the company specific issues in an effort to improve future results. These
actions include the hiring of a new management team, changing operating and
pricing policies, and reviewing information system capabilities. The lodging
contribution is comprised of revenues of $155,740,000 and $160,297,000 and
operating expenses of $98,743,000 and $86,161,000 for the three months ended
September 30, 2000 and 1999, respectively. The decrease in lodging contribution
is primarily due to decreased inn revenues and incremental hotel operating and
general and administrative expenses as more fully described below, as well as
the impact of an oversupply of available
26
rooms within the Companies' markets. The following table summarizes statistical
lodging data for the three months ended September 30, 2000 and 1999 for Inns,
Inn & Suites, Total Company and Inn & Suites (Comparable Hotels).
Three months ended September 30,
INNS INN & SUITES TOTAL COMPANY
---- ------------ -------------
2000 1999 2000 1999 2000 1999
------------- ------------ ----------- ---------- ------------ ------------
Number of Hotels 230 232 70 70 300 302
Occupancy Percentage 66.1% 69.4% 67.7% 69.2% 66.5% 69.4%
ADR (1) $59.04 $58.59 $72.97 $70.49 $62.37 $61.34
RevPar (2) $39.04 $40.69 $49.41 $48.81 $41.47 $42.56
Available Rooms(4) 2,737 2,757 841 829 3,578 3,586
Inn & Suites (Comparable Hotels)(3)
Number of Hotels 64 64
Occupancy Percentage 68.1% 69.9%
ADR(1) $72.67 $70.47
RevPar(2) $49.48 $49.25
Available Rooms (4) 762 765
(1) Represents average daily rate
(2) Represents revenue per available room
(3) Represents Inn & Suites open for more than one year.
(4) Available Room count in thousands
Hotel operating revenues are generally measured as a function of average
daily rate (ADR) and occupancy. The ADR for the third quarter of 2000
increased to $62.37 from $61.34 in the comparable quarter of 1999, an
increase of $1.03 or 1.7%. The occupancy percentage decreased 2.9 percentage
points to 66.5% for the quarter ended September 30, 2000 from 69.4% in the
same quarter in 1999. Revenue per available room (RevPar), which is the
product of occupancy percentage and ADR, decreased 2.6% to $41.47 from last
year's comparable quarter. The decrease in RevPar is partially due to an
increase in the supply of available rooms in the region and segment of the
lodging industry in which La Quinta competes. Other factors that have had a
significant impact on La Quinta's operations include certain decisions made
by La Quinta in 1999 related to pricing, the centralization of senior field
operations personnel, the relocation of its headquarters from San Antonio,
Texas to Dallas, Texas coupled with the continuing disruptive impact of the
new property management system, and vacancies in several senior management
positions for the first half of 2000. The increases in hotel operating
expenses of $9,162,000, general and administrative expenses of $2,903,000 and
rental property operating expense of $517,000 are primarily attributable to
increases in salary and wage rates, expenses associated with the
implementation of the new property management system, increased sales
expenses, expenses associated with the realignment of operations personnel,
increase in franchise tax expense, increase in bad debt expense and certain
other incremental expenses. Rental property operating costs attributed to the
lodging segment principally consists of property taxes on hotel facilities.
Hotel operating and general and administrative expenses include costs
associated with the operation such as salaries, wages, utilities, repair and
maintenance, credit card discounts and room supplies as well as certain
allocated corporate expenses, such as the costs of general management, office
rent, training and field supervision of hotel managers and other sales,
marketing and administrative expenses.
Healthcare generated a contribution for the quarter ended September 30, 2000 of
$46,152,000, a decrease of $23,820,000 or 34.0% from the comparable prior year
quarter. The Healthcare contribution was comprised of revenues of $50,106,000
and $74,531,000 and operating expenses of $3,954,000 and $4,559,000 for the
quarter ended September 30, 2000 and 1999, respectively. Of these amounts,
revenues of $32,853,000 pertain to healthcare assets remaining in the Companies'
portfolio at September 30, 2000.
27
The following table summarizes healthcare portfolio by type of facility as of
September 30, 2000 and 1999:
As of September 30,
2000 1999
------------------------------------- -----------------------------------
Type of Facility Facilities Beds/Units Facilities Beds/Units
- ------------------------------------ ------------------------------------- -----------------------------------
Assisted & Retirement Living 94 4,457 137 7,542
Long-Term Care 94 11,744 207 27,131
Medical Office Buildings 5 - 35 120
Acute Care Hospital 1 492 1 492
Other Healthcare 6 625 7 724
------------------------------------- -----------------------------------
200 17,318 387 36,009
===================================== ===================================
The Companies had a remaining net investment of $223,387,000 and $1,059,920,000
in the form of mortgages outstanding to operators of 37 and 161 of the
facilities listed above as of September 30, 2000 and 1999, respectively. The
Companies had a remaining net investment of $706,214,000 and $1,210,799,000 in
the form of leases with operators of 163 and 226 of the facilities listed above
at September 30, 2000 and 1999, respectively.
The decreases in revenues and operating expenses are primarily a result of the
impact on revenue of asset sales and mortgage repayments over the last year net
of the impact of savings in rental and general and administrative expenses.
Rental property operating expenses consisting principally of expenses for the
management and operation of medical office buildings attributable to the
healthcare business decreased $2,143,000. The decrease in rental property
operating expense was primarily due to the sale of substantially all of the
Companies' medical office buildings in January 2000. General and administrative
expenses related to healthcare increased by $1,538,000 as a result of increased
legal and franchise taxes arising from corporate matters and restructuring of
legal entities, personnel related expenses and professional fees.
Telematrix, a provider of telephones, software and equipment for the lodging
industry, contributed $570,000 for the three months ended September 30, 2000.
This contribution was comprised of revenues of $4,715,000 and expenses of
$4,145,000 for the quarter ended September 30, 2000. Telematrix expenses include
operating expenses of $3,015,000 and general and administrative expenses of
$1,130,000. Operations of Telematrix are included in lodging revenue and expense
categories of the combined and consolidated statements since consummation of the
acquisition in October 1999 and separately disclosed as "Other Contribution" in
Note 11 "Segment Reporting" of the combined and consolidated statements.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The combined contribution from operating segments for the nine months ended
September 30, 2000, was $345,201,000 compared to $436,588,000 for the nine
months ended September 30, 2000 and 1999, respectively. This represents a
decrease of $91,387,000 or 20.9%. The decline in the combined contribution is
the result of the sale of healthcare assets and weak operating performance in
the lodging segment. The contribution is comprised of revenues of $644,761,000
and $700,990,000 combined with operating expenses of $299,560,000 and
$264,402,000 for the nine months ended September 30, 2000 and 1999,
respectively.
Lodging provided a contribution of $183,328,000, a decrease of $41,366,000 or
18.4% from the comparable prior year period. Lodging operations were negatively
impacted during the nine months ended September 30, 2000, due to a number of
company specific issues as well as industry conditions (as noted below).
Management is in the process of addressing many of the company specific issues
in an effort to improve future results. These actions include the hiring of a
new management team, changing operating and pricing policies, and reviewing
information system capabilities. This contribution was comprised of revenues of
$461,235,000 and $471,105,000 offset by operating expenses of $277,907,000 and
$246,411,000 for the nine months ended September 30, 2000 and 1999,
respectively. The decrease in lodging contribution is primarily due to a
decrease in inn revenues and incremental hotel operating and general and
administrative expenses, as more fully described below, as well as the impact of
an oversupply of available rooms within the Companies' markets.
28
The following table summarizes statistical lodging data for the nine-month
periods ended September 30, 2000 and 1999 for Inns, Inn & Suites, Total Company
and Inn & Suites - Comparable Hotels.
Nine months ended September 30,
INNS INN & SUITES TOTAL COMPANY
---- ------------ -------------
2000 1999 2000 1999 2000 1999
------------ ------------ ------------- ------------ ------------- --------------
Number of Hotels 230 232 70 70 300 302
Occupancy Percentage 64.4% 69.6% 67.2% 70.8% 65.0% 69.9%
ADR(1) $59.39 $58.37 $75.30 $70.99 $63.26 $61.15
RevPar(2) $38.22 $40.64 $50.58 $50.22 $41.13 $42.72
Available Rooms(4) 8,163 8,186 2,513 2,274 10,677 10,460
Inn & Suites (Comparable Hotels)(3)
Number of Hotels 64 64
Occupancy Percentage 67.7% 71.5%
ADR(1) $74.20 $71.09
RevPar(2) $50.21 $50.82
Available Rooms(4) 2,104 2,099
(1) Represents average daily rate
(2) Represents revenue per available room
(3) Represents Inn & Suites open for more than one year.
