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 June 30, 2001
[ ] 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
LA QUINTA PROPERTIES, INC. LA QUINTA CORPORATION
(Exact name of registrant as (Exact name of registrant as
specified in its charter) specified in it charter)
DELAWARE DELAWARE
(State or other jurisdiction of (State or other jurisdiction of
incorporation or organization) incorporation or 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 (Address of principal executive
offices, including zip code) offices, including zip code)
(214) 492-6600 (214) 492-6600
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
MEDITRUST CORPORATION MEDITRUST OPERATING COMPANY
(Former Name, Former Address and (Former Name, Former Address and
Former Fiscal Year, if changed Former Fiscal Year, if changed
since Last Report) since Last Report)
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 July 30, 2001, were:
La Quinta Properties, Inc.: 144,044,488
La Quinta Corporation: 143,099,111
THE LA QUINTA COMPANIES
FORM 10-Q
INDEX
PAGE
Part I. Financial Information
Item 1. Financial Statements
The La Quinta Companies
Combined Consolidated Balance Sheets as of June 30, 2001
(unaudited) and December 31, 2000................................................................ 1
Combined Consolidated Statements of Operations for the three and six month periods
ended June 30, 2001 (unaudited) and 2000 (unaudited)............................................. 2
Combined Consolidated Statements of Cash Flows for the six
month periods ended June 30, 2001 (unaudited) and 2000 (unaudited)............................... 3
La Quinta Properties, Inc.
Consolidated Balance Sheets as of June 30, 2001 (unaudited)
and December 31, 2000............................................................................ 4
Consolidated Statements of Operations for the three and six month periods ended
June 30, 2001 (unaudited) and 2000 (unaudited)................................................... 5
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 2001 (unaudited) and 2000 (unaudited)................................................... 6
La Quinta Corporation
Consolidated Balance Sheets as of June 30, 2001 (unaudited)
and December 31, 2000............................................................................ 7
Consolidated Statements of Operations for the three and six month periods
ended June 30, 2001 (unaudited) and 2000 (unaudited)............................................. 8
Consolidated Statements of Cash Flows for the six month periods ended
June 30, 2001 (unaudited) and 2000 (unaudited)................................................... 9
Notes to Combined Consolidated Financial Statements (unaudited).................................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 26
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................. 41
Part II. Other Information
Item 1. Legal Proceedings.......................................................................... 43
Item 4. Submission of Matters to a Vote of Security Holders........................................ 43
Item 6. Exhibits and Reports on Form 8-K........................................................... 41
Signatures......................................................................................... 42
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE LA QUINTA COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
----------- ------------
ASSETS: ................................................................................ (unaudited)
Real estate investments, net ........................................................... $ 2,829,444 $ 3,352,676
Cash and cash equivalents .............................................................. 203,363 38,993
Fees, interest and other receivables ................................................... 66,541 73,476
Goodwill, net .......................................................................... 446,579 457,789
Other assets, net ...................................................................... 172,674 176,103
----------- -----------
Total assets .................................................................. $ 3,718,601 $ 4,099,037
=========== ===========
LIABILITIES:
Indebtedness:
Notes payable ...................................................................... $ 1,017,163 $ 1,017,244
Convertible debentures ............................................................. 54,036 137,028
Bank notes payable ................................................................. 150,000 400,000
Bonds and mortgages payable ........................................................ 32,339 42,077
----------- -----------
Total indebtedness ............................................................... 1,253,538 1,596,349
----------- -----------
Accounts payable, accrued expenses and other liabilities ............................... 173,846 179,877
----------- -----------
Total liabilities ................................................................ 1,427,384 1,776,226
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
La Quinta Properties, Inc. Preferred Stock, $0.10 par value; 6,000 shares
authorized; 701 shares issued and outstanding at June 30, 2001 and
December 31, 2000 ............................................................ 70 70
Paired Common Stock, $0.20 combined par value; 500,000 shares
authorized; 143,036 and 142,905 paired shares issued and outstanding
at June 30, 2001 and December 31, 2000, respectively ......................... 28,607 28,580
Additional paid-in-capital ......................................................... 3,659,380 3,659,339
Unearned compensation .............................................................. (3,752) (4,911)
Accumulated other comprehensive income ............................................. (1,017) (985)
Distributions in excess of net income .............................................. (1,392,071) (1,359,282)
----------- -----------
Total shareholders' equity ...................................................... 2,291,217 2,322,811
----------- -----------
Total liabilities and shareholders' equity .................................. $ 3,718,601 $ 4,099,037
=========== ===========
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, 2000, are an integral part of these financial statements.
1
THE LA QUINTA COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
------------------ ------------------
REVENUE:
Lodging ................................................................... $ 158,694 $ 160,210 $ 311,690 $ 309,957
Rental .................................................................... 9,196 28,403 36,390 60,398
Interest .................................................................. 7,805 29,100 17,068 60,990
------------ ---------- ---------- ----------
175,695 217,713 365,148 431,345
------------ ---------- ---------- ----------
EXPENSES:
Direct lodging operations ................................................. 67,512 69,527 132,952 132,440
Other lodging expenses .................................................... 16,588 15,211 33,276 30,049
Interest .................................................................. 24,822 51,541 59,758 106,777
Depreciation and amortization ............................................. 29,697 34,090 59,244 70,829
Amortization of goodwill .................................................. 5,526 5,688 11,212 11,387
General and administrative ................................................ 12,887 15,625 25,124 27,374
(Gain) loss on sale of assets and mortgage repayments ..................... (2,345) 551 (2,291) 4,363
Impairment of real estate assets, mortgages and notes receivable .......... 33,767 61,126 60,608 61,126
Provision for loss on equity securities ................................... -- 39,076 -- 39,076
Other ..................................................................... (503) 8,756 9,517 21,120
------------ ---------- ---------- ----------
187,951 301,191 389,400 504,541
------------ ---------- ---------- ----------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ......................... (12,256) (83,478) (24,252) (73,196)
Income tax expense ........................................................ 217 -- 393 --
------------ ---------- ---------- ----------
LOSS BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE .............................................. (12,473) (83,478) (24,645) (73,196)
EXTRAORDINARY ITEM:
Gain on early extinguishments of debt ..................................... -- 9 -- 1,403
Cumulative effect of change in accounting principle ....................... -- -- 856 --
------------ ---------- ---------- ----------
NET LOSS ..................................................................... (12,473) (83,469) (23,789) (71,793)
Preferred stock dividends ................................................. (4,500) (4,500) (9,000) (9,000)
------------ ---------- ---------- ----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS .................................... $ (16,973) $ (87,969) $ (32,789) $ (80,793)
============ ========== ========== ==========
BASIC LOSS PER PAIRED COMMON SHARE:
Loss available to Common Shareholders
before extraordinary item and cumulative effect of change in
accounting principle.................................................... $ (0.12) $ (0.62) $ (0.24) $ (0.58)
Gain on early extinguishments of debt .................................. -- -- -- 0.01
Cumulative effect of change in accounting principle .................... -- -- 0.01 --
------------ ---------- ---------- ----------
Net loss................................................................ $ (0.12) $ (0.62) $ (0.23) $ (0.57)
============ ========== ========== ==========
DILUTED LOSS PER PAIRED COMMON SHARE:
Loss available to Common Shareholders
before extraordinary item and cumulative effect of change in
accounting principle .................................................... $ (0.12) $ (0.62) $ (0.24) $ (0.58)
Gain on early extinguishments of debt ..................................... -- -- -- 0.01
Cumulative effect of change in accounting principle ....................... -- -- 0.01 --
------------ ---------- ---------- ----------
Net loss................................................................... $ (0.12) $ (0.62) $ (0.23) $ (0.57)
============ ========== ========== ==========
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, 2000, are an integral part of these financial statements.
2
THE LA QUINTA COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
------------------------
(IN THOUSANDS) 2001 2000
------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................ $ (23,789) $ (71,793)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation of real estate .................................................... 51,165 61,868
Goodwill amortization .......................................................... 11,212 11,387
(Gain) loss on sale of assets .................................................. (2,291) 4,363
Shares issued for compensation ................................................. 232 --
Gain on early extinguishments of debt .......................................... -- (2,183)
Other depreciation, amortization and other items, net .......................... 12,253 13,122
Other non-cash items ........................................................... 71,495 111,892
--------- ---------
Cash Flows from Operating Activities Available for Distribution ..................... 120,277 128,656
Net change in other assets and liabilities ..................................... (28,833) (9,556)
--------- ---------
Net cash provided by operating activities ................................. 91,444 119,100
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on bank notes payable ...................................... 245,000 127,000
Repayment of bank notes payable ..................................................... (495,000) (328,700)
Repayment of notes payable .......................................................... -- (43,033)
Repayment of convertible debentures ................................................. (82,992) (48,115)
Debt issuance costs ................................................................. (8,786) --
Principal payments on bonds and mortgages payable ................................... (9,614) (17,946)
Dividends/distributions to shareholders ............................................. (9,000) (9,000)
--------- ---------
Net cash used in financing activities ..................................... (360,392) (319,794)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate capital expenditures and development funding ............................ (34,670) (17,848)
Investment in real estate mortgages and development funding ......................... -- (161)
Prepayment proceeds and principal payments received on real estate mortgages ........ 10,943 21,136
Proceeds from sale of assets ........................................................ 449,308 235,802
Proceeds from sale of securities .................................................... 7,737 --
Payment of costs related to prior year asset sales .................................. -- (25,879)
Working capital and notes receivable advances, net of repayments and collections .... -- (10,137)
--------- ---------
Net cash provided by investing activities ..................................... 433,318 202,913
--------- ---------
Net increase in cash and cash equivalents ..................................... 164,370 2,219
Cash and cash equivalents at:
Beginning of period ................................................................. 38,993 7,220
--------- ---------
End of period ....................................................................... $ 203,363 $ 9,439
========= =========
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, 2000, are an integral part of these financial statements.
3
LA QUINTA PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
--------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
--------------- ---------------
ASSETS: (unaudited)
Real estate investments, net ............................................. $ 2,800,828 $ 3,333,168
Cash and cash equivalents ................................................ 203,083 38,991
Fees, interest and other receivables ..................................... 45,209 56,829
Goodwill, net ............................................................ 418,313 429,134
Rent and royalties receivable from La Quinta Corporation ................. 140,532 63,516
Due from La Quinta Corporation ........................................... -- 27,679
Other assets, net ........................................................ 123,785 123,165
----------- -----------
Total assets ................................................. $ 3,731,750 $ 4,072,482
=========== ===========
LIABILITIES:
Indebtedness:
Notes payable ........................................................ $ 1,017,163 $ 1,017,244
Convertible debentures ............................................... 54,036 137,028
Bank notes payable ................................................... 150,000 400,000
Bonds and mortgages payable .......................................... 32,339 42,077
----------- -----------
Total indebtedness .............................................. 1,253,538 1,596,349
----------- -----------
Due to La Quinta Corporation ............................................. 15,870 --
Accounts payable, accrued expenses and other liabilities ................. 104,382 110,545
----------- -----------
Total liabilities .................................................. 1,373,790 1,706,894
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.10 par value; 6,000 shares authorized;
701 shares issued and outstanding at June 30, 2001
and December 31, 2000 .......................................... 70 70
Common Stock, $0.10 par value; 500,000 shares authorized; 144,341
and 144,210 shares issued and outstanding at June 30, 2001 and
December 31, 2000, respectively .................................... 14,434 14,421
Additional paid-in-capital ........................................... 3,592,365 3,592,306
Unearned compensation .............................................. (1,846) (2,526)
Accumulated other comprehensive income ............................. (32) --
Distributions in excess of net income ................................ (1,247,031) (1,238,683)
----------- -----------
Total shareholders' equity ......................................... 2,357,960 2,365,588
----------- -----------
Total liabilities and shareholders' equity ....................... $ 3,731,750 $ 4,072,482
=========== ===========
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, 2000, are an integral part of these financial statements.
4
LA QUINTA PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
------------------------ -------------------------
REVENUE:
Lodging .............................................................. $ 2,450 $ 2,883 $ 5,505 $ 5,674
Rental ............................................................... 9,196 28,403 36,390 60,398
Interest ............................................................. 7,791 29,075 17,048 60,928
Rent from La Quinta Corporation ...................................... 77,764 76,641 149,332 145,521
Interest from La Quinta Corporation .................................. -- 143 -- 284
Royalty from La Quinta Corporation ................................... 5,546 5,270 10,994 10,143
--------- --------- ---------- ----------
102,747 142,415 219,269 282,948
--------- --------- ---------- ----------
EXPENSES:
Direct lodging operations ............................................ 623 762 1,404 1,492
Other lodging expenses ............................................... 7,946 7,581 16,335 15,301
Interest ............................................................. 24,764 51,434 59,621 106,559
Depreciation and amortization ........................................ 26,666 30,719 53,639 64,382
Amortization of goodwill ............................................. 5,331 5,493 10,823 10,998
General and administrative ........................................... 5,008 5,862 9,424 10,379
(Gain) loss on sale of assets and mortgage repayments ................ (2,345) 1,521 (2,291) 5,333
Impairment of real estate assets, mortgages and notes receivable ..... 33,767 61,126 60,608 61,126
Provision for loss on equity securities .............................. -- 39,076 -- 39,076
Other ................................................................ (503) 8,756 9,517 21,120
--------- --------- ---------- ----------
101,257 212,330 219,080 335,766
--------- --------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ................... 1,490 (69,915) 189 (52,818)
Income tax expense ............................................... 217 -- 393 --
--------- --------- ---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE .................................. 1,273 (69,915) (204) (52,818)
EXTRAORDINARY ITEM:
Gain on early extinguishments of debt ................................ -- 9 -- 1,403
Cumulative effect of change in accounting principle .................. -- -- 856 --
--------- --------- ---------- ----------
NET INCOME (LOSS) .......................................................... 1,273 (69,906) 652 (51,415)
Preferred stock dividends ....................................... (4,500) (4,500) (9,000) (9,000)
--------- --------- ---------- ----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS .................................. $ (3,227) $ (74,406) $ (8,348) $ (60,415)
========= ========= ========== ==========
BASIC LOSS PER PAIRED COMMON SHARE:
Loss available to Common Shareholders before extraordinary item
and cumulative effect of change in accounting principle .......... $ (0.02) $ (0.52) $ (0.07) $ (0.43)
Gain on early extinguishments of debt ................................ -- -- -- 0.01
Cumulative effect of change in accounting principle .................. -- -- 0.01 --
--------- --------- ---------- ----------
Net loss.............................................................. $ (0.02) $ (0.52) $ (0.06) $ (0.42)
========= ========= ========== ==========
DILUTED LOSS PER PAIRED COMMON SHARE:
Loss available to Common Shareholders before extraordinary item
and cumulative effect of change in accounting principle .......... $ (0.02) $ (0.52) $ (0.07) $ (0.43)
Gain on early extinguishments of debt ................................ -- -- -- 0.01
Cumulative effect of change in accounting principle .................. -- -- 0.01 --
--------- --------- ---------- ----------
Net loss.............................................................. $ (0.02) $ (0.52) $ (0.06) $ (0.42)
========= ========= ========== ==========
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, 2000, are an integral part of these financial statements.
5
LA QUINTA PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
--------------------------------------
(IN THOUSANDS) 2001 2000
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................... $ 652 $ (51,415)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation of real estate ................................................ 50,788 61,528
Goodwill amortization ...................................................... 10,823 10,998
(Gain) loss on sale of assets .............................................. (2,291) 5,333
Gain on early extinguishments of debt ...................................... -- (2,183)
Shares issued for compensation ............................................. 232 --
Other depreciation, amortization and other items, net ...................... 6,445 7,097
Other non-cash items ....................................................... 71,495 111,892
--------- ---------
Cash Flows from Operating Activities Available for Distribution ................. 138,144 143,250
Net change in other assets and liabilities ................................. (47,124) (23,747)
--------- ---------
Net cash provided by operating activities ............................. 91,020 119,503
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on bank notes payable .................................. 245,000 127,000
Repayment of bank notes payable ................................................. (495,000) (328,700)
Repayment of notes payable ...................................................... -- (43,033)
Repayment of convertible debentures ............................................. (82,992) (48,115)
Debt issuance costs ............................................................. (8,786) --
Principal payments on bonds and mortgages payable ............................... (9,614) (17,946)
Dividends/distributions to shareholders ......................................... (9,000) (9,000)
--------- ---------
Net cash used in financing activities ....................................... (360,392) (319,794)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Real estate capital expenditures and development funding ........................ (34,524) (17,766)
Investment in real estate mortgages and development funding ..................... -- (161)
Prepayment proceeds and principal payments received on real estate mortgages .... 10,943 21,136
Payment of costs related to prior year asset sales .............................. -- (25,879)
Proceeds from sale of assets .................................................... 449,308 235,802
Proceeds from sale of securities ................................................ 7,737 --
Working capital and notes receivable advances, net of repayments and
collections ............................................................... -- (10,137)
--------- ---------
Net cash provided by investing activities ................................... 433,464 202,995
--------- ---------
Net increase in cash and cash equivalents ................................... 164,092 2,704
Cash and cash equivalents at:
Beginning of period ............................................................. 38,991 5,779
--------- ---------
End of period ................................................................... $ 203,083 $ 8,483
========= =========
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, 2000, are an integral part of these financial statements.
6
LA QUINTA CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
---------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
---------- ------------
ASSETS: (unaudited)
Cash and cash equivalents .................................................. $ 280 $ 2
Fees, interest and other receivables ....................................... 21,332 16,647
Due from La Quinta Properties, Inc. ........................................ 15,870 --
Other current assets, net .................................................. 9,494 9,613
--------- ---------
Total current assets .................................................. 46,976 26,262
Investment in Common Stock of La Quinta Properties, Inc. ................... 37,581 37,581
Goodwill, net .............................................................. 28,266 28,655
Property, plant and equipment, net of accumulated depreciation
of $13,949 and $9,339, respectively .................................... 67,993 56,125
Other non-current assets ................................................... 5,073 6,959
--------- ---------
Total assets ................................................ $ 185,889 $ 155,582
========= =========
LIABILITIES:
Accounts payable ........................................................... $ 27,855 $ 28,876
Accrued payroll and employee benefits ...................................... 28,652 30,767
Accrued expenses and other current liabilities ............................. 6,408 6,516
Rent and royalty payable to La Quinta Properties, Inc. ..................... 140,532 63,516
Due to La Quinta Properties, Inc. .......................................... -- 27,679
--------- ---------
Total current liabilities ............................................ 203,447 157,354
Other non-current liabilities .............................................. 11,353 3,173
--------- ---------
Total liabilities .................................................... 214,800 160,527
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT:
Common Stock, $0.10 par value; 500,000 shares authorized; 143,036 and
142,905 shares issued and outstanding at June 30, 2001 and
December 31, 2000, respectively ....................................... 14,304 14,290
Additional paid-in-capital ................................................. 104,716 104,734
Unearned compensation ...................................................... (1,906) (2,385)
Accumulated other comprehensive income ..................................... (985) (985)
Accumulated deficit ........................................................ (145,040) (120,599)
--------- ---------
Total shareholders' deficit ........................................ (28,911) (4,945)
--------- ---------
Total liabilities and shareholders' deficit .................... $ 185,889 $ 155,582
========= =========
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, 2000, are an integral part of these financial statements.
7
LA QUINTA CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
------ ------ ------ ------
REVENUE:
Lodging ......................................... $ 156,338 $ 157,453 $ 306,383 $ 304,499
Interest ........................................ 14 25 20 62
--------- --------- --------- ---------
156,352 157,478 306,403 304,561
--------- --------- --------- ---------
EXPENSES:
Direct lodging operations ...................... 66,897 68,764 131,548 130,947
Other lodging expenses ......................... 8,708 7,707 17,095 14,915
Depreciation and amortization .................. 3,031 3,371 5,605 6,447
Amortization of goodwill ....................... 195 195 389 389
Interest and other ............................. 58 107 137 218
Interest to La Quinta Properties, Inc. ......... -- 143 -- 284
General and administrative ..................... 7,899 9,813 15,744 17,045
Royalty to La Quinta Properties, Inc. .......... 5,546 5,270 10,994 10,143
Rent to La Quinta Properties, Inc. ............. 77,764 76,641 149,332 145,521
Gain on sale of assets ......................... -- (970) -- (970)
--------- --------- --------- ---------
170,098 171,041 330,844 324,939
--------- --------- --------- ---------
NET LOSS ......................................... $ (13,746) $ (13,563) $ (24,441) $ (20,378)
========= ========= ========= =========
EARNING PER COMMON SHARE:
Basic ........................................... $ (0.10) $ (0.10) $ (0.17) $ (0.14)
Diluted ......................................... $ (0.10) $ (0.10) $ (0.17) $ (0.14)
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, 2000, are an integral part of these financial statements.
8
LA QUINTA CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------
2001 2000
------ ------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................... $(24,441) $(20,378)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Goodwill amortization ................................................. 389 389
Gain on sale of assets ................................................ -- (970)
Other depreciation and amortization ................................... 6,185 6,365
Net change in other assets and liabilities ............................ 18,291 14,191
-------- --------
Net cash provided by (used in) operating activities .............. 424 (403)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate and development funding ......................... (146) (82)
-------- --------
Net cash used in investing activities ................................. (146) (82)
-------- --------
Net increase (decrease) in cash and cash equivalents .................. 278 (485)
Cash and cash equivalents at:
Beginning of period ........................................................ 2 1,441
-------- --------
End of period .............................................................. $ 280 $ 956
======== ========
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, 2000, are an integral part of these financial statements.
9
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION 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 accounting principles generally
accepted in the United States, 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").
Effective June 20, 2001, The Meditrust Companies were renamed The La Quinta
Companies. Meditrust Corporation was renamed La Quinta Properties, Inc. and
Meditrust Operating Company was renamed La Quinta Corporation. The renamed La
Quinta Companies continue to trade on the New York Stock Exchange as a
paired-share REIT under the new ticker symbol "LQI".
In the opinion of La Quinta Properties, Inc. and subsidiaries ("Realty")
and La Quinta Corporation and subsidiaries ("Operating", and collectively with
Realty, the "Companies" or "The La Quinta 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 June 30, 2001, the results of operations for the three
and six month periods ended June 30, 2001 and 2000, and cash flows for the six
month periods ended June 30, 2001 and 2000. The results of operations for the
three and six month periods ended June 30, 2001 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 and The La Quinta 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, 2000 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. Combined Realty and Operating financial statements have been
presented as The La Quinta Companies. All significant intercompany and
inter-entity balances and transactions have been eliminated in combination. The
La Quinta Companies and Realty use an unclassified balance sheet presentation.
The consolidated financial statements of Realty and Operating include the
accounts of the respective entity and its majority-owned 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.