(4) Available Room count in thousands
The ADR for the nine month period ending September 30, 2000 increased to $63.26
from $61.15 in 1999, an increase of $2.11 or 3.5%. Occupancy percentage
decreased 4.9 percentage points to 65.0% in 2000 from 69.9% in 1999. RevPar
decreased 3.7% from 1999. The decrease in RevPar is partially due to a greater
increase in the supply of available rooms than in demand in the segment of the
lodging industry in which La Quinta competes. Other factors that have had a
significant impact on La Quinta's operations include certain decisions made by
La Quinta in 1999 related to pricing, the centralization of senior field
operations personnel, the relocation of its headquarters from San Antonio, Texas
to Dallas, Texas coupled with the continuing disruptive impact of the new
property management system, and vacancies in several senior management positions
for the first half of 2000. The increases in hotel operating expenses of
$21,067,000, general and administrative expenses of $9,093,000, and rental
property operating expense of $1,336,000 are primarily attributable to increases
in salary and wage rates, expenses associated with the implementation of the new
property management system, increased sales expenses, expenses associated with
the realignment of operations personnel, executive severance and other
employment contract related expenses, increase in franchise tax expense, an
increase in bad debt expense and certain other incremental expenses. Rental
property operating costs attributed to the lodging segment principally consists
of property taxes on hotel facilities. Hotel operating and general and
administrative expenses include operating costs such as salaries, wages,
utilities, repair and maintenance, credit card discounts and room supplies as
well as certain allocated corporate expenses, such as the costs of general
management, office rent, training and field supervision of hotel managers and
other marketing and administrative expenses.
Healthcare generated a contribution for the nine months ended September 30, 2000
of $160,075,000 a decrease of $51,819,000 or 24.5% compared to the same prior
year period. The contribution was comprised of revenues of $171,494,000 and
$229,885,000 combined with operating expenses of $11,419,000 and $17,991,000 for
the nine month periods ended September 30, 2000 and 1999, respectively. The
decreases in revenues and operating expenses are primarily a result of the
impact on revenue of asset sales and mortgage repayments over the last year net
of the impact of savings in rental and general and administrative expenses.
Rental property operating expenses principally consist of expenses for the
management and operation of medical office buildings and decreased by $5,882,000
from the prior year period primarily as a result of the sale of substantially
all of the Companies' medical office buildings in January 2000. General and
administrative expenses related to healthcare decreased by $690,000 primarily
due to the sale of healthcare assets and tax restructuring.
The Telematrix operation contributed $1,798,000 for the nine months ended
September 30, 2000. This additional contribution is comprised of revenues of
$12,032,000 and expenses of $10,234,000. Operations of Telematrix are included
in lodging revenue and expense categories of the combined and consolidated
statements since consummation of the acquisition in October of 1999 and
separately disclosed as "Other Contribution" in Note 11 "Segment Reporting" of
the combined and consolidated statements.
INTEREST EXPENSE
For the three and nine month periods ended September 30, 2000, the interest
expense decreased by $13,415,000 and $31,981,000, respectively, compared to the
same period in 1999. The decreases in interest expense were due to reductions in
total indebtedness of
29
the Companies as a result of application of substantially all proceeds generated
from the various healthcare asset sales and mortgage repayments over the past
twelve months and were partially offset by increases in borrowing rates over the
same periods.
REAL ESTATE INVESTMENTS, DEPRECIATION, ASSET SALES, AND PROVISION FOR IMPAIRMENT
OF REAL ESTATE ASSETS
As of September 30, 2000 and 1999, the Companies had net investments in real
estate as summarized in the table below:
Three months ended Nine months ended
September 30, September 30,
----------------------------------- -----------------------------------
(IN THOUSANDS)
2000 1999 2000 1999
----------------------------------- -----------------------------------
INVESTMENT IN REAL ESTATE ASSETS, NET
LODGING
Lodging assets held for investment, beginning of period $ 2,474,437 $ 2,547,114 $ 2,509,039 $ 2,539,497
Additions 9,946 9,454 24,424 60,362
Depreciation expense and write offs (30,418) (21,672) (79,498) (64,963)
---------------- ----------------- ----------------- ----------------
Lodging assets held for investment, end of period 2,453,965 2,534,896 2,453,965 2,534,896
---------------- ----------------- ----------------- ----------------
Lodging assets held for sale, beginning of period 12,893 13,674 13,114 16,512
Miscellaneous (129) (641) (350) (3,479)
---------------- ----------------- ----------------- ----------------
Lodging assets held for sale, end of period 12,764 13,033 12,764 13,033
---------------- ----------------- ----------------- ----------------
TOTAL INVESTMENT IN LODGING ASSETS, NET $ 2,466,729 $ 2,547,929 $ 2,466,729 $ 2,547,929
---------------- ----------------- ----------------- ----------------
HEALTHCARE
Healthcare mortgage assets net book value, beginning of
period $ 934,857 $ 1,156,184 $ 1,059,920 $ 1,197,634
Principal amortization (1,456) (2,548) (6,026) (7,278)
Additions - 5,765 161 30,797
Principal prepayments (1,558) (1,229) (1,586) (1,229)
Provisions for loss on mortgages (23,559) - (71,432) -
Net book value of mortgages repaid (684,933) (28,846) (757,800) (90,714)
Other adjustments 36 57 150 173
---------------- ----------------- ----------------- ----------------
Healthcare mortgage assets net book value, end of period 223,387 1,129,383 223,387 1,129,383
---------------- ----------------- ----------------- ----------------
Healthcare assets net book value, beginning of period 828,081 1,250,276 1,090,586 1,333,093
Additions 926 6,947 4,039 34,977
Depreciation expense (5,837) (8,636) (18,681) (27,305)
Provisions for real estate impairments and assets
held for sale (67,747) - (81,000) -
Net book value of assets sold (48,213) (18,596) (285,751) (114,577)
Other adjustments (996) - (2,979) 3,803
---------------- ----------------- ----------------- ----------------
Healthcare assets net book value, end of period 706,214 1,229,991 706,214 1,229,991
---------------- ----------------- ----------------- ----------------
TOTAL INVESTMENT IN HEALTHCARE REAL ESTATE ASSETS, NET 929,601 2,359,374 929,601 2,359,374
---------------- ----------------- ----------------- ----------------
TOTAL REAL ESTATE INVESTMENT, NET BOOK VALUE $ 3,396,330 $ 4,907,303 $ 3,396,330 $ 4,907,303
================ ================= ================= ================
30
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the three and nine month periods ending
September 30, 2000, was $42,500,000 and $113,329,000, respectively, compared to
$33,277,000 and $101,359,000 for the same periods in 1999. The increases from
the prior year periods are primarily the result of incremental depreciation on
the new lodging property management systems, hotel properties put into service
during the nine months ended September 30, 1999 and the write-off of a hotel
building. These increases are partially offset by a decrease in depreciation
from the sale of healthcare assets.
ASSET SALES
During the three and nine month periods ended September 30, 2000, the Companies
have realized losses of $126,362,000 and $130,725,000 related to the sale of
healthcare assets and mortgage repayments yielding net proceeds of $637,518,000
and $943,759,000, respectively. The loss for the three months relates primarily
to the early repayment of mortgages by one operator who offered in August to
prepay substantially all of its mortgages at a discount. In addition, the
Companies had previously recorded a loss provision for mortgages of $32,925,000
and $46,149,000 and a loss provision for assets held for sale of $9,381,000 and
$63,149,000 related to the assets sales and mortgage repayments which were
completed during the three and nine month periods ended September 30, 2000,
respectively. During the three and nine month periods ended September 30, 1999,
the Companies realized gains on the sale of assets of $179,000 and $12,463,000,
respectively.
PROVISION FOR IMPAIRMENT OF REAL ESTATE ASSETS
During the three and nine month periods ending September 30, 2000, the Companies
recorded charges of $91,306,000 and $152,432,000, repectively, related to
provisions for anticipated losses on properties classified as assets held for
sale, provisions on assets held for use and provisions for losses on mortgage
loan receivables.
PROVISION FOR LOSS ON EQUITY SECURITIES
The Companies have an investment in Nursing Home Properties Plc ("NHP Plc"), a
property investment group which specializes in the financing, through sale
leaseback transactions, of nursing homes located in the United Kingdom. The
investment includes approximately 26,606,000 shares of NHP Plc, representing an
ownership interest in NHP Plc of 19.99% of which Realty has voting rights with
respect to 9.99%.