CHANGE IN ACCOUNTING PRINCIPLE
The Companies use interest rate swap agreements, a derivative instrument,
to manage its exposure to interest rate risk. Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," was adopted by the Companies
beginning January 1, 2001. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities measured at fair value and that
depending on the nature of the hedge, changes in the fair value of the
derivative be offset against the change in fair value of the hedged assets or
liabilities through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. Any ineffective portion of a
derivative's change in fair value is immediately recognized in earnings and any
derivatives that are not hedges are adjusted to fair value through income. The
Companies currently have not obtained hedge accounting for any of it's
derivatives; therefore, the Companies' derivatives have been carried at fair
value on the balance sheet and changes in the fair value have been recognized in
current period earnings.
Adoption of these new accounting standards resulted in a net charge to
earnings of $1,236,000 during the three months ended March 31, 2001 comprised of
a loss for the change in fair value for the three months ended March 31, 2001
recorded in interest expense of approximately $2,092,000 and a partially
offsetting entry to reflect the cumulative effect of a change in accounting
principle (through December 31, 2000) of $856,000. Additionally, the adoption
required the Companies to record a liability on the balance sheet to record the
fair value of the interest rate swap at March 31, 2001.
10
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
On June 27, 2001, the Companies settled its interest rate swap agreement.
The Companies settled the interest rate swap at its fair value of approximately
$566,000, decreasing interest expense by $670,000 to record the difference
between the recorded liability and fair market value on the date of settlement.
As of June 30, 2001, the Companies have no outstanding derivatives.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 will be
effective for fiscal years beginning after December 15, 2001 and will require
1) intangible assets (as defined in SFAS No. 141) to be reclassified into
goodwill, 2) the ceasing of amortization of goodwill, and 3) the testing of
goodwill for impairment at transition and on an annual basis (more frequently
if the occurrence of an event or circumstance indicates an impairment). The
Companies will adopt SFAS No. 142 on January 1, 2002. The Companies have not
yet determined what the impact of SFAS No. 142 will be on the Companies'
results of operations and financial position.
In January 2001, the Emerging Issues Task Force of the Financial
Accounting Standards Board (the "EITF") reached a consensus ("the Consensus")
on a portion of the EITF Issue No. 00-22 "Accounting for `Points' and Certain
Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free
Products or Services to Be Delivered in the Future." The Consensus addresses
the recognition of a cash rebate or refund obligation as a reduction of
revenue based on a systematic and rational allocation of cost. In January
2001, Operating implemented a customer retention program which provides a
cash rebate. In accordance with the consensus, Operating classified such cash
rebates or refunds as a reduction of revenues. In addition, the EITF will
address incentive or loyalty programs such as the "La Quinta Returns Club."
Operating has historically reported the cost that it would refund the hotel
for the free night as offsetting components of marketing expense and lodging
revenues and reflected a zero economic impact of the "free night stay." In
2001, Operating has presented this revenue as a reduction of costs. The 2000
comparable marketing expense and lodging revenue components have been
reclassified to conform with the fiscal year 2001 financial statement
presentation. The Companies will re-evaluate the impact of the final
Consensus of the EITF on the Companies' accrual of the "minimal" value of a
night's stay award and will make any necessary adjustments and revision to
accounting policy upon implementation of EITF issue No. 00-22.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
replaced SFAS No. 125 of the same name. The Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after June 30, 2001. The Statement is also effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures for prior comparative financial statements are not required. The
Companies are currently not affected by the Statement's requirements.
RECLASSIFICATION
Certain reclassifications have been made to the 2000 presentation to
conform to the 2001 presentation.
11
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUPPLEMENTAL CASH FLOW INFORMATION
Details of other non-cash items:
FOR THE SIX MONTHS ENDED
JUNE 30,
-------------------------------------
(IN THOUSANDS) 2001 2000
------------------ ----------------
Impairment of assets held for sale.................................................. $ 16,280 $ 13,253
Impairment of assets held for use................................................... 23,731 -
Impairment of real estate mortgages and notes receivable............................ 20,597 47,873
Provision for loss on equity securities............................................. - 39,076
Straight line rent.................................................................. - (885)
Provision for loss on interest and other receivables ............................... 9,933 2,802
Reserve for restructuring expenses.................................................. 1,080 7,312
Accelerated amortization of unearned compensation................................... - 2,461
Other............................................................................... (126) -
----------------- ---------------
Total other non-cash items.......................................................... $ 71,495 $ 111,892
================= ===============
Details of interest paid and non-cash investing and financing transactions:
THE LA QUINTA COMPANIES:
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------------
(IN THOUSANDS) 2001 2000
----------------- -------------
Interest paid during the period...................................................... $ 63,724 $ 107,104
Interest capitalized during the period............................................... 530 578
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3).................................... 29,872 53,900
Accumulated depreciation and impairment on assets sold.......................... 229,945 86,584
Increase in real estate mortgages net of participation reduction................ 7 113
Allowance for loan losses on prepaid mortgages.................................. - 5,027
Change in market value of equity securities .................................... (32) (42,749)
LA QUINTA PROPERTIES, INC.:
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------------
(IN THOUSANDS) 2001 2000
---------------- -------------
Interest paid during the period...................................................... $ 63,673 $ 106,874
Interest capitalized during the period............................................... 484 446
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3).................................... 29,872 53,900
Accumulated depreciation and impairment on assets sold.......................... 229,945 86,584
Increase in real estate mortgages net of participation reduction................ 7 113
Allowance for loan losses on prepaid mortgages.................................. - 5,027
Change in market value of equity securities .................................... (32) (42,749)
LA QUINTA CORPORATION:
FOR THE SIX MONTHS ENDED
JUNE 30,
----------------------------------
(IN THOUSANDS) 2001 2000
--------------- ---------------
Interest paid during the period...................................................... $ 51 $ 230
Interest capitalized during the period............................................... 46 132
12
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS
The following is a summary of the Companies' real estate investments:
JUNE 30, DECEMBER 31,
---------- --------------
(IN THOUSANDS) 2001 2000
------------- ---------------
Land ........................................................................... $ 388,304 $ 393,083
Buildings and improvements, net of accumulated depreciation of $286,333
and $240,356 and impairments of $46,464 and $26,751 ....................... 2,152,677 2,231,267
Real estate mortgages and notes receivable, net of impairments
of $36,592 and $53,640 .................................................... 132,019 222,571
Assets held for sale, net of accumulated depreciation of $18,802 and
$130,167 and impairments of $53,698 and $99,902 ........................... 156,444 505,755
---------- ----------
$2,829,444 $3,352,676
========== ==========
During the six months ended June 30, 2001, the Companies incurred
$35,005,000 in capital improvements related to the lodging segment.
Additionally, during the six months ended June 30, 2001, lodging real estate had
depreciation expense and write-offs of $48,392,000. Total impairments on the
Companies' investment in lodging real estate recorded for the six months ended
June 30, 2001 were $10,888,000 comprised of impairments of $7,691,000 on assets
held for sale and $3,197,000 on assets held for use. As of June 30, 2001 and
December 2000, the total impairment balance on the investment in lodging
facilities was $14,019,000 and $3,131,000, respectively.
The Companies received $80,700,000 in principal payments on mortgages
receivable during the six month period ended June 30, 2001 comprised of:
o $1,321,000 in monthly principal payments;
o $9,622,000 in partial principal prepayments; and
o $69,757,000 in principal payments on mortgages (with a net book value of
$96,069,000, net of reserves of $26,312,000 previously recorded by the
Companies) 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 gain of $208,000.
Also during the six month period ended June 30, 2001, the Companies sold
74 healthcare facilities comprised of real estate and other assets with net
book values of $375,561,000 (net of previously recorded impairments of
$66,502,000). Net proceeds on these transactions totaled $376,613,000 and
consisted of:
o $346,741,000 in cash; and
o $29,872,000 of subordinated indebtedness due in 2006, net of a discount
of $5,128,000 (on the difference between the 9.0% stated rate of
interest and the 13.0% imputed interest rate).
These transactions resulted in a net gain of $1,053,000.
Total impairments of healthcare real estate assets, mortgages and notes
receivable recorded during the six months ended June 30, 2001 and 2000 were
$49,720,000 and $61,126,000, respectively. As of June 30, 2001 and December
31, 2000, the total impairment balance was $122,735,000 and $177,162,000,
respectively.
13
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
The following is the rollforward of the net book value of investments in
real estate during the first six months of 2001:
(IN THOUSANDS)
Net book value of investments in real estate assets at December 31, 2000 ........ $ 3,352,676
Lodging
Capital improvements .................................................... 35,005
Depreciation expense and write-offs ..................................... (48,392)
Impairment on assets held for sale ...................................... (7,691)
Impairment on assets held for use ....................................... (3,197)
Net book value of assets sold and other adjustments ..................... (948)
Healthcare
Mortgages:
Principal payments ...................................................... (1,321)
Net book value of partial principal prepayments ......................... (9,414)
Net book value of mortgages prepaid ..................................... (69,757)
Impairment on real estate mortgages and notes receivable ................ (20,597)
Increase in real estate mortgages net of participation reduction ........ 7
Other adjustments ....................................................... 10,530
Sale/lease-back assets:
Depreciation expense .................................................... (2,773)
Impairment on assets held for sale ...................................... (8,589)
Impairment on assets held for use ....................................... (20,534)
Net book value of real estate assets sold ............................... (375,561)
-----------
Net book value of investments in real estate assets at June 30, 2001 ............ $ 2,829,444
===========
The change in impairment balances for real estate investments for the
six months ended June 30, 2001 are summarized as follows:
REAL ESTATE
BUILDINGS MORTGAGES
AND AND NOTES ASSETS HELD
(IN THOUSANDS) IMPROVEMENTS RECEIVABLE FOR SALE TOTAL
------------ ------------- ------------ -----------
Lodging impairments at December 31, 2000 ............. $ 1,835 $ -- $ 1,296 $ 3,131
Healthcare impairments at December 31, 2000 .......... 24,916 53,640 98,606 177,162
--------- --------- --------- ---------
Total impairment balance at December 31, 2000 ........ 26,751 53,640 99,902 180,293
Impairments recorded ................................. 23,731 20,597 16,280 60,608
Transfer to held for sale ............................ (2,892) -- 2,892 --
Assets sold .......................................... (1,126) (27,115) (65,376) (93,617)
Other adjustments .................................... -- (10,530) -- (10,530)
--------- --------- --------- ---------
Balance at June 30, 2001 ............................. $ 46,464 $ 36,592 $ 53,698 $ 136,754
========= ========= ========= =========
IMPAIRMENT OF REAL ESTATE ASSETS
At June 30, 2001 and December 31, 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 an
impairment on assets held for sale of $16,280,000 and $13,253,000 respectively,
for the six month periods ended June 30, 2001 and 2000. In addition, during the
six month period ended June 30, 2001, the Companies recorded an impairment of
$23,731,000 on real estate assets held for use where current facts,
circumstances and analysis indicate that the assets might be impaired.
As of June 30, 2001 and December 31, 2000, the Companies have an
impairment balance of $53,698,000 and $99,902,000, respectively, related to
assets held for sale and $46,464,000 and $26,751,000, respectively,
pertaining to properties held for use where management believes that a
reduction in the assets' cost basis is appropriate based on an assessment of
current circumstances.
14
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
IMPAIRMENT OF MORTGAGES AND NOTES RECEIVABLE
During the six months ended June 30, 2001, the Companies recorded an
impairment related to the mortgage portfolio of $20,597,000 (of which
$10,530,000 related to working capital and other notes receivables classified
as fees, interest and other receivables). During the six month period ended
June 30, 2000, the Companies recorded an impairment related to the mortgage
portfolio of $47,873,000. As of June 30, 2001 and December 31, 2000, the
Companies have $36,592,000 and $53,640,000, respectively, in loan impairments
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.