During the nine months ended September 30, 2000, the market value of this
investment significantly decreased below the Companies' initial cost. In
accordance with Financial Accounting Standard Board Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS 115"),
the Companies are required to determine whether a decline in fair value of an
investment accounted for as "an available for sale security" is
other-than-temporary. Further guidance in Staff Accounting Bulletin Topic 5M
("SAB 5M") suggests that the decline is other-than-temporary if, among other
factors, the decline in market value persists for a period over six months and
the decline is in excess of 20% of cost. As a result, the Companies determined
the decline was other-than-temporary at June 30, 2000, adjusted the cost basis
of its investment in NHP Plc to fair value and recorded a charge to earnings for
the impairment of the investment in NHP Plc of $39,076,000 based on the
difference between the Companies' cost of $57,204,000 and the market value as of
June 30, 2000 of $18,128,000. The market value of NHP Plc as of September 30,
2000, was $12,561,000. The decrease of $5,567,000 from the market value as of
June 30, 2000 is reflected as a reduction of shareholders' equity.
As of September 30, 2000, Realty owns 1,081,000 shares of stock and warrants to
purchase 5,000 shares of stock in Balanced Care Corporation ("BCC"), a
healthcare operator. The stock and warrants have a current market value of
$1,154,000. The difference between current market value and the cost of the BCC
investment, recorded as an unrealized gain of $49,000 in shareholders' equity in
the accompanying balance sheet.
OTHER EXPENSE
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the three months ended September 30, 2000, the Companies recorded
approximately $9,825,000 in other expenses as described below.
In January 2000, the Companies announced that the corporate headquarters would
be moved to Dallas, Texas and that changes would be made to the management team.
As a result in June 2000, the Boards of Directors approved a plan to reduce by
14 the number of employees, including four officers, as of December 31, 2000.
The reduction is primarily in the financial and legal groups of the Companies'
Needham, Massachusetts offices. Accordingly, during the three months ended
September 30, 2000, the Companies recorded $4,890,000 for severance related
expenses expected to be incurred to terminate those employees. The Companies
plan to further reduce staff over the next two years with the intention of
consolidating the remaining healthcare operations in Dallas, Texas by
31
December 31, 2002. As part of the plan to close the Needham office, additional
severance and other payments are expected in the future. In addition, the
Companies recorded a charge of $3,142,000 related to accelerated amortization
of debt issuance costs and certain other expenses associated with the early
repayment of debt and the reduction of the Companies' revolving credit
facility.
During the three months ended September 30, 2000, the Companies recorded
provisions and other expense of approximately $1,843,000 on receivables related
to real estate assets and other receivables management considers uncollectible.
The Companies also recorded approximately $50,000 of bad debt recoveries during
the three months ended September 30, 2000 related to receivables written-off in
prior years.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the nine months ended September 30, 2000, the Companies recorded
approximately $30,945,000 in other expenses related to the items described
below.
In January 2000, the Companies executed a separation and consulting agreement
with the Chief Executive Officer, President and Treasurer of Realty pursuant to
which Realty made a cash payment of approximately $9,500,000 (including
consulting fees), converted 155,000 restricted paired common shares into
unrestricted paired common shares (which resulted in approximately $2,500,000 of
accelerated amortization of unearned compensation) and continued certain
medical, dental and other benefits.
Also in January 2000, the Companies announced that the Meditrust corporate
headquarters would be moved to Dallas, Texas and that changes would be made
to the management team. As a result, in June 2000, the Boards of Directors
approved a plan to reduce the number of employees by 14 as of December 31,
2000, including four officers. The reduction is primarily in the financial
and legal groups of the Companies' Needham, Massachusetts offices.
Accordingly, during the nine months ended September 30, 2000, the Companies
recorded $12,202,000 for severance related expenses expected to be incurred
to terminate those employees. The Companies plan to further reduce staff over
the next two years with the intention of consolidating the remaining
healthcare operations in Dallas, Texas by December 31, 2002. As part of the
plan to close the Needham office, additional severance and other payments are
expected in the future. In addition, the Companies recorded a charge of
$3,142,000 related to accelerated amortization of debt issuance costs and
certain other expenses associated with the early repayment of debt and the
reduction of the Companies' revolving credit facility.
During the nine months ended September 30, 2000, the Companies recorded
provisions and other expenses of approximately $4,645,000 on receivables related
to real estate assets and other receivables management considers uncollectible.
The Companies also recorded approximately $1,245,000 of bad debt recoveries
during the nine months ended September 30, 2000 related to receivables
written-off in prior years.
The Companies also incurred approximately $279,000 of professional fees during
the nine month period ended September 30, 2000 related to implementation of the
Five Point Plan.
During the nine months ending September 30, 1999, the Companies recorded other
expense of approximately $40,228,000 related to a separation agreement with the
former Director and Chairman of the Companies and Chief Executive Officer and
Treasurer of Meditrust Operating Company, certain non-recurring costs associated
with development and implementation of the 1998 Plan (including costs related to
the early repayment and modification of certain debt and other advisory fees)
and a charge related to the abandonment of an information system under
development within the Companies' lodging division.
DISCONTINUED OPERATIONS
For the nine months ended September 30, 1999, and as part of the 1998 Plan, the
Companies sold the Santa Anita Racetrack during the fourth quarter of 1998 and
sold the Cobblestone Golf Group during the first quarter of 1999. The Companies
reflected the financial results for 1999 and 1998 of the Santa Anita Racetrack
and Cobblestone Golf Group as discontinued operations. During the nine months
ended September 30, 1999, the Companies adjusted the provision for loss on
disposal of the Cobblestone Golf Group by recording a gain of approximately
$18,552,000 which included an estimate of a working capital adjustment to the
final selling price. In addition, during the nine months ended September 30,
1999, the Companies recorded $2,961,000 as an adjustment to the estimated
selling price of the Santa Anita Racetrack.
32
EXTRAORDINARY ITEM
During the nine months ended September 30, 2000, the Companies retired
$58,496,000 of debt prior to its maturity, (excluding bank related debt) and as
part of certain asset sale transactions repaid secured debt totaling
$14,936,000. As a result of these early repayments of debt, a net gain of
$1,403,000 was realized and is reflected as an extraordinary item.
REALTY--RESULTS OF OPERATIONS
Realty reported a net loss available to common paired shareholders of
$202,252,000 or $1.41 per diluted common share for the quarter ended September
30, 2000, compared to net income of $59,282,000 or $.42 per diluted common share
for the same quarter in 1999. For the nine months ended September 30, 2000,
Realty reported a net loss of $262,667,000 or $1.84 per diluted share compared
to net income of $156,461,000 or $1.08 per diluted share for the same period in
1999.
REVENUE AND EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue for the three months ended September 30, 2000, was $132,982,000 compared
to $155,676,000 for three months ended September 30, 1999, a decrease of
$22,694,000. The revenue decrease was primarily attributed to a decrease in
rental revenue of $12,899,000 and interest revenue of $11,517,000. This decrease
primarily resulted from asset sales and mortgage repayments over the last year
net of the effect of additions to real estate investments made during the same
period. The revenue decrease was partially offset by the addition of revenues
from Telematrix, acquired in October 1999. Revenues related to Telematrix for
the three months ended September 30, 2000 consisted of licensing fees of
$1,750,000.
For the three months ended September 30, 2000, total recurring expenses were
$103,234,000 compared to $108,910,000 for the three months ended September 30,
1999, a decrease of $5,676,000. This decrease was primarily attributable to a
decrease in interest expense of $13,561,000 due to reductions in total
indebtedness as a result application of substantially all proceeds generated
from various healthcare asset sales and mortgage repayments over the past twelve
months. These decreases were partially offset by increases in borrowing rates
over the same periods. Other increases in expenses of $7,695,000 consisted of an
increase in depreciation and amortization expense of $6,103,000 (due to certain
lodging asset writeoffs) as well as an increase in general and administrative
expense of $3,218,000 (due to an increase in legal fees and certain other
expenses) offset by a decrease in rental property operations of $1,626,000 (due
to the sale of healthcare assets).
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue for the nine months ended September 30, 2000, was $415,948,000 compared
to $471,341,000 for nine months ended September 30, 1999, a decrease of
$55,393,000. The revenue decrease was primarily attributed to a decrease in
rental revenue of $38,022,000 and interest revenue of $20,360,000. This decrease
primarily resulted from asset sales and mortgage repayments over the last year
net of the effect of additions to real estate investments made during the same
period. The revenue decrease was partially offset by the addition of revenues
from the acquisition of Telematrix in October 1999. Revenues related to
Telematrix for the nine months ended September 30, 2000 consisted primarily of
licensing fees of $4,460,000.
For the nine months ended September 30, 2000, total recurring expenses were
$312,430,000 compared to $339,193,000 for the nine months ended September 30,
1999, a decrease of $26,763,000. This decrease was primarily attributable to a
decrease in interest expense of $32,203,000 due to reductions in debt from
amounts paid as a result of various asset sales and mortgage repayments over the
past twelve months. This decrease was partially offset by increases in borrowing
rates over the same periods and an increase of $6,217,000 in depreciation and
amortization.
ASSET SALES
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the three months ended September 30, 2000, Realty realized losses on the
sale of healthcare assets and the repayment of mortgage loans of $126,369,000.
This loss relates primarily to the early repayment of mortgages by one operator
who offered in August to prepay substantially all of its mortgages at a
discount. Provisions of $42,306,000 had previously been taken related to these
transactions. Sales of healthcare properties were completed pursuant to the Five
Point Plan.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the nine months ended September 30, 2000, Realty realized losses on the
sale of healthcare assets and the repayment of mortgage loans of $131,702,000
compared to gains of $12,463,000 during the comparable nine months ended
September 30, 1999.
33
Provisions of $109,298,000 had previously been taken related to the asset sales
completed during the nine months ended September 30, 2000.
PROVISION FOR IMPAIRMENT OF REAL ESTATE ASSETS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the three months ended September 30, 2000, the Companies classified
certain assets as held for sale based on management having the authority and
intent of entering into commitments for sale transactions expected to close in
the next twelve months. Based on estimated net sale proceeds, the Companies
recorded a provision for loss on assets held for sale of $11,600,000. The
provision reduces the carrying value of these assets to the estimated net sales
proceeds less costs to sell. During the three months ended September 30, 2000,
the Companies recorded a provision for the mortgage portfolio of $23,559,000. In
addition, during the quarter ended September 30, 2000, the Companies recorded an
impairment provision of $56,147,000 on real estate assets held for use where
current facts, circumstances and analysis indicate that the assets might be
impaired.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the nine months ended September 30, 2000, Realty classified certain
assets as held for sale based on management having the authority and intent of
entering into commitments for sale transactions expected to close in the next
twelve months. Based on estimated net sale proceeds, Realty recorded a provision
for loss on assets held for sale of $24,853,000. During the nine months ended
September 30, 2000, Realty recorded a provision for the mortgage portfolio of
$71,432,000. In addition, during the quarter ended September 30, 2000, the
Companies recorded an impairment provision of $56,147,000 on real estate assets
held for use where current facts, circumstances and analysis indicate that the
assets might be impaired.
PROVISION FOR LOSS ON EQUITY SECURITIES
THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000
During the nine months ended September 30, 2000, the Companies adjusted the cost
basis of an investment in Nursing Home Properties Plc ("NHP Plc") to fair value
by recording a charge to earnings of $39,076,000 based on the difference between
the investment's cost of $57,204,000 and its market value as of June 30, 2000 of
$18,128,000. NHP Plc is a property investment group that specializes in the
financing, through sale leaseback transactions, of nursing homes in the United
Kingdom. The Companies applied accounting guidance provided by the Financial
Accounting Standard Board in Statement No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115") and Staff Accounting
Bulletin Topic 5M ("SAB 5M") in arriving at this impairment charge. These
pronouncements require recognition of decline in fair value of an investment if
the decline is determined to be other than temporary. The market value of NHP
Plc as of September 30, 2000 was $12,561,000. The decrease of $5,567,000 from
the market value as of June 30, 2000 is reflected as a reduction of
shareholders' equity.
OTHER EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the three months ended September 30, 2000, Realty recorded approximately
$9,825,000 in other expenses as described below.
In January 2000, the Companies announced that the corporate headquarters
would be moved to Dallas, Texas and that changes would be made to the
management team. As a result in June 2000, the Boards of Directors approved a
plan to reduce by 14 the number of employees, including four officers, as of
December 31, 2000. The reduction is primarily in the financial and legal
groups of the Companies' Needham, Massachusetts offices. Accordingly, during
the three months ended September 30, 2000, Realty recorded $4,890,000 for
severance related expenses expected to be incurred to terminate those
employees. The Companies plan to further reduce staff over the next two years
with the intention of consolidating the remaining healthcare operations in
Dallas, Texas by December 31, 2002. As part of the plan to close the Needham
office, additional severance and other payments are expected in the future.
In addition, the Companies recorded a charge of $3,142,000 related to
accelerated amortization of debt issuance costs and certain other expenses
associated with the early repayment of debt and the reduction of the
Companies' revolving credit facility.
During the three months ended September 30, 2000, Realty recorded provisions and
other expense of approximately $1,843,000 on receivables related to real estate
assets and other receivables management considers uncollectible. Realty also
recorded approximately $50,000 of bad debt recoveries during the three months
ended September 30, 2000 related to receivables written-off in prior years.
34
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
During the nine months ended September 30, 2000, Realty recorded
approximately $30,945,000 in other expenses related to the items described
below.
In January 2000, the Companies executed a separation and consulting agreement
with the Chief Executive Officer, President and Treasurer of Realty pursuant to
which Realty made a cash payment of approximately $9,500,000 (including
consulting fees), converted 155,000 restricted paired common shares into
unrestricted paired common shares (which resulted in approximately $2,500,000 of
accelerated amortization of unearned compensation) and continued certain
medical, dental and other benefits.
Also in January 2000, the Companies announced that the Meditrust corporate
headquarters would be moved to Dallas, Texas and that changes would be made
to the management team. As a result, in June 2000, the Boards of Directors
approved a plan to reduce the number of employees by 14 as of December 31,
2000, including four officers. The reduction is primarily in the financial
and legal groups of the Companies' Needham, Massachusetts offices.
Accordingly, during the nine months ended September 30, 2000, Realty recorded
$12,202,000 for severance related expenses expected to be incurred to
terminate those employees. The Companies plan to further reduce staff over
the next two years with the intention of consolidating the remaining
healthcare operations in Dallas, Texas by December 31, 2002. As part of the
plan to close the Needham office, additional severance and other payments are
expected in the future. In addition, the Companies recorded a charge of
$3,142,000 related to accelerated amortization of debt issuance costs and
certain other expenses associated with the early repayment of debt and the
reduction of the Companies' revolving credit facility.
During the nine months ended September 30, 2000, Realty recorded provisions
and other expenses of approximately $4,645,000 on receivables related to real
estate assets and other receivables management considers uncollectible.
Realty also recorded approximately $1,245,000 of bad debt recoveries during
the nine months ended September 30, 2000 related to receivables written-off
in prior years.
Realty also incurred approximately $279,000 of professional fees during the
nine month period ended September 30, 2000 related to implementation of the
Five Point Plan.
During the nine months ended September 30, 1999 Realty incurred other expenses
of approximately $8,712,000 related to the 1998 Comprehensive Restructuring
Plan. These expenses consisted of approximately $4,907,000 in write off of debt
costs, 1,119,000 of breakage fees associated with swap contracts related to debt
that was repaid and approximately $2,686,000 in professional and advisory fees.
EXTRAORDINARY ITEM
During the nine months ended September 30, 2000, the Companies retired
$58,496,000 of debt prior to its maturity (excluding bank relate debt), and as
part of certain asset sale transactions repaid secured debt totaling
$14,936,000. As a result of these early repayments of debt, a net gain of
$1,403,000 was realized and is reflected as an extraordinary item.
DISCONTINUED OPERATIONS
Pursuant to the 1998 Plan, Realty classified golf and horseracing activities as
discontinued operations for financial reporting purposes. Accordingly, Realty
presented as discontinued operations approximately $32,376,000 of gains on
disposal of the golf and horseracing segments during the nine months ended
September 30, 1999.
OPERATING--RESULTS OF OPERATIONS
Operating incurred a net loss available to common shareholders for the three
months ended September 30, 2000, of $20,052,000 compared to net income of
$83,000 for the three months ended September 30, 1999. The net loss per common
share for the three months ended September 30, 2000 was $0.14 compared to net
income per common share of $0.00 for the three months ended September 30, 1999.
The per common share amount decreased primarily as a result of the decline in
the operating performance of the lodging segment and increased operating and
general administrative expenses incurred during the three months ended September
30, 2000.
For the nine months ended September 30, 2000, Operating incurred a net loss
available to common shareholders of $40,430,000 compared to $37,585,000 for
the nine months ended September 30, 1999. The net loss per common share for
the nine months ended September 30, 2000 was $0.29 compared to $0.26 for the
nine months ended September 30, 1999. The per common share loss increased
primarily as a result of increasing operating expenses, partially offset by
other expenses and losses on discontinued
35
operations incurred during the nine months ended September 30, 1999, which did
not recur in the nine month period ended September 30, 2000.