The following table details the real estate portfolio by type of facility
as of June 30, 2001:
PORTFOLIO BY TYPE # of
(IN THOUSANDS, EXCEPT NUMBER Gross Net Book Operating % of # of # of
OF PROPERTIES AND PERCENTAGES) Investment Value(2) Properties Portfolio Mortgages Properties Leases Leases
---------- -------- ------------- --------- --------- ---------- ------ ------
LODGING PORTFOLIO:
Hotel (1) ................. $ 2,702,812 $2,423,168 297
HEALTHCARE PORTFOLIO:
Assisted Living ........... 318,621 297,190 86 56% $ 35,629 3 $261,561 83
Long Term Care ............ 99,512 94,678 12 18% 72,013 10 22,665 2
Acute Care Hospital ....... 65,650 55,389 1 10% -- -- 55,389 1
Other Healthcare .......... 48,770 46,640 6 9% 34,757 4 11,883 2
Medical Office Buildings .. 35,968 35,114 4 7% 26,212 3 8,902 1
----------- ----------- ----------- --------- ---------- ---------- --------- -----
568,521 529,011 109 100% 168,611 20 360,400 89
Impairment ................ (122,735) (36,592) (86,143)
----------- ----------- ----------- ---------- ---------
568,521 406,276 109 $132,019 $274,257
----------- ----------- ----------- ========== =========
Total Real Estate Portfolio $ 3,271,333 $2,829,444 406
=========== =========== ===========
(1) The lodging portfolio net book value is net of the impairment
balance of $14,019,000.
(2) Net book value shown above includes non-operating properties, including
undeveloped land and two flood-damaged hotels undergoing renovation.
Lodging assets comprise approximately 86% of the Companies' total real
estate portfolio. Companies in the assisted living sector of the healthcare
industry approximate 11% of the net book value of the Companies' total real
estate investments (and approximately 56% of the healthcare portfolio before the
impairment balance), while companies in the long term care sector approximate 3%
of the net book value of the Companies' total real estate investments (and
approximately 18% of the healthcare portfolio before the impairment balance).
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 or loss, funds available from operations, its
ability to make distributions to its shareholders and meet debt obligations. 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.
15
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS, CONTINUED
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 slowed their growth plans and may
have a negative effect on their operating cash flows and their ability to access
capital.
OPERATORS IN BANKRUPTCY
As of June 30, 2001, the Companies had exposure to two operators, Sun
Healthcare Group, Inc. ("Sun") and CareMatrix Corporation ("CareMatrix"), who
have filed for bankruptcy protection under Chapter 11. The following table
describes the number of facilities, net assets by lease/mortgage and the
lease/mortgage income for each of the operators which are in Chapter 11
proceedings:
(IN THOUSANDS, EXCEPT Six months ended
FOR NUMBER OF FACILITIES) Leases Mortgages June 30, 2001
---------------------- ---------------------- ----------------
Total Rental Interest
Operator Date filed Facilities Facilities Net Assets Facilities Net Assets Income Income
-------- ---------- ---------- ---------- ---------- ---------- ---------- ------ --------
CareMatrix...... 11/9/2000 3 - $ - 3 $35,440 N/A $1,718(1)
Sun............. 10/14/1999 1 1 10,762 - - $710 N/A
---------- ---------- ---------- ---------- ---------- ------ --------
Totals ......... 4 1 $10,762 3 $35,440 $710 $1,718
========== ========== ========== ========== ========== ====== ========
(1) Mortgages related to CareMatrix have been placed on non-accrual status
and interest income is recorded only as payments are received.
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.
Management has initiated various actions to protect the Companies'
interests under its leases and mortgages, including the draw down 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 losses based on its assessment of current circumstances. However,
upon changes in circumstances, including but not limited to, possible
foreclosure, lease termination, or further declines in operating results or
capital market changes, there can be no assurance that the Companies'
investments in healthcare facilities would not be written down below the current
carrying value based upon estimates of fair value at such time.
4. INDEBTEDNESS
During the six months ended June 30, 2001, the Companies had the following
debt activity:
Bonds and
Notes Convertible Bank Notes Mortgages
(IN THOUSANDS) Payable Debentures Payable Payable Total
-------------- ---------------- ----------------- -------------- ------------
DECEMBER 31, 2000 .............. $ 1,017,244 $ 137,028 $ 400,000 $ 42,077 $ 1,596,349
Repayment of principal ......... -- (82,992) (495,000) (9,614) (587,606)
Borrowings ..................... -- -- 245,000 -- 245,000
Other .......................... (81) -- -- (124) (205)
----------- ----------- ----------- ----------- -----------
JUNE 30, 2001 .................. $ 1,017,163 $ 54,036 $ 150,000 $ 32,339 $ 1,253,538
=========== =========== =========== =========== ===========
CONVERTIBLE DEBENTURES
The Companies' convertible debentures that matured on March 1, 2001 with a
balance of $82,992,000 were repaid through borrowings under the Tranche A
revolving line of credit.
16
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. INDEBTEDNESS, CONTINUED
BANK NOTES PAYABLE
During the six months ended June 30, 2001, the Companies borrowed $95
million on the Tranche A revolving line of credit to repay the convertible
debentures, which matured on March 1, 2001, and other debt. The balance of the
borrowing on the line of credit was fully repaid in April 2001 with proceeds
from the sale of healthcare assets. Also during the six months ended June 30,
2001, the Companies repaid $400 million on the Tranche D term loan. The Tranche
D term loan was repaid during the second quarter with proceeds from the sale of
certain healthcare assets and borrowings under its new credit facility as
described below.
Effective June 8, 2001, the Companies entered into a new credit
agreement with a bank group which provided for a $150 million term loan and a
$200 million revolving line of credit. Borrowings under the new credit
facility initially bear interest at LIBOR plus 3.5% (7.34% at June 30, 2001).
The credit facility matures in May 2003 and may be extended under certain
conditions at the Companies' option. Approximately $161,144,000 (net of
outstanding letters of credit) was available under the new credit facility at
June 30, 2001.
BONDS AND MORTGAGES PAYABLE
During the six months ended June 30, 2001, the Companies repaid, through
operating cash flow and borrowings under the line of credit, approximately
$9,614,000 in principal on bonds and mortgages payable, which included a balloon
payment of $7,091,000 on a mortgage which matured on March 1, 2001.
INTEREST RATE SWAP AGREEMENT
Through June 25, 2001, the Companies were fixed rate payors of 5.7%
under an interest rate swap agreement with a notional amount of $400,000,000
and received a variable rate of 5.056%, which the Companies settled on June
27, 2001. The swap agreement was measured at fair value at March 31, 2001 and
recorded as a liability in accounts payable, accrued expenses and other
liabilities in accordance with SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." The interest rate swap was not
designated as a hedging instrument and, accordingly, a net charge to earnings
of $1,236,000 was recorded during the three months ended March 31, 2001,
comprised of an increase in interest expense of approximately $2,092,000 and
a partially offsetting entry to reflect the cumulative effect of a change in
accounting principle (through December 31, 2000) of $856,000. Upon
termination of the interest rate swap agreement on June 25, 2001, the
Companies decreased interest expense by $670,000, the difference between the
fair value of the swap at settlement, $566,000, and the fair value at March
31, 2001.
5. COMMITMENTS AND CONTINGENCIES
On June 27, 2001, a complaint was filed in the United States District
Court for the District of Massachusetts, entitled Steadfast Insurance Co. v.
Meditrust Corp., et al., Civ Action No. 01-CV-1115-MEL. The complaint, which
has not yet been served on Meditrust Corp. or on any other of the named
defendants, and which was filed by the plaintiff under seal, names Meditrust
Corp. and certain of its present and former directors and officers as
defendants. The plaintiff, which claims to be the subrogee or assignee of the
claims of various entities, alleges purported causes of action including
breach of contract, negligence, violation of 15 USC Section 771, violation of
Mass. Gen. L. c. 110, Section 410, negligent misrepresentation, and violation
of Mass. Gen. L. c. 93A Section 11, arising out of an alleged
misrepresentation in the offering memorandum for Meditrust Corp.'s 7.114%
Exercisable Put Option Securities and seeks approximately $15 million plus
other potential damages. The Companies believe that it has meritorious
defenses to the lawsuit, as well as claims against non-parties to the lawsuit
that may satisfy all or part of any potential liability that may be found
against Meditrust Corp. The Companies are currently determining its response
to this lawsuit.
6. SHAREHOLDERS' EQUITY
As of June 30, 2001, the following classes of Preferred Stock, Excess Stock
and Series Common Stock were authorized; no shares were issued or outstanding at
either June 30, 2001 or December 31, 2000:
o La Quinta Corporation Preferred Stock $0.10 par value; 6,000,000 shares
authorized;
o La Quinta Properties, Inc. Excess Stock $0.10 par value; 25,000,000 shares
authorized;
o La Quinta Corporation Excess Stock $0.10 par value; 25,000,000 shares
authorized;
o La Quinta Properties, Inc. Series Common Stock $0.10 par value; 30,000,000
shares authorized;
o La Quinta Corporation Series Common Stock $0.10 par value; 30,000,000
shares authorized.
During the six months ended June 30, 2001, 140,000 restricted shares of the
Companies' common stock were issued to employees under The La Quinta Properties
1995 Share Award Plan and The La Quinta Corporation 1995 Share Award Plan
(collectively known as the "Share Award Plan"). During the six months ended June
30, 2001, 66,000 restricted shares were forfeited
17
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. SHAREHOLDERS' EQUITY, CONTINUED
and thus cancelled. Restricted shares outstanding at June 30, 2001 and December
31, 2000 were 1,784,000 and 1,710,000, respectively.
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
six years. Participants vest in the restricted shares granted upon the earliest
of six months to six years after the date of issuance, upon achieving the
performance goals as defined, completion of the vesting periods, or as the
Boards of Directors (the "Boards") may determine.
For the six months ended June 30, 2000, pursuant to a separation and
consulting agreement with the former Director and Chairman of the Companies and
the Chief Executive Officer and Treasurer of Operating, the vesting period for
155,000 restricted shares was accelerated such that the shares were immediately
vested. This resulted in approximately $2,461,000 of accelerated amortization of
unearned compensation in the six months ended June 30, 2000.
Unearned compensation is charged for the fair value of the restricted
shares on the date of grant and is 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.
7. COMPREHENSIVE LOSS, OTHER ASSETS, FEES, INTEREST AND OTHER RECEIVABLES
In January 2001, Realty sold its 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 included approximately 26,606,000 shares of NHP Plc,
representing an ownership interest in NHP Plc of 19.99%, of which Realty had
voting rights with respect to 9.99%. Realty sold its investment in NHP Plc for
net proceeds of $7,737,000 and recorded a charge to earnings of $22,000 for the
difference in the net book value and the selling price of the stock. Realty had
recorded a loss on its equity investment through December 31, 2000 of
$49,445,000.
At June 30, 2001 and December 31, 2000, Realty had an investment of
1,081,000 shares of capital stock in Balanced Care Corporation, a healthcare
operator. This investment had a market value of $239,000 and $271,000 at June
30, 2001 and December 31, 2000, respectively. A net adjustment to accumulated
other comprehensive income of $32,000 was recorded in 2001 to reflect the
unrealized loss on this investment.