REVENUES AND EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Hotel revenues for the three months ended September 30, 2000 were $157,590,000,
compared to $157,219,000 for the three months ended September 30, 1999, an
increase of $371,000. Approximately $147,287,000 or 98% of hotel revenues were
derived from room rentals. Hotel operating revenues generally are measured as a
function of the ADR and occupancy. The ADR increased to $62.37 during the three
months ended September 30, 2000 from $61.34 during the three months ended
September 30, 1999, an increase of $1.03 or 1.7%. Occupancy percentage decreased
2.9 percentage points to 66.5% in 2000 from 69.4% in 1999. RevPar decreased 2.6%
below RevPar for 1999. The decrease in RevPar is partially due to an increase in
the supply of available rooms in the region and segment of the lodging industry
in which La Quinta competes. Certain decisions made by La Quinta in 1999 related
to pricing, centralization of senior field operations personnel and the
relocation of its headquarters from San Antonio, Texas to Dallas, Texas coupled
with the continuing disruptive impact of the new property management system have
also contributed to the decrease in RevPar. The hotel revenue decrease was
offset by the addition of revenues from the acquisition of Telematrix in October
1999. Revenues related to Telematrix for the three months ended September 30,
2000 were $4,715,000.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Hotel revenues for the nine months ended September 30, 2000 were $464,710,000
compared to $461,670,000 for the nine months ended September 30, 1999, an
increase of $3,040,000. Approximately $435,510,000 or 94% of hotel revenues were
derived from room rentals. Hotel operating revenues generally are measured as a
function of the ADR and occupancy. The ADR increased to $63.26 during the nine
months ended September 30, 2000 from $61.15 during the nine months ended
September 30, 1999, an increase of $2.11 or 3.5%. Occupancy percentage decreased
4.9 percentage points to 65.0% in 2000 from 69.9% in 1999. RevPar decreased 3.7%
below RevPar for 1999. The decrease in RevPar is partially due to an increase in
the supply of available rooms in the region and segment of the lodging industry
in which La Quinta competes. Certain decisions made by La Quinta in 1999 related
to pricing, centralization of senior field operations personnel and the
relocation of its headquarters from San Antonio, Texas to Dallas, Texas coupled
with the continuing disruptive impact of the new property management system have
contributed to the decrease in RevPar. The hotel revenue decrease was offset by
the addition of revenues from the acquisition of Telematrix in October 1999.
Revenues related to Telematrix for the nine months ended September 30, 2000 were
$12,032,000.
OPERATING EXPENSES
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total operating expenses for the three months ended September 30, 2000 were
$177,656,000 compared to $157,880,000 for the same period in 1999, an increase
of $19,776,000. This increase was primarily attributable to an increase in
lodging operating expenses of $12,269,000, and an increase to lodging general
and administrative expenses of $2,353,000. The increase in hotel operating
expenses and general and administrative expense is primarily attributable to
increases in salary and wage rates, expenses associated with implementation of
the new property management system, increased sales expenses, expenses
associated with the realignment of field operations personnel, an increase in
bad debt expense and certain other incremental expense. The increase to hotel
operating expenses also includes $3,015,000 of operating costs incurred related
to the operations of Telematrix. Hotel operating and general and administrative
expenses include costs associated with the operation such as salaries, wages,
utilities, repair and maintenance, credit card discounts and room supplies as
well as corporate expenses, such as the costs of general management, office
rent, training and field supervision of hotel managers and other sales,
marketing and administrative expenses. Depreciation and amortization for the
three months ended September 30, 2000, was $5,166,000 compared to $1,962,000 for
the same period in 1999, an increase of $3,204,000. The increase in depreciation
and amortization expense is due to incremental depreciation associated with the
new property management system, the write off of the costs of certain internally
developed software, and depreciation associated with Telematrix operations.
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Total operating expenses for the nine months ended September 30, 2000 were
$505,216,000 compared to $490,798,000 for the same period in 1999, an increase
of $14,418,000. The increase in hotel operating expenses is primarily
attributable to increases in salary and wage rates, increased sales and
marketing expenses, expenses associated with implementation of the new property
management system increased expenses associated with the realignment of field
operations personnel, an increase in bad debt expense and incremental expenses
related to certain other expenses. The increase in hotel operating expenses also
includes $6,355,000 of operating costs incurred related to the operations of
Telematrix. General and administrative expenses increased primarily as a result
of executive severance and other employment related expenses. Hotel operating
and general and administrative expenses include costs associated with the
operation such as salaries, wages, utilities, repair and maintenance, credit
card discounts and room supplies as well
36
as corporate expenses, such as the costs of general management, office rent,
training and field supervision of hotel managers and other sales, marketing and
administrative expenses. Depreciation and amortization for the nine months ended
September 30, 2000, was $11,419,000 compared to $5,666,000 for the same period
in 1999, or an increase of $5,753,000. The increase in depreciation and
amortization expense is due to incremental depreciation associated with the new
property management system, the write off of the costs of certain internally
developed software, and depreciation associated with Telematrix operations.
OTHER EXPENSES
During the nine months ended September 30, 1999, Operating recorded other
expense of approximately $31,516,000 related to a separation agreement with the
former Director and Chairman of the Companies and Chief Executive Officer and
Treasurer of Operating, certain advisory fees related to this separation
agreement, and a charge related to the abandonment of an information system
under development within the Companies' lodging division.
DISCONTINUED OPERATIONS
Pursuant to the 1998 Plan, Operating classified golf and horseracing activities
as discontinued operations for financial reporting purposes. Accordingly,
Operating presented as discontinued operations approximately $10,863,000 of
losses on disposal from the golf and horseracing segments during the nine months
ended September 30, 1999. Operating recorded a loss of $6,445,000 related to the
sale of the Cobblestone Golf Group on March 31, 1999. The loss includes an
estimate of working capital balances at the sale date. The horseracing segment
was sold on December 10, 1998. During the nine months ended September 30, 1999,
a loss of $6,655,000 related to an adjustment of the selling price between
Realty and Operating was recorded. This loss was partially offset by an
estimated gain of $1,875,000 arising from an adjustment relating to working
capital balances at the sale date.
THE MEDITRUST COMPANIES, REALTY, AND OPERATING - COMBINED LIQUIDITY AND CAPITAL
RESOURCES
The Companies earn revenue by (i) owning and operating 230 La Quinta Inns and 70
La Quinta Inns and Suites; (ii) leasing 163 healthcare assets under long-term
triple net leases in which the rental rate is generally fixed with annual
escalators and (iii) providing mortgage financing for 37 healthcare facilities
in which the interest is generally fixed with annual escalators subject to
certain conditions. Approximately $450,000,000 of the Companies' debt
obligations are floating rate obligations in which interest rate and related
cash flows vary with the movements in the London Interbank Offered Rate
("LIBOR"). The general fixed nature of the Companies' assets and the variable
nature of a portion of the Companies' debt obligations creates interest rate
risk. If interest rates were to rise significantly, the Companies' interest
payments may increase resulting in decreases in net income and funds from
operations. To mitigate this risk, the Companies have entered into interest rate
swaps to convert some of its floating rate debt obligations to fixed rate debt
obligations. Interest rate swaps generally involve the exchange of fixed and
floating rate interest payments on an underlying notional amount. At September
30, 2000, the Companies had $450,000,000 of interest rate swaps outstanding in
which the Companies pay a fixed rate of 5.7% to the counterparty and receive
LIBOR from the counterparty. Accordingly, at September 30, 2000, the Companies
have no variable debt outstanding with interest rates that fluctuate with
changes in LIBOR.
Operating is dependent upon Realty for its financing and is a guarantor on
Realty's debt. As a result, the liquidity and capital resources discussion
related to Realty is equally relevant to Operating.
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund the Companies', Realty's and
Operating's future operating expenses and recurring capital expenditures will be
cash flow provided by operating activities and in the case of Operating, by
borrowings from Realty. The Companies, Realty and Operating anticipate that cash
flow provided by operating activities (and in the case of Operating, borrowing
from Realty) will provide the necessary funds on a short and long-term basis to
meet operating cash requirements, including distributions to shareholders.
Future interest expense and distribution payments, if any, for the Companies and
Realty will also be funded with cash flow provided by operating activities.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
The Companies, Realty and Operating provide funding for new investments and
costs associated with restructuring through a combination of long-term and
short-term financing including both debt and equity. The Companies and Realty
also provide funding for new investments and costs associated with restructuring
through the previously announced sale of healthcare related assets. As part of
the Five Point Plan, the Companies and Realty have decided to sell additional
healthcare related assets to meet their commitments and to provide them with
additional liquidity. The Companies and Realty obtain long-term financing
through the issuance of shares, long-term secured or unsecured notes,
convertible debentures and the assumption of mortgage notes. Operating obtains
long-term financing through the issuance of shares and unsecured notes. The
Companies and Realty obtain short-term financing through the use of bank lines
of credit, which are replaced with long-term financing as appropriate, while
Operating obtains short-term financing through borrowings from Realty. From time
to time, the Companies and Realty utilize interest rate caps or swaps to attempt
to hedge
37
interest rate volatility. It is the Companies' and Realty's objective to match
mortgage and lease terms with the terms of their borrowings. The Companies and
Realty 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.
On July 17, 1998, Realty entered into a credit agreement (the "Credit
Agreement") which provided Realty with up to $2,250,000,000 in credit
facilities, replacing Realty's then existing $365,000,000 revolving credit
facilities. The Credit Agreement provided for borrowings in four separate
tranches (each a "Tranche"): Tranche A, a $1,000,000,000 revolving loan, amounts
of which if repaid may be reborrowed, which matures July 17, 2001; Tranche B, a
term loan in the amount of $500,000,000, amounts of which if repaid may not be
reborrowed, which matured July 17, 1999 and which had a $250,000,000 mandatory
principal payment on April 17, 1999; Tranche C, a term loan in the amount of
$250,000,000, amounts of which if repaid may not be reborrowed, which matured
July 17, 1999 with a six month extension option which management exercised for a
fee of 12.5 basis points; and Tranche D, a term loan in the amount of
$500,000,000, amounts of which if repaid may not be reborrowed, which matures
July 17, 2001.
The Credit Agreement includes covenants with respect to maintaining certain
financial benchmarks, limitations on the types and percentages of investments in
certain business lines, a subjective acceleration clause contingent upon the
occurrence of an event with a material adverse effect on the Companies,
limitations on dividends of Realty and Operating, and other restrictions.
On November 23, 1998, Realty amended its Credit Agreement to provide for, among
other things, the amendment of certain financial covenants to accommodate asset
sales, to exclude the impact of non-recurring charges in certain covenant
calculations, and to provide for future operating flexibility. The amendment
also provided for an increase to the LIBOR pricing of the credit facility by
approximately 125 basis points, and the pledge of stock of the Companies'
subsidiaries. This pledge of subsidiary stock also extended on a pro rata basis
to entitled bondholders. Realty also agreed to a 25 basis point increase to the
LIBOR pricing in the event that an equity offering of at least $100,000,000 had
not been completed by February 1, 1999. On February 1, 1999 this increase went
into effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that
was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment provided for, among
other things, a lowering of the commitment on the revolving tranche to
$850,000,000.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan
scheduled to mature on July 17, 1999.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan that
was scheduled to mature on January 17, 2000.
On January 28, 2000, the Companies announced that the Boards of Directors had
approved the Five Point Plan. The Companies also announced that consistent with
the adoption of the Five Point Plan to reduce its emphasis on the healthcare
division, David F. Benson would be leaving as Chief Executive Officer,
President, and Treasurer of Realty.
On June 30, 2000, Realty repaid the 8.54% convertible debentures with a balance
of $34,834,000, that were scheduled to mature on July 1, 2000.
Effective June 30, 2000 Realty reached a third agreement with its bank group to
further amend the Credit Agreement. The third amendment provided for, among
other things, limitations on early debt repayments, limitations on common
dividend payments, which is partially based on a calculation of REIT taxable
income, and changes to the definition of the minimum tangible net worth
covenant.
Effective September 5, 2000, the Companies reached a fourth agreement with its
bank group to further amend the Credit Agreement. The fourth amendment provided
for, among other things: changes to the definition of the minimum tangible net
worth covenant; limitation on cash and cash equivalents held, and limitations on
capital expenditures; reduced the Tranche A revolving loan commitment from
$850,000,000 to $400,000,000; and allowed an optional prepayment of $50,000,000
on the Tranche D term loan. In addition, the agreement specifies when and how
the proceeds of future asset sales are required to be applied against any
outstanding balances on Tranches A and D.
Effective September 7, 2000, the Companies cancelled $50,000,000 of its interest
rate swap agreement. At September 30, 2000, the Companies were fixed rate payors
of 5.7% under an interest rate swap agreement with an underlying notional amount
of $450,000,000 and received a variable rate of 6.6%. Differentials in the
swapped amounts are recorded as adjustments to interest expense of the
Companies.
During the nine months ended September 30, 2000, the Companies and Realty
received net cash proceeds of approximately $890,000,000 from the sale of
healthcare assets and the repayment of healthcare mortgage loans. These cash
proceeds were primarily used to repay the Companies' outstanding debt.
38
At September 30, 2000, the Companies and Realty had approximately $362,000,000
(net of outstanding letters of credit) in available borrowings under its
revolving tranche commitment. During the period from October 1 to December 31,
2000, the Companies and Realty have approximately $1,000,000 of debt maturing.
In addition, Realty also has approximately $90,000,000 of debt maturing in the
first quarter of 2001 and an additional $75,000,000 of debt maturing in July
2001, at approximately the same time as the $450,000,000 Tranche D term loan and
the revolving credit commitment, with a maximum capacity of $400,000,000,
mature. Realty intends to continue to use available borrowings under its
revolving credit facility, together with cash flow from operations and proceeds
from asset sales, to fund the repayment of debt obligations other than the
senior credit facility as they come due. The Companies further intend to use
cash flow from operations and the proceeds from sales of healthcare assets under
the Five Point Plan to repay amounts due under the senior credit facility. The
Companies also intend to pursue the refinancing of amounts due under Realty's
senior credit facility, which the Companies believe may be facilitated by the
continued sale of healthcare assets.
The following is a summary of the Companies' future debt maturities:
(IN MILLIONS)
Notes Convertible Bank Bonds and
Year Payable Debentures Notes Mortgages Total
- ------------------------------------- -------------- -------------- --------------- ------------- ---------------
2000 $ - $ - $ - $ 1 $ 1
2001 123 83 450 22 678
2002 36 54 - 2 92
2003 205 (1) - - 2 207
2004 250 - - 2 252
2005 116 - - - 116
2006 and thereafter 287 - - 19 306
-------------- -------------- --------------- ------------- ---------------
Total 1,017 137 450 48 1,652
Unamortized debt issuance costs (4) - (4) - (8)
-------------- -------------- --------------- ------------- ---------------
Debt, net of unamortized debt
issuance costs $1,013 $ 137 $ 446 $ 48 $1,644
============== ============== =============== ============= ===============
(1) Assumes that $175 of notes due in 2026 are put to the Companies
As of September 30, 2000, the Companies' and Realty's gross real estate
investments totaled approximately $3,899,946,000 consisting of 300 hotel
facilities in service, 94 long-term care facilities, 94 retirement and assisted
living facilities, five medical office buildings, one acute care hospital campus
and six other healthcare facilities. At September 30, 2000, Realty was committed
to provide additional financing of approximately $834,000 for additions to
existing facilities in the portfolio.
The Companies had shareholders' equity of $2,365,152,000 and debt constituted
41% of the Companies' total capitalization as of September 30, 2000. Realty had
shareholders' equity of $2,369,931,000 and debt constituted 41% of the
Companies' total capitalization as of September 30, 2000. The Operating Company
had a shareholders' deficit of $4,969,000.
The Companies and Realty have an effective shelf registration statement on file
with the SEC under which the Companies may issue $1,825,000,000 of securities
including common stock, preferred stock, debt, series common stock, convertible
debt and warrants to purchase shares, preferred shares, debt, series common
stock and convertible debt.
The Companies believe that their various sources of capital, including
availability under Realty's credit facility, operating cash flow for both Realty
and Operating, proceeds from the sale of certain healthcare assets as
contemplated under the Five Point Plan and Operating's borrowings from Realty
are adequate to finance their operations as well as their existing commitments,
including financial commitments related to certain healthcare facilities and
repayment of debt, through the second quarter of 2001. However, the Companies
have significant debt maturing during the third quarter of 2001.
Although the Companies intend to continue to sell healthcare assets and to
pursue the refinancing of the senior credit facility, the Companies efforts, and
the success of these efforts, will be impacted by many factors, some of which
are outside of the Companies' control. The factors impacting the sale of the
healthcare assets include the nature of the assets being sold (including the
condition, financial or otherwise, of the operators of such assets), the overall
condition of the healthcare real estate market at the time of any such sale, the
nature of the consideration delivered by any purchaser of such assets and the
presence of other similar healthcare properties for sale on the market at the
time of any such sale (including the effect that the presence of such other
properties could have on the prices that can be obtained in such sales and the
availability of financing for prospective purchasers of such assets). The
section entitled "Certain Factors You Should Consider" commencing on page 67 of
the Companies' Joint Annual Report on Form 10-K for the year-ending December 31,
1999 contains additional factors that could impact the Companies efforts, and
the success of those efforts, in selling healthcare assets and refinancing the
senior credit facility.