The following is a summary of the Companies' comprehensive loss:
SIX MONTHS ENDED JUNE 30,
-----------------------------------
(IN THOUSANDS) 2001 2000
--------------- ----------------
Net loss............................................................. $ (23,789) $ (71,793)
Other comprehensive loss:
Unrealized holding losses arising during the period............. (32) (42,749)
Reclassification adjustment for losses recognized in net loss... - 39,076
--------------- ----------------
Comprehensive loss................................................... $ (23,821) $ (75,466)
=============== ================
Other assets include investments in equity securities classified as
available for sale, La Quinta intangible assets, the TeleMatrix non-competition
agreement, furniture, fixtures and equipment.
Realty provides for reserves against other assets and receivables. As of
June 30, 2001, and December 31, 2000, the reserve provided against other assets
and receivables aggregated approximately $23,544,000 and $32,785,000,
respectively.
On May 31, 2001, the Companies sold a note receivable with a carrying value
of $30,810,000 (net of a previously recorded reserve of $21,284,000). The
Companies received total proceeds of $32,000,000 from the sale and recorded a
net gain of approximately $1,190,000.
18
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. DISTRIBUTIONS PAID TO SHAREHOLDERS
On April 2, 2001, Realty paid a dividend of $0.5625 per depository share of
preferred stock to holders of record on March 15, 2001 of its 9.00% Series A
Cumulative Redeemable Preferred Stock. On March 26, 2001, 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 July 2, 2001, Realty paid a dividend of $0.5625 per depository share of
preferred stock to holders of record on June 15, 2001 of its 9.00% series A
Cumulative Redeemable Preferred Stock. On June 28, 2001, 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.
9. OTHER EXPENSES
For the six months ended June 30, 2001 and 2000, other expenses consisted
of the following:
SIX MONTHS ENDED JUNE 30,
--------------------------------------------
(IN THOUSANDS) 2001 2000
-------------------- -------------------
Restructuring:
Employee severance and related employment costs...................... $ 1,223 $ 16,772
Accelerated amortization of unearned compensation.................... -- 2,461
Other restructuring expense.......................................... -- 280
-------------------- -------------------
Restructuring and related expenses.............................. 1,223 19,513
Bad debt:
Provision for loss on interest and other receivables................. 9,933 2,802
Bad debt recoveries.................................................. (1,639) (1,195)
-------------------- -------------------
Bad debt expenses............................................... 8,294 1,607
-------------------- -------------------
Total Other Expenses...................................................... $ 9,517 $ 21,120
==================== ===================
RESTRUCTURING CHARGES
In June 2000, the Boards approved a plan to reduce the number of
employees by 14 as of December 31, 2000, including four officers, primarily
in the financial and legal groups, of the Companies' Needham, Massachusetts
offices. For the six months ended June 30, 2001 and 2000, the Companies
recorded $1,223,000 and $7,312,000, respectively, of other expense related to
severance and retention incentive compensation earned by the healthcare
segment employees based on achievement of healthcare asset sale goals and
compliance with specified employment terms in order to facilitate the sale of
certain healthcare assets and closing of the Needham office by December 2002.
In January 2000, the Companies executed a separation and consulting
agreement with the former Chief Executive Officer, President and Treasurer of
Realty pursuant to which Realty made a cash payment of approximately $9,460,000
(including consulting fees), converted 155,000 restricted paired common shares
into unrestricted paired common shares (which resulted in approximately
$2,461,000 of accelerated amortization of unearned compensation) and continued
certain medical, dental and other benefits.
The Companies also incurred approximately $280,000 of professional fees
during the six months ended June 30, 2000 related to the implementation of the
Five Point Plan.
OTHER
During the six months ended June 30, 2001 and 2000, the Companies recorded
provisions and other expenses of approximately $9,933,000 and $2,802,000,
respectively, on interest and other receivables management considers
uncollectable. The Companies also recorded approximately $1,639,000 and
$1,195,000, respectively, of bad debt recoveries during the six months ended
June 30, 2001 and 2000 related to receivables previously written off.
19
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. EARNINGS PER SHARE
Earnings or loss per paired common share and per share is calculated as net
income or loss divided by the weighted average number of common shares
outstanding. Diluted net earnings per share assumes, when dilutive, issuance of
the net incremental shares from stock options. Certain options outstanding
during the periods represented below were not included in the computation
because their inclusion would result in an antidilutive per-share amount as the
Companies reported losses from continuing operations available to Common
Shareholders. The following tables reconcile the net income or loss amounts and
share numbers used in the computation of net loss per share.
THE COMPANIES' COMBINED CONSOLIDATED EARNINGS PER SHARE IS COMPUTED AS
FOLLOWS:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
---- ---- ---- ----
Loss from continuing operations before extraordinary item
And cumulative effect of change in accounting principle .......... $ (12,473) $ (83,478) $ (24,645) $ (73,196)
Preferred stock dividends ........................................... (4,500) (4,500) (9,000) (9,000)
--------- --------- --------- ---------
Loss from continuing operations before extraordinary item
And cumulative effect of change in accounting principle .......... (16,973) (87,978) (33,645) (82,196)
--------- --------- --------- ---------
Gain on early extinguishments of debt ............................... -- 9 -- 1,403
Cumulative effect of a change in accounting principle ............... -- -- 856 --
--------- --------- --------- ---------
Net loss ............................................................ $ (16,973) $ (87,969) $ (32,789) $ (80,793)
========= ========= ========= =========
Weighted average outstanding shares of Paired Common Stock .......... 143,034 141,431 142,992 141,330
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE
Basic:
Loss available to Common Shareholders before extraordinary
item and cumulative effect of a change in accounting principle .... $ (0.12) $ (0.62) $ (0.24) $ (0.58)
Gain on early extinguishments of debt ............................... -- -- -- 0.01
Cumulative effect of a change in accounting principle ............... -- -- 0.01 --
--------- --------- --------- ---------
Net loss available to Common Shareholders ........................... $ (0.12) $ (0.62) $ (0.23) $ (0.57)
========= ========= ========= =========
Diluted:
Loss available to Common Shareholders before extraordinary item
and cumulative effect of a change in accounting principle....... $ (0.12) $ (0.62) $ (0.24) $ (0.58)
Gain on early extinguishments of debt -- -- -- 0.01
Cumulative effect of a change in accounting principle -- -- 0.01 --
---------- ---------- ---------- -----------
Net income available to Common Shareholders $ (0.12) $ (0.62) $ (0.23) $ (0.57)
========== ========== ========== ===========
20
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. EARNINGS PER SHARE, CONTINUED
LA QUINTA PROPERTIES, INC. EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
---- ---- ---- ----
Income (loss) from continuing operations before extraordinary
item and cumulative effect of change in accounting principle ...... $ 1,273 $ (69,915) $ (204) $ (52,818)
Preferred stock dividends ........................................... (4,500) (4,500) (9,000) (9,000)
--------- ----------- ----------- ---------
Loss from continuing operations before extraordinary item and
cumulative effect of change in accounting principle (3,227) (74,415) (9,204) (61,818)
--------- ----------- ----------- ---------
Gain on early extinguishments of debt ............................... -- 9 -- 1,403
Cumulative effect of a change in accounting principle ............... -- -- 856 --
--------- ----------- ----------- ---------
Net loss ............................................................ $ (3,227) $ (74,406) $ (8,348) $ (60,415)
========= =========== =========== =========
Weighted average outstanding shares of Paired Common Stock .......... 144,340 142,736 144,297 142,635
========= =========== =========== =========
EARNINGS PER SHARE
Basic:
Loss available to Common Shareholders before extraordinary item
and cumulative effect of a change in accounting principle .... $ (0.02) $ (0.52) $ (0.07) $ (0.43)
Gain on early extinguishments of debt ............................... -- -- -- 0.01
Cumulative effect of a change in accounting principle ............... -- -- 0.01 --
--------- ----------- ----------- ---------
Net loss available to Common Shareholders ........................... $ (0.02) $ (0.52) $ (0.06) $ (0.42)
========= =========== =========== =========
Diluted:
Loss available to Common Shareholders before extraordinary item
and cumulative effect of a change in accounting principle ........ $ (0.02) $ (0.52) $ (0.07) $ (0.43)
Gain on early extinguishments of debt ............................... -- -- -- 0.01
Cumulative effect of a change in accounting principle ............... -- -- 0.01 --
--------- ----------- ----------- ---------
Net loss available to Common Shareholders ........................... $ (0.02) $ (0.52) $ (0.06) $ (0.42)
========= =========== =========== =========
21
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. EARNINGS PER SHARE, CONTINUED
LA QUINTA CORPORATION EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
-------------------------------- --------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000 2001 2000
-------------- -------------- -------------- --------------
Loss from continuing operations .................. $ (13,746) $ (13,563) $ (24,441) $ (20,378)
Preferred stock dividends ........................ -- -- -- --
--------- --------- --------- ---------
Loss from continuing operations available to
Common Shareholders ........................... $ (13,746) $ (13,563) $ (24,441) $ (20,378)
========= ========= ========= =========
Weighted average outstanding shares of Paired
Common Stock .................................. 143,034 141,431 142,992 141,330
========= ========= ========= =========
Earnings per share:
Basic ......................................... $ (0.10) $ (0.10) $ (0.17) $ (0.14)
Diluted ....................................... $ (0.10) $ (0.10) $ (0.17) $ (0.14)
11. TRANSACTIONS BETWEEN REALTY AND OPERATING
Operating leases hotel facilities from Realty and its subsidiaries. The
hotel facility lease arrangements between Operating and Realty are for a five
year term (expiring July 2003), include base and additional rent provisions
and require Realty to assume costs attributable to property taxes and
insurance and to fund certain capital expenditures. At June 30, 2001 and
December 31, 2000, Operating owed Realty $130,135,000 and $58,567,000,
respectively, related to these hotel leases.
Operating also has a royalty arrangement with Realty for the use of the
La Quinta tradename at a rate of approximately 2.5% of gross revenue, as
defined in the Agreement. At June 30, 2001 and December 31, 2000, Operating
owed Realty $6,913,000 and $3,275,000, respectively, related to the royalty
arrangement.
In connection with certain acquisitions, Operating issued shares to Realty
to be paired with Realty shares. Also, Operating owns 1,305,000 unpaired common
shares of Realty. Periodically, Realty and Operating issue paired shares under
the Share Award Plan.
Operating provides certain management services to Realty primarily related
to executive management, general tax preparation and consulting, legal,
accounting, and certain aspects of human resources. Realty compensates Operating
for direct costs of providing such services.
During the three months ended June 30, 2001, Realty contributed its 60%
investment in a partnership for a 100% interest in a limited liability
company (the "LLC") created to hold the investment in the partnership.
Operating then exchanged a note payable due to Realty for $3,901,000 for 83%
of Realty's interest in the LLC. The transaction was recorded at historical
balances as both Realty and Operating are under common control and there was
no change in shareholder ownership percentages.
22
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. SEGMENT REPORTING
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. The Companies account for Realty and Operating
transactions at current market prices, as if the transactions were to
third-parties.
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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(IN THOUSANDS) 2001 2000 2001 2000
---- ---- ---- ----
Lodging:
Room revenue ....................................................... $ 147,647 $ 149,732 $ 288,378 $ 288,223
Other lodging revenue .............................................. 6,364 6,696 13,738 14,417
Direct operating expenses .......................................... (64,668) (67,342) (127,089) (128,285)
Other operating expenses ........................................... (16,588) (15,211) (33,276) (30,049)
General and administrative expenses ................................ (8,330) (10,456) (16,617) (18,000)
---------- ---------- ---------- ----------
Lodging Contribution .................................................... 64,425 63,419 125,134 126,306
---------- ---------- ---------- ----------
Healthcare:
Rental income ...................................................... 9,196 28,403 36,390 60,398
Interest income .................................................... 7,805 29,100 17,068 60,990
General and administrative expenses ................................ (3,575) (4,127) (6,448) (7,440)
---------- ---------- ---------- ----------
Healthcare Contribution ................................................. 13,426 53,376 47,010 113,948
---------- ---------- ---------- ----------
Other:(a)
Revenue ............................................................ 4,683 3,782 9,574 7,317
Operating expense .................................................. (2,844) (2,185) (5,863) (4,155)
General and administrative expenses ................................ (982) (1,042) (2,059) (1,934)
---------- ---------- ---------- ----------
Other Contribution ...................................................... 857 555 1,652 1,228
---------- ---------- ---------- ----------
Combined Contribution ................................................... 78,708 117,350 173,796 241,482
Reconciliation to Combined Consolidated Financial Statements:
Interest expense ........................................................ 24,822 51,541 59,758 106,777
Depreciation and amortization
Lodging ............................................................ 28,104 27,473 56,062 57,574
Healthcare ......................................................... 1,410 6,469 2,821 12,963
Other .............................................................. 183 148 361 292
Amortization of goodwill ................................................ 5,526 5,688 11,212 11,387
(Gain) loss on sale of assets ........................................... (2,345) 551 (2,291) 4,363
Provision for impairment on real estate assets, mortgages and notes
receivable ........................................................... 33,767 61,126 60,608 61,126
Provision for loss on equity securities ................................. -- 39,076 -- 39,076
Other (income) expenses ................................................. (503) 8,756 9,517 21,120
---------- ---------- ---------- ----------
90,964 200,828 198,048 314,678
---------- ---------- ---------- ----------
Loss before income taxes, extraordinary item and cumulative effect
of change in accounting principle .................................... (12,256) (83,478) (24,252) (73,196)
Income tax expense ...................................................... 217 -- 393 --
---------- ---------- ---------- ----------
Loss before extraordinary item and cumulative effect of
change in accounting principle...................................... (12,473) (83,478) (24,645) (73,196)
Gain on early extinguishments of debt ................................... -- 9 -- 1,403
Cumulative effect of change in accounting principle ..................... -- -- 856 --
---------- ---------- ---------- ----------
Net loss ................................................................ (12,473) (83,469) (23,789) (71,793)
Preferred stock dividends ............................................... (4,500) (4,500) (9,000) (9,000)
---------- ---------- ---------- ----------
Net loss available to Paired Common Shareholders ........................ $ (16,973) $ (87,969) $ (32,789) $ (80,793)
========== ========== ========== ==========
(a) Other Contribution includes TeleMatrix, a provider of telephones,
software and equipment for the lodging industry.
23
LA QUINTA PROPERTIES, INC. AND SUBSIDIARIES
AND LA QUINTA CORPORATION AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. SUBSEQUENT EVENTS
On July 2, 2001, Realty paid a dividend of $0.5625 per depository share of
preferred stock to holders of record on June 15, 2001 of its 9.00% Series A
Cumulative Redeemable Preferred Stock.
On July 12, 2001, Realty sold its investment in a healthcare facility.
Realty received net proceeds of $1,573,000. The net book value of this
investment after previous impairments was $1,250,000. Realty will record a
gain on the sale of the healthcare facility of $323,000 in the third quarter
of fiscal year 2001.
On July 16, 2001, the Companies repaid $75,050,000 in notes payable at
maturity with proceeds from the new Credit Facility.
On July 19, 2001 the Companies received a partial prepayment of a mortgage
loan amounting to $7,469,000.
On July 30, 2001, the Companies redeemed $54,036,000 in convertible
debentures which were scheduled to mature in January and July 2002 with proceeds
from the new Credit Facility.
Effective July 31, 2001, the revolving line of credit under the new
Credit Facility was increased from $200,000,000 to $225,000,000. Also in July
2001, the Companies repaid $11,000,000 of notes payable scheduled to mature
in August 2002 with proceeds from the new Credit Facility. These repayments
resulted in a gain on early extinguishments of debt of $20,000.
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 LA QUINTA
COMPANIES (THE "COMPANIES"), CONSISTING OF LA QUINTA PROPERTIES, INC.
("REALTY") AND LA QUINTA CORPORATION ("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 CYCLICALITY OF THE HOTEL AND LEISURE BUSINESS,
INCREASED CAPACITY AND WEAK DEMAND WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE ANTICIPATED, INCREASES IN ENERGY
COSTS AND OTHER OPERATING COSTS RESULTING IN LOWER OPERATING MARGINS, THE
CONDITIONS OF THE CAPITAL MARKETS IN GENERAL, THE ABILITY OF THE COMPANIES TO
REFINANCE AND/OR PAY OFF NEAR TERM DEBT MATURITIES, 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, COMPETITION IN FRANCHISING THE COMPANIES' BRANDS, THE ULTIMATE
OUTCOME OF CERTAIN LITIGATION FILED AGAINST THE COMPANIES, 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 CONTINUED ABILITY OF REALTY TO QUALIFY FOR TAXATION 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
("SEC"), 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 63 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 believe that the combined presentation is most
informative to the reader.
GENERAL
In 1997, Meditrust, a Massachusetts business trust ("Meditrust's
Predecessor"), merged with Santa Anita Realty Enterprises, Inc., with Santa
Anita Realty Enterprises, Inc. as the surviving corporation, and Meditrust
Acquisition Company merged with Santa Anita Operating Company, with Santa Anita
Operating Company as the surviving corporation (hereafter referred to as the
"Santa Anita Merger"). Upon completion of these mergers, Santa Anita Realty
Enterprises, Inc. changed its corporate name to "Meditrust Corporation" and
Santa Anita Operating Company changed its corporate name to "Meditrust Operating
Company". During early 1998 and after completion of the Santa Anita Merger, the
Companies began pursuing a strategy of diversification into additional new
businesses which culminated in mergers with La Quinta Inns, Inc., a lodging
company (the "La Quinta Merger"), and Cobblestone Holdings, Inc., a golf course
company (the "Cobblestone Merger").
Federal legislation adopted in July 1998 limited benefits attributable to
future use of the paired share structure. In addition, during the summer of 1998
and thereafter, the debt and equity markets available to REITs generally, and
healthcare and lodging REITs specifically, deteriorated, thus limiting the
Companies' access to cost efficient capital. As a result, during the latter part
of 1998 and throughout 1999 the Companies implemented a comprehensive
restructuring plan (the "1998 Plan") designed to strengthen the Companies'
financial position and clarify its investment and operating strategy whereby the
Companies sold over $1.4 billion in assets (including the Cobblestone Golf Group
and the Santa Anita Racetrack) and $820 million of healthcare properties, repaid
over $625 million in debt and fully settled the Companies' forward equity
issuance transaction ("FEIT") with certain affiliates of Merrill Lynch & Co.
During 2000, the Companies implemented a five-point plan of reorganization
(the "Five Point Plan") intended to further strengthen the position of the
Companies and focus on the lodging division. Consistent with certain components
of the Five Point Plan which called for, among other things, an orderly
disposition of a significant portion of healthcare assets and substantial
reduction in debt, the Companies have completed healthcare asset sales and
received mortgage repayments totaling approximately $1.4 billion between January
1, 2000 and June 30, 2001 and have applied substantially all of the proceeds
toward reduction of total indebtedness of $2.6 billion as of December 31, 1999
to $1.2 billion as of June 30, 2001.
Also, consistent with the Companies' plan to focus on the lodging division,
the Companies made certain changes in its executive management team and have
transitioned the financial and legal functions of its healthcare operations from
the Companies' Needham, Massachusetts office and intend to consolidate the
remaining healthcare operations to Irving, Texas by December 31, 2002.
25
On April 17, 2000, Francis W. ("Butch") Cash joined the Companies as
President and Chief Executive Officer. In addition, in 2000 the Companies
appointed David L. Rea as Chief Financial Officer and Stephen L. Parker was
appointed as Senior Vice President of Sales and Marketing. As part of the
initiation of a franchise program for the La Quinta brand, the Companies
appointed Alan L. Tallis as Executive Vice President and Chief Development
Officer.
On June 20, 2001, Meditrust changed its name to La Quinta to reflect its
focus on the lodging industry. Meditrust Corporation was renamed La Quinta
Properties, Inc. and Meditrust Operating Company was renamed La Quinta
Corporation. The renamed La Quinta Companies continue to trade as a paired share
REIT under the ticker symbol "LQI".
In 2001, the Companies will continue to focus on selling healthcare assets,
deleveraging the balance sheet and improving lodging results. Part of the
Companies' strategy for improving lodging results will be in the growth of
fee-based income through implementation of a franchising program. On April 10,
2001, the first La Quinta franchise hotel opened for business under this new
program. As of July 31, 2001 the Companies had opened 5 franchise hotels,
executed an additional 24 franchise contracts and approved an additional 14
franchise contracts.
THE LA QUINTA COMPANIES - COMBINED CONSOLIDATED RESULTS OF OPERATIONS
The Companies earn revenue by (i) owning and operating 227 La Quinta Inns
and 70 La Quinta Inn & Suites; (ii) leasing 89 healthcare facilities under
long-term triple net leases in which the rental rate is generally fixed with
annual escalators; and (iii) providing mortgage financing for 20 healthcare
facilities in which the interest is generally fixed with annual escalators
subject to certain conditions. The La Quinta Companies reported a net loss
available to paired shareholders of $16,973,000 or $0.12 per diluted common
share for the quarter ended June 30, 2001, compared to net loss of $87,969,000
or $0.62 per diluted common share for the second quarter of 2000. For the six
months ended June 30, 2001, The La Quinta Companies reported a net loss
available to paired common shareholders of $32,789,000 or $0.23 per diluted
share compared to net loss of $80,793,000 or $0.57 per diluted share for the
same period in 2000.
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 six months ended June 30, 2001 and 2000. The Companies consider
contributions from each operating segment to include revenue from each business,
less 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 JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------
(IN THOUSANDS) 2001 2000 2001 2000
-------------------- -------------------- ------------------- -------------------
REVENUE:
Lodging $ 154,011 $ 156,428 $ 302,116 $ 302,640
Healthcare 17,001 57,503 53,458 121,388
Other 4,683 3,782 9,574 7,317
-------------------- -------------------- ------------------- -------------------
Total revenue 175,695 217,713 365,148 431,345
OPERATING EXPENSES:
Lodging 89,586 93,009 176,982 176,334
Healthcare 3,575 4,127 6,448 7,440
Other 3,826 3,227 7,922 6,089
-------------------- -------------------- ------------------- -------------------
Total operating expenses 96,987 100,363 191,352 189,863
CONTRIBUTIONS:
Lodging 64,425 63,419 125,134 126,306
Healthcare 13,426 53,376 47,010 113,948
Other 857 555 1,652 1,228
-------------------- -------------------- ------------------- -------------------
Total Contribution $ 78,708 $ 117,350 $ 173,796 $ 241,482
==================== ==================== =================== ===================
26
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
The combined contribution from operating segments for the three months
ended June 30, 2001 was $78,708,000 compared to $117,350,000 for the three
months ended June 30, 2000. This represents a decrease of $38,642,000 or 32.9%.
The decline in the combined contribution is primarily the result of the sale of
healthcare assets. The contribution is comprised of revenues of $175,695,000 and
$217,713,000, offset by operating expenses of $96,987,000 and $100,363,000 for
the three months ended June 30, 2001 and 2000, respectively.
Lodging provided a contribution of $64,425,000 for the three months ended
June 30, 2001, an increase of $1,006,000 or 1.6% from the same period in 2000.