39
The above-described factors (including those set forth in the Companies' Joint
Annual Report on Form 10-K) specifically will impact the amount of the
consideration to be received in connection with the sale of any such assets,
which will impact the amount of debt obligations that may be repaid in
connection with such sales, as well as the gain or loss that will be recognized
by Realty in connection with such sale. Further, to the extent Realty enters
into agreements to sell assets at sales prices less than the carrying value of
such assets on Realty's balance sheet (after giving effect to prior adjustments
to such carrying value), Realty will recognize losses related to such sales,
some of which may be substantial as a result of the above-described
transactions, at the time that such agreements are entered into, rather than at
the time such sales are actually consummated. Accordingly, the Companies cannot
guarantee that their efforts to sell healthcare assets, or to pursue the
refinancing of the senior credit facility, will be successful.
INFORMATION REGARDING OPERATORS OF HEALTHCARE ASSETS
As of September 30, 2000, the healthcare portfolio comprised approximately 31.8%
of the Companies' total real estate investments. Sun and Alterra currently
operate approximately 14.5% of the total real estate investments, or 45.85% of
the healthcare portfolio. A schedule of significant healthcare operators
follows:
Portfolio by Operator
(IN THOUSANDS, EXCEPT NUMBER OF Gross Net Book # of % of # of # of
PROPERTIES AND PERCENTAGES) Investment Value Properties Portfolio Mortgages Properties Leases Properties
---------------- -------------- ----------- ----------- ----------- ------------ ------- ----------
Sun Healthcare Group, Inc. $ 407,079 $ 325,118 41 29.8% $ 30,430 4 $294,688 37
Alterra 161,592 150,115 57 13.8% - - 150,115 57
Other Non-Public Operators 118,998 111,798 13 10.2% 85,566 10 26,232 3
Harborside 103,360 92,940 18 8.5% 15,975 4 76,965 14
Balanced Care Corporation 93,502 91,858 19 8.4% 36,754 7 55,104 12
Tenet Healthcare/Iasis 65,650 56,589 1 5.2% - - 56,589 1
CareMatrix Corporation 50,658 49,498 4 4.5% 35,658 3 13,840 1
Integrated Health Services, Inc. 50,973 37,365 10 3.4% - - 37,365 10
Genesis Health Ventures, Inc. 35,639 33,668 8 3.1% 18,439 4 15,229 4
Assisted Living Concepts 31,487 28,587 16 2.6% - - 28,587 16
Other Public Operators 29,725 27,288 4 2.5% 7,050 1 20,238 3
ARV Assisted Living, Inc. 28,982 26,459 4 2.4% - - 26,459 4
Life Care Centers of America, Inc. 26,212 26,212 2 2.4% 26,212 2 - -
HealthSouth 25,001 25,001 2 2.3% 25,001 2 - -
Paramount Real Estate Services 9,756 9,085 1 0.9% - - 9,085 1
---------------- -------------- ----------- ----------- ----------- ------------ ---------- -------
1,238,614 1,091,581 200 100% 281,085 37 810,496 163
Valuation Allowance - (161,980) - (57,698) - (104,282) -
---------------- -------------- ----------- ----------- ------------ ---------- -------
1,238,614 929,601 200 $ 223,387 37 $ 706,214 163
=========== ============ ========== =======
Lodging:
La Quinta Companies 2,661,332 2,466,729 300
---------------- -------------- -----------
$ 3,899,946 $ 3,396,330 500
================ ============== ===========
Companies in the assisted living sector of the healthcare industry operate
approximately 9.1% of the net book value of Realty's total real estate
investments (and approximately 28.4% of the healthcare portfolio), while
companies in the long term sector approximate 18.8% of the net book value of
Realty's total real estate investments (and approximately 58.5% of the
healthcare portfolio).
Realty monitors credit risk for its Healthcare Portfolio by evaluating a
combination of publicly available financial information, information provided by
the operators themselves and information otherwise available to Realty. The
financial condition and ability of these healthcare operators to meet their
rental and other obligations will, among other things, have an impact on
Realty's revenues, net income (loss), funds available from operations and its
ability to make distributions to its shareholders. The operations of the
long-term care (skilled nursing) companies have been negatively impacted by
changes in Medicare reimbursement rates (PPS), increases in labor costs,
increases in their leverage and certain other factors. In addition, any failure
by these operators to effectively conduct their operations could have a material
adverse effect on their business reputation or on their ability to enlist and
maintain patients in their facilities.
Operators of assisted living facilities are experiencing fill-up periods of a
longer duration, and are being impacted by concerns regarding the potential of
over-building, increased regulation and the use of certain accounting practices.
Accordingly, many of these operators have announced decreased earnings or
anticipated earnings shortfalls and have experienced a significant decline in
their stock prices. These factors have had a detrimental impact on the liquidity
of some assisted living operators, which has caused their growth plans to
decelerate and may have a negative effect on their operating cash flows.
40
OPERATORS IN BANKRUPTCY
As of September 30, 2000, the Companies have exposure to four operators who have
filed for protection under Chapter 11: Sun Healthcare Group, Inc. ("Sun"),
Mariner Health Group ("Mariner"), Integrated Health Services, Inc.
("Integrated"), and Genesis Health Ventures, Inc. ("Genesis"). The following
table describes the number of facilities, net assets by lease/mortgage and the
lease/mortgage income by each of the four operators that have filed for Chapter
11:
Summary of Investments with Operators in Chapter 11
(IN THOUSANDS, EXCEPT FOR Nine Months Ended
NUMBER OF FACILITIES) Leases Mortgages September 30, 2000
---------------------------- ------------------------------ -----------------------------
Total Rental Interest
Operator Date filed Facilities Facilities Net Assets Facilities Net Assets Income Income
-------- ---------- ---------- ---------- ---------- ---------- ---------- ------ ------
Sun(4) 10/14/99 41 37 $299,077 4 $30,430 $35,881 $ - (1)
Mariner 1/18/00 2 1 6,918 1 7,050 733 - (2)
Integrated 2/2/00 10 10 37,365 N/A N/A 4,716 N/A
Genesis 6/26/00 8 4 15,229 4 18,439 1,239 978 (3)
----------- ---------------------------- ------------------------------ -----------------------------
Totals 61 52 $358,589 9 $55,919 $42,569 $978 (3)
=========== ============================ ============================== =============================
(1) No interest payments related to the Sun mortgages have been received
since October 14, 1999 and, accordingly, these mortgages were placed on
non-accrual status.
(2) No interest payments related to the Mariner mortgage were received and,
accordingly, this mortgage was placed on non-accrual status.
(3) No interest payments related to Genesis have been received since June
1, 2000 and, accordingly, such mortgages have been placed on
non-accrual status.
(4) Net lease assets include straight-line rent receivables of $4,389,000.
The Companies continue to monitor its operators that have filed for Chapter
11. The Companies have not come to any definitive agreement with any of these
operators. In the event any of its leases are successfully rejected through
the course of the bankruptcy proceedings, the Companies intend to transition
the operations of these facilities to other operators.
Management has initiated various actions to protect the Companies' interests
under its leases and mortgages including the drawdown and renegotiations of
certain escrow accounts and agreements. While the earnings capacity of certain
facilities has been reduced and the reductions may extend to future periods,
management believes that it has recorded appropriate accounting impairment
provisions based on its assessment of current circumstances. However, upon
changes in circumstances, including but not limited to, possible foreclosure or
lease termination, there can be no assurance that the Companies' investments in
healthcare facilities would not be written down below current carrying value
based upon estimates of fair value at such time.
COMBINED FUNDS FROM OPERATIONS
Combined Funds from Operations ("FFO") of the Companies was $131,688,000 and
$194,908,000 for the nine months ended September 30, 2000 and 1999,
respectively. Effective January 1, 2000 the National Association of Real Estate
Investment Trusts (NAREIT) adopted a new definition of FFO. The Companies
believe that FFO has been calculated using the new definition for all periods
presented in the table below.
Management considers FFO to be a key external measurement of REIT performance.
FFO 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, gains and losses from the sale
of assets and provisions for impairment on owned properties, mortgages and real
estate related equity securities, and extraordinary items.