The lodging segment contribution was comprised of revenues of $154,011,000 and
$156,428,000 offset by operating expenses of $89,586,000 and $93,009,000 for the
three months ended June 30, 2001 and 2000, respectively. The increase in the
lodging contribution was due to the decrease in lodging operating expenses of
$3,423,000, partially offset by the decrease in lodging revenue of $2,417,000,
as more fully described below in management's discussion of the results of
Operating.
The following table summarizes statistical lodging data for the three
months ended June 30, 2001 and 2000:
2001 2000
---------------- -----------------
Number of Hotels In Operation.......................... 297 300
Number of Hotels Under Construction or Refurbishment... 5 2
Occupancy Percentage................................... 68.3% 67.4%
ADR (1)................................................ $ 61.80 $ 63.16
RevPAR (2)............................................. $ 42.21 $ 42.58
Available Rooms (3).................................... 3,522 3,546
Comparable Hotels (4).................................. 297 297
Occupancy Percentage................................... 68.3% 67.4%
ADR (1)................................................ $ 61.86 $ 63.30
RevPAR (2)............................................. $ 42.26 $ 42.68
Available Rooms (3).................................... 3,505 3,505
(1) Represents average daily rate
(2) Represents revenue per available room
(3) Available room night count in thousands
(4) Represents hotels open for more than one year
Hotel operating revenues are generally measured as a function of average
daily rate ("ADR") and occupancy. Revenue per available room ("RevPAR"),
which is the product of occupancy percentage and ADR, decreased 0.9% (or 1.0%
for comparable hotels) to $42.21 in the second quarter of 2001 from $42.58 in
the second quarter of 2000. The occupancy percentage increased 0.9 percentage
points to 68.3% in the second three months of 2001 from 67.4% for the same
period in 2000. The ADR decreased to $61.80 in the second quarter of 2001
from $63.16 in the second quarter of 2000, a decrease of $1.36 or 2.2%. The
decrease in ADR and RevPAR resulted from competitive pricing strategies
implemented in response to declining demand in the industry over all during
the three months ended June 30, 2001. A decrease in direct expenses for the
three month period ended June 30, 2001 compared to the three month period
ended June 30, 2000 included the impact of cost control measures which
resulted in a reduction in salaries and other inn expenses partially offset
by rising energy and insurance costs as well as an increase in marketing
costs. Direct hotel labor costs have continued to decline due to policies,
practices and efficiencies implemented during the six months ended June 30,
2001. Additionally, corporate overhead expense for the three month period
ended June 30, 2001 decreased $2,126,000 primarily due to costs incurred
during the three months ended June 30, 2000 related to certain employment and
severance agreements. This decrease was partially offset by expenses related
to the transitioning of certain information systems services to a third-party
provider.
Healthcare provided a contribution of $13,426,000 in the second quarter of
2001, a decrease of $39,950,000 or 74.9% from the prior year's second quarter.
The decrease in contribution was primarily the result of the sale of certain
healthcare assets and repayment of healthcare mortgages made between the second
quarter of fiscal year 2000 and the second quarter of fiscal year 2001. The
healthcare contribution was comprised of revenues of $17,001,000 (including rent
income of $9,196,000, interest income from real estate mortgages of $6,911,000
and interest from investment of cash reserves of $894,000) and $57,503,000
(including rent income of $28,403,000, interest income from mortgage loans of
$28,876,000 and interest from investment of cash reserves of $224,000) and
operating expenses of $3,575,000 and $4,127,000 for the three month periods
ended June 30, 2001 and 2000, respectively.
27
The following table summarizes the healthcare portfolio by type of facility
as of June 30, 2001 and December 31, 2000:
JUNE 30, 2001 DECEMBER 31, 2000
----------------------------------- -----------------------------------
Type of Facility FACILITIES BEDS/UNITS FACILITIES BEDS/UNITS
- -------------------------------- --------------- ------------------- ----------------- -----------------
Assisted Living................. 86 4,263 94 4,457
Long-Term Care.................. 12 1,696 93 11,604
Medical Office Buildings........ 4 - 5 -
Acute Care Hospital............. 1 492 1 492
Other Healthcare................ 6 435 6 625
--------------- ------------------- ----------------- -----------------
109 6,886 199 17,178
=============== =================== ================= =================
The Companies had a remaining net investment of $132,019,000 and
$222,571,000 in the form of mortgages outstanding to operators of 20 and 36 of
the facilities listed above as of June 30, 2001 and December 31, 2000,
respectively. The Companies had a remaining net investment of $274,257,000 and
$681,714,000 in the form of leases with operators of 89 and 163 of the
facilities listed above at June 30, 2001 and December 31, 2000, respectively.
The decreases in healthcare revenues and operating expenses are
primarily a result of the impact of asset sales and mortgage repayments over
the last year. Healthcare segment expenses decreased $552,000 from the same
period in the prior year.
TeleMatrix, a provider of telephones, software and equipment for the
lodging industry, contributed $857,000 for the three months ended June 30, 2001,
an increase of 54.4% from the prior year's second quarter. This contribution was
comprised of revenues of $4,683,000 and $3,782,000 and expenses of $3,826,000
and $3,227,000 for the three month periods ended June 30, 2001 and 2000,
respectively. TeleMatrix expenses include operating expenses of $2,844,000 and
$2,185,000 and general and administrative expenses of $982,000 and $1,042,000
for the three months ended June 30, 2001 and 2000, respectively. Operations of
TeleMatrix have been included in lodging revenue and expense categories of the
combined and consolidated statements and are separately disclosed as "Other
Contribution" in Note 11 "Segment Reporting" of the combined and consolidated
statements.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
The combined contribution from operating segments for the six months ended
June 30, 2001 was $173,796,000, compared to $241,482,000 for the six months
ended June 30, 2000. This represents a decrease of $67,686,000 or 28.0%. The
decline in the combined contribution is primarily the result of the sale of
healthcare assets. The contribution is comprised of revenues of $365,148,000 and
$431,345,000, offset by operating expenses of $191,352,00 and $189,863,000 for
the six months ended June 30, 2001 and 2000, respectively.
Lodging provided a contribution of $125,134,000 for the six months ended
June 30, 2001, a decrease of $1,172,000, or 0.9%, from the same period in 2000.
The lodging segment revenues were comprised of revenues of $302,116,000 and
$302,640,000 offset by operating expenses of $176,982,000 and $176,334,000 for
the six months ended June 30, 2001 and 2000, respectively. The decrease in the
lodging contribution for the six month period was primarily due to increases in
hotel operating expenses and a decrease in revenue.
28
The following table summarizes statistical lodging data for the six months
ended June 30, 2001 and 2000:
2001 2000
---------------- -----------------
Number of Hotels In Operation............................ 297 301
Number of Hotels Under Construction or Refurbishment..... 5 2
Occupancy Percentage..................................... 66.3% 64.3%
ADR (1).................................................. $ 62.47 $ 63.72
RevPAR (2)............................................... $ 41.44 $ 40.95
Available Rooms (3)...................................... 7,012 7,098
Comparable Hotels (4).................................... 297 297
Occupancy Percentage..................................... 66.3% 64.3%
ADR (1).................................................. $ 62.55 $ 63.88
RevPAR (2)............................................... $ 41.49 $ 41.08
Available Rooms (3)...................................... 6,973 7,011
(1) Represents average daily rate
(2) Represents revenue per available room
(3) Available room night count in thousands
(4) Represents hotels open for more than one year
Hotel operating revenues are generally measured as a function of average
daily rate ("ADR") and occupancy. Revenue per available room ("RevPAR"),
which is the product of occupancy percentage and ADR, increased 1.2% (or 1.0%
for comparable hotels) to $41.44 in the first six months of 2001 from $40.95
in the first six months of 2000. The occupancy percentage increased 2.0
percentage points to 66.3% in the first six months of 2001 from 64.3% for the
same period in 2000. The ADR decreased to $62.47 in the first six months of
2001 from $63.72 in the first six months of 2000, a decrease of $1.25 or
2.0%. The increase in RevPAR resulted from an increase in occupancy primarily
attributed to recent promotional efforts and changes in pricing strategy when
comparing the six month period ended June 30, 2001 and June 30, 2000. The
increase in lodging operating expense is comprised of rising energy costs and
increases in insurance expense as well as marketing costs partially offset by
decreases in certain direct expenses for the six month period ended June 30,
2001 compared to the six month period ended June 30, 2000 resulting from cost
savings in salaries and benefits, repairs and maintenance, bad debts, credit
card costs and other inn costs. Direct hotel labor costs continued to decline
due to policies, practices and efficiencies implemented during the six months
ended June 30, 2001. Additionally, corporate overhead expense for the six
month period ended June 30, 2001 decreased $1,383,000 from the same period in
the prior year primarily due to additional expenses during the six month
period ended June 30, 2000 related to employment and severance agreements
entered into. This decrease was partially offset by expenses related to the
transitioning of certain information systems services to a third-party
provider.
Healthcare provided a contribution of $47,010,000 in the first six months
of 2001, a decrease of $66,938,000 or 58.7% from the prior year's first six
months. The healthcare contribution was comprised of revenues of $53,458,000
(including rent of $36,390,000, interest from real estate mortgage loans of
$15,817,000 and interest from investment of cash reserves of $1,251,000) and
$121,388,000 (including rent of $60,398,000, interest from real estate mortgage
loans of $60,412,000 and interest from investment of cash reserves of $578,000)
and operating expenses of $6,448,000 and $7,440,000 for the six months ended
June 30, 2001 and 2000, respectively. The decreases in healthcare revenues and
operating expenses are primarily a result of the impact of asset
sales and mortgage repayments over the last year. Healthcare segment expenses
decreased $992,000 from the same period in the prior year.
TeleMatrix, a provider of telephones, software and equipment for the
lodging industry, contributed $1,652,000 for the six months ended June 30, 2001,
an increase of 34.5% from the prior year's first six months. This contribution
was comprised of revenues of $9,574,000 and $7,317,000 and expenses of
$7,922,000 and $6,089,000 for the six month periods ended June 30, 2001 and
2000, respectively. TeleMatrix expenses include operating expenses of $5,863,000
and $4,155,000 and general and administrative expenses of $2,059,000 and
$1,934,000 for the six months ended June 30, 2001 and 2000, respectively.
Operations of TeleMatrix have been included in lodging revenue and expense
categories of the combined and consolidated statements and are separately
disclosed as "Other Contribution" in Note 11 "Segment Reporting" of the combined
and consolidated statements.
INTEREST EXPENSE
For the three and six month periods ended June 30, 2001, interest expense
was $24,822,000 and $59,758,000, respectively, compared to $51,541,000 and
$106,777,000 for the three and six month period ended June 30, 2000,
respectively. The decrease in
29
interest expense is primarily attributable to the reduction of total
indebtedness of the Companies as a result of application of substantially all
proceeds generated from various healthcare asset sales and mortgage repayments
over the past year.