FFO should not be considered an alternative to net income or other measurements
under generally accepted accounting principles as an indicator of operating
performance or to cash flows from operating, investing, or financing activities
as a measure of liquidity. FFO do not reflect working capital changes, cash
expenditures for capital improvements or principal payments on indebtedness.
41
The following reconciliation of net income and loss available to common
shareholders to FFO illustrates the difference between the two measures of
operating performance for the comparative nine months ended September 30, 2000
and 1999. Certain reconciling items include amounts reclassified from
discontinued operations and, accordingly, do not agree to revenue and expense
captions in the Companies' financial statements.
Combined funds from operations
NINE MONTHS ENDED SEPTEMBER 30,
(IN THOUSANDS) 2000 1999
-------------------- --------------------
Net income (loss) available to common shareholders $(303,097) $118,876
Depreciation of real estate and intangible amortization 115,200 110,008
Other expenses 190,263 -
Other capital gains and losses 130,725 (12,463)
Gain on disposal of business segments - (21,513)
Extraordinary item: Gain on debt extinguishment (1,403) -
-------------------- --------------------
Funds from operations $ 131,688 $194,908
==================== ====================
Weighted average paired common shares outstanding:
Basic 141,596 143,379
Diluted 141,596 143,379
REIT QUALIFICATION ISSUES
The Ticket to Work and Work Incentives Improvement Act of 1999 (the "Ticket to
Work Act"), has modified certain provisions of federal income tax law applicable
to REITs. All of the changes described below will be effective with respect to
the Companies beginning after the year ending December 31, 2000. These changes
include new rules permitting a REIT to own up to 100% of the stock of a
corporation (a "taxable REIT subsidiary"), taxable as a C corporation, that may
provide non-customary services to the REIT's tenants and may engage in certain
other business activities. However, the taxable REIT subsidiary cannot directly
or indirectly operate or manage a lodging or healthcare facility. Although the
taxable REIT subsidiary may lease a lodging facility (i.e., a hotel) from the
REIT (provided no gambling revenues were derived from the hotel or on its
premises), with the lodging facility operated by an "eligible independent
contractor," such eligible independent contractor must be actively engaged in
the trade or business of operating lodging facilities for persons or entities
unrelated to the REIT. On account of the foregoing restrictions imposed on the
use of taxable REIT subsidiaries in the case of lodging and healthcare
facilities, the opportunity for the Companies to make use of taxable REIT
subsidiaries will be limited.
The Ticket to Work Act also replaces the former rule permitting a REIT to own
more than 10% of a corporate subsidiary by value, provided its ownership of the
voting power is limited to 10% (a "decontrolled subsidiary"), with a new rule
prohibiting a REIT from owning more than 10% of a corporation by vote or value,
other than a taxable REIT subsidiary (described above) or a "qualified REIT
subsidiary" (a wholly owned corporate subsidiary that is treated as part of the
REIT for all federal income tax purposes). Existing decontrolled subsidiaries
are grandfathered, but will lose such status if they engage in a substantial new
line of business or acquire any substantial new asset after July 12, 1999, other
than pursuant to a contract binding on such date and at all times thereafter
prior to acquisition. Accordingly, and taking into account the Companies'
general inability to utilize taxable REIT subsidiaries, the Ticket to Work Act
severely limits the ability of Realty to own substantial ownership interests in
taxable corporate subsidiaries. Direct ownership by Realty of assets that
otherwise would be held in a decontrolled subsidiary may not be possible without
disqualifying Realty as a REIT, and transfer of such assets to Operating
similarly may not be possible without causing Realty to recognize substantial
taxable income or jeopardizing the Companies' current grandfather status under
the 1998 anti-paired share legislation enacted as part of the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "Reform Act"). In combination
with the restrictions on activities of a grandfathered pair share REIT provided
for in the Reform Act, the Ticket to Work Act may limit the ability of Realty to
grow through construction or acquisition of new hotels or the acquisition of
other lodging brands or companies.
Compliance with the tax rules applicable to REITS generally and to paired share
REITS in particular has become increasingly difficult due to additional
limitations imposed by the Reform Act and the Ticket to Work Act as well as
other developments in the Companies' businesses, including its recent sales of
health care assets and consequent loss of related qualifying rental and interest
income. Due to recent sales of healthcare assets and the resulting loss of
qualifying rental and interest income disqualifying income as a percentage of
Realty's gross income has increased. Disqualifying income cannot exceed five
percent of Realty's gross income. Although Realty currently satisfies this
requirement additional asset sales (which will result in further reductions of
qualifying rental and interest income) as well as increases in royalty income
(which is considered nonqualifying income) could cause Realty to not meet the
requirement, resulting in REIT disqualification a potential taxable event to
Realty or its shareholders, and or substantial costs to avoid such
disqualification. In light of the Five Point Plan and the Companies' announced
intention to increase its focus on its lodging business (including franchising)
and sell a significant portion of its healthcare assets, the Companies intend to
continue to reevaluate its financial legal and tax structure to determine the
best platform for growing La Quinta and enhancing shareholder value going
forward.
42
Other provisions in the Ticket to Work Act include a reduction in the annual
minimum distribution requirement for a REIT from 95% to 90% of its taxable
income (excluding net capital gain) and a provision which allows a REIT to own
and operate a healthcare facility for a least two years (with extensions for up
to another four years possible) if the facility is acquired by the termination
or expiration of a lease, with net income with respect to such property subject
to corporate tax but not counted as disqualifying income for purposes of
qualification as REIT.
NEWLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") requires that all
derivative investments be recorded in the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction, and the type of hedge transaction. The Companies anticipate
that due to their limited use of derivative instruments, the adoption of SFAS
133 will not have a material effect on the financial statements.
During 1999, Financial Accounting Standards Board Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities--deferral of the Effective
Date of the Statement of Financial Accounting Standards No 133" ("SFAS 137") was
issued. This statement amended SFAS 133 by deferring the effective date to
fiscal quarters of all fiscal years beginning after June 15, 2000.
During 2000, Financial Accounting Standards Board Statement No. 138, "Accounting
for Certain Derivative Instruments and Certain Hedging - an Amendment to the
Statement of Financial Accounting Standards No 133" ("SFAS 138") was issued.
This statement amends the accounting and reporting standards of SFAS 133 for
certain derivative instruments and certain hedging activities.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no changes in the qualitative or quantitative market risk of the
Companies since the prior reporting period.
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of Meditrust Corporation and Meditrust
Operating Company held on July 20, 2000, the recorded vote for each of the
following matters submitted to the shareholders of the Companies was as follows:
1. Election of Directors of Meditrust Corporation: William C. Baker and
John C. Cushman, III were nominated and duly elected to hold office as
Directors of Meditrust Corporation, each to serve a term of three years
and until their successors are duly elected and qualified, by the
number of votes set forth opposite each person's name as follows:
William C. Baker 130,099,963
John C. Cushman, III 130,281,751
The following persons continued as Directors of Meditrust Corporation
following the meeting:
William C. Baker
Clive D. Bode
William G. Byrnes
Francis W. Cash
James P. Conn
John C. Cushman, III
Stephen E. Merrill
43
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
2. Election of Directors of Meditrust Operating Company: William C. Baker
and John C. Cushman, III were nominated and duly elected to hold office
as Directors of Meditrust Operating Company, each to serve a term of
three years and until their successors are duly elected and qualified,
by the number of votes set forth opposite each person's name as
follows:
William C. Baker 129,477,507
John C. Cushman, III 129,661,491
The persons listed below continued as Directors of Meditrust Operating
Company following the meeting:
William C. Baker
Clive D. Bode
William G. Byrnes
Francis W. Cash
James P. Conn
John C. Cushman, III
Stephen E. Merrill
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
Title Method of Filing
10.1 Fourth amendment to Credit Agreement Incorporated by reference to Exhibit 10.1 to the
dated August 31, 2000 by and among joint current report on Form 8-K of Meditrust
Meditrust Corporation, Morgan Guaranty Corporation and Meditrust Operating Company for
Trust Company of New York, Bankers Trust event dated August 31, 2000 (File Nos. 333-47737
Company, Bank Boston, N.A., Fleet and 333-47737-01)
National Bank and other banks set forth
therein
27.1 Financial Data Schedule Filed herewith
27.2 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K
The Meditrust Companies filed a joint current report on form
8-K for event dated August 31, 2000
44
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
SIGNATURES
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 hereunto duly authorized.
MEDITRUST CORPORATION
November 8, 2000 /s/ LAURIE T. GERBER
--------------------
Laurie T. Gerber
Chief Financial Officer and Treasurer
MEDITRUST OPERATING COMPANY
November 8, 2000 /s/ DAVID L. REA
----------------
David L. Rea
Chief Financial Officer and Treasurer
45