REAL ESTATE INVESTMENTS, DEPRECIATION, ASSET SALES, AND PROVISION FOR IMPAIRMENT
OF REAL ESTATE ASSETS, MORTGAGES AND NOTES RECEIVABLE
As of June 30, 2001 and 2000, the Companies had net investments in real
estate as summarized in the table below:
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
INVESTMENT IN REAL ESTATE ASSETS, NET 2001 2000 2001 2000
---- ---- ---- ----
LODGING
Lodging assets net book value, beginning of period .............. $ 2,430,414 $ 2,501,127 $ 2,448,391 $ 2,522,153
Funding of capital improvements .............................. 22,269 9,095 35,005 14,042
Depreciation expense and write-offs .......................... (24,059) (20,567) (48,392) (43,533)
Impairment of assets held for sale ........................... (1,937) -- (7,691) --
Impairment of asset held for use ............................. (3,197) -- (3,197) --
Net book value of assets sold and other adjustments .......... (322) (2,325) (948) (5,332)
----------- ----------- ----------- -----------
TOTAL INVESTMENT IN LODGING ASSETS, NET ......................... 2,423,168 2,487,330 2,423,168 2,487,330
----------- ----------- ----------- -----------
HEALTHCARE
Mortgage assets net book value, beginning of period ............. 219,923 1,041,676 222,571 1,059,920
Principal payments ........................................... (571) (2,311) (1,321) (4,597)
Construction loan funding .................................... -- -- -- 161
Partial principal prepayments ................................ (9,414) (363) (9,414) --
Impairment on real estate mortgages and notes receivable ..... (8,172) (47,873) (20,597) (47,873)
Net book value of mortgages repaid ........................... (69,757) (56,329) (69,757) (72,868)
Increase in real estate mortgages net of participation
reduction .................................................. 10 57 7 114
Other adjustments to mortgages ............................... -- -- 10,530 --
----------- ----------- ----------- -----------
Mortgage assets net book value, end of period ................... 132,019 934,857 132,019 934,857
----------- ----------- ----------- -----------
Sale/lease-back assets net book value, beginning of period ...... 671,665 846,968 681,714 1,090,586
Construction funding ......................................... -- 875 -- 3,113
Depreciation expense ......................................... (1,387) (6,409) (2,773) (12,844)
Impairment on assets held for sale ........................... (1,000) (13,253) (8,589) (13,253)
Impairment on assets held for use ............................ (19,460) -- (20,534) --
Net book value of real estate assets sold .................... (375,561) -- (375,561) (237,539)
Other adjustments to real estate investments ................. -- (100) -- (1,982)
----------- ----------- ----------- -----------
Sale/lease-back assets net book value, end of period ............ 274,257 828,081 274,257 828,081
----------- ----------- ----------- -----------
TOTAL INVESTMENT IN HEALTHCARE REAL ESTATE ASSETS, NET .......... 406,276 1,762,938 406,276 1,762,938
----------- ----------- ----------- -----------
TOTAL INVESTMENT IN REAL ESTATE ASSETS, NET ..................... $ 2,829,444 $ 4,250,268 $ 2,829,444 $ 4,250,268
=========== =========== =========== ===========
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the three and six month periods ended
June 30, 2001 were $29,697,000 and $59,244,000, respectively, compared to
$34,090,000 and $70,829,000 for the same periods in 2000, respectively. The
decreases are primarily the result of the sale of healthcare properties and
certain healthcare and lodging properties being classified as held for sale.
ASSET SALES
During the three and six month periods ended June 30, 2001, the Companies
realized gains of $2,345,000 and $2,291,000, respectively, on the sale of 90
healthcare facilities, equity securities, one restaurant facility, one office
building and one healthcare note receivable, net of previous writedowns of
$114,901,000. Losses on sales of 43 and 46 healthcare facilities, respectively,
for the 3 and 6 month periods ended June 30, 2000 were of $551,000 and
$4,363,000, respectively, net of previous writedowns.
30
IMPAIRMENT OF REAL ESTATE ASSETS, MORTGAGES AND NOTES RECEIVABLE
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
During the three months ended June 30, 2001, the Companies recorded an
impairment on real estate assets, mortgages and notes receivable of $39,520,000.
The Companies recorded an impairment on assets held for sale of $8,691,000 and
an impairment on assets held for use of $22,657,000 for the three months ended
June 30, 2001. During the three months ended June 30, 2001, the Companies
recorded an impairment related to the mortgage portfolio of $8,172,000.
During the three months ended June 30, 2000, the Companies recorded an
impairment of real estate assets, mortgages and notes receivable of $61,126,000.
During the three months ended June 30, 2000, the Companies recorded an
impairment on assets held for sale of $13,253,000 and an impairment related to
the mortgage portfolio of $47,873,000.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
During the six months ended June 30, 2001, the Companies recorded an
impairment of real estate assets, mortgages and notes receivable of $60,608,000.
The Companies recorded an impairment on assets held for sale of $16,280,000 and
an impairment of $23,731,000 on real estate assets held for use for the six
months ended June 30, 2001. During the six months ended June 30, 2001, the
Companies recorded an impairment related to the mortgage portfolio of
$20,597,000 (of which $10,530,000 was related to working capital and other notes
receivables classified as fees, interest and other receivables).
During the six months ended June 30, 2000, the Companies recorded an
impairment on real estate assets, mortgages and notes receivable of $61,126,000.
The Companies recorded an impairment on assets held for sale of $13,253,000 for
the six months ended June 30, 2000. During the six months ended June 30, 2000,
the Companies recorded an impairment related to the mortgage portfolio of
$47,873,000.
OTHER INCOME AND EXPENSES
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
During the three months ended June 30, 2001 and 2000, the Companies
recorded approximately $503,000 in other income and $8,756,000 in other expense,
respectively, as described below.
In June 2000, the Boards approved a plan to reduce the number of employees,
primarily in the financial and legal groups, of Realty's Needham, Massachusetts
offices. For the three months ended June 30, 2001 and 2000, Realty recorded
$678,000 and $7,312,000, respectively, of other expense related to severance and
retention incentive compensation earned by the healthcare segment employees
based on achievement of asset sale goals and compliance with specified
employment terms in order to facilitate the sale of certain healthcare assets
and closing of the Needham office by December 2002. Realty also incurred
approximately $121,000 of professional fees during the three months ended June
30, 2000 related to the implementation of the Five Point Plan.
During the three months ended June 30, 2001 and 2000, the Companies
recorded provisions and other expenses of approximately $458,000 and $2,518,000,
respectively, on interest and other receivables management considers
uncollectable. The Companies also recorded approximately $1,639,000 and
$1,195,000, respectively, of bad debt recoveries during the three months ended
June 30, 2001 and 2000 related to receivables written off in prior periods.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
During the six months ended June 30, 2001 and 2000, the Companies recorded
approximately $9,517,000 and $21,120,000, respectively, in other expenses as
described below.
In June 2000, the Boards approved a plan to reduce the number of employees,
primarily in the financial and legal groups, of the Companies' Needham,
Massachusetts offices. For the six months ended June 30, 2001 and 2000, the
Companies recorded $1,223,000 and $7,312,000, respectively, of other expense
related to severance and retention incentive compensation earned by healthcare
segment employees based on achievement of asset sale goals and compliance with
specified employment terms in order to facilitate the sale of certain healthcare
assets and closing of the Needham office by December 2002. The amount for the
six months ended June 30, 2000 includes a cash payment of approximately
$9,460,000 made to the former Chief Executive Officer, President and Treasurer
of Realty pursuant to a separation and consulting agreement executed in January
2000. In addition, other expenses for the six months ended June 30, 2000
included accelerated amortization on unearned compensation of $2,461,000 related
to certain
31
restricted paired common shares which were part of this separation agreement.
Realty also incurred approximately $280,000 of professional fees during the six
months ended June 30, 2000 related to the implementation of the Five Point Plan.
During the six months ended June 30, 2001 and 2000, the Companies recorded
provisions and other expenses of approximately $9,933,000 and $2,802,000,
respectively, on interest and other receivables management considers
uncollectable. The Companies also recorded approximately $1,639,000 and
$1,195,000, respectively, of bad debt recoveries during the six months ended
June 30, 2001 and 2000 related to receivables written off in prior periods.
EXTRAORDINARY ITEM
During the six months ended June 30, 2000, the Companies retired
$58,496,000 of debt at a discount prior to its maturity date 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.
CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001, the Companies applied the provisions of SFAS No. 133,
which states that if a derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset against
the change in fair value of the hedged assets or liabilities through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. It further states that gains or losses on a derivative instrument not
designated as a hedging instrument shall be recognized currently in earnings. As
of March 31, 2001, the interest rate swap was not designated as a hedging
instrument and, therefore, $1,236,000 was recorded as a charge to earnings
during the three months ended March 31, 2001 comprised of an increase in
interest expense of approximately $2,092,000 and a partially offsetting entry to
reflect the cumulative effect of a change in accounting principle (through
December 31, 2000) of $856,000. On June 27, 2001, the interest rate swap was
settled and $670,000 (the difference between the settlement value, $566,000 and
the fair value of the interest rate swap at March 31, 2001) was charged to
earnings as a result.
REALTY - CONSOLIDATED RESULTS OF OPERATIONS
Realty reported a net loss available to paired shareholders of $3,227,000
or $0.02 per diluted share for the quarter ended June 30, 2001, compared to a
net loss of $74,406,000 or $0.52 per diluted share for the second quarter of
2000. For the six months ended June 30, 2001, Realty reported a net loss
available to paired common shareholders of $8,348,000 or $0.06 per diluted share
compared to net loss of $60,415,000 or $0.42 per diluted share for the same
period in 2000.
REVENUES AND EXPENSES
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Revenue for the three months ended June 30, 2001 was $102,747,000, compared
to $142,415,000 for the three months ended June 30, 2000, a decrease of
$39,668,000. The revenue decrease was primarily attributable to a decrease in
interest revenue of $21,284,000 and a decrease in rental revenue of $19,207,000.
These decreases are primarily the result of mortgage repayments and healthcare
asset sales over the past year and partially offset by increases in interest
income of $670,000 from investment of cash reserves in 2001 over 2000.
For the three months ended June 30, 2001, total recurring expenses were
$70,338,000, compared to $101,851,000, for the three months ended June 30, 2000,
a decrease of $31,513,000. This decrease was primarily attributable to a
decrease in interest expense of $26,670,000 due to reductions of debt
outstanding resulting from application of proceeds from various asset sales and
mortgage repayments over the past year. In addition, depreciation expense for
the three months ended June 30, 2001, decreased $4,053,000 when compared to the
second quarter of 2000. The decrease in depreciation is related to the sale of
certain healthcare assets and classification of certain real estate as held for
sale.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Revenue for the six months ended June 30, 2001 was $219,269,000, compared
to $282,948,000 for the six months ended June 30, 2000, a decrease of
$63,679,000. The revenue decrease was primarily attributable to a decrease in
interest revenue of $43,880,000 and a decrease in rental revenue of $24,008,000.
These decreases primarily resulted from mortgage repayments and healthcare
assets sales over the last year and partially offset by increases in interest
income of $673,000 from investment of cash reserves in 2001 over 2000.
32
For the six months ended June 30, 2001, total recurring expenses were
$151,246,000, compared to $209,111,000 for the six months ended June 30, 2000, a
decrease of $57,865,000. This decrease was primarily attributable to a decrease
in interest expense of $46,938,000 due to reductions of debt outstanding
resulting from application of proceeds from various asset sales and mortgage
repayments over the past year. In addition, depreciation for the six months
ended June 30, 2001 decreased $10,743,000 when compared to the same period in
2000. The decrease in depreciation is related to the sale of certain healthcare
assets a classification of certain assets as held for sale.
ASSET SALES
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
During the three months ended June 30, 2001, Realty realized gains of
$2,345,000 on the sale of healthcare assets and the sale of one office building,
net of previous writedowns of $114,901,000, compared to losses on asset sales of
$1,521,000 during the same period in 2000.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
During the six months ended June 30, 2001, Realty realized gains of
$2,291,000 on the sale of healthcare assets, equity securities and the sale of
one restaurant and one office building, net of previous writedowns of
$114,901,000, compared to losses on asset sales of $5,333,000 during the same
period in 2000.
IMPAIRMENT OF REAL ESTATE ASSETS, MORTGAGES AND NOTES RECEIVABLE
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
During the three months ended June 30, 2001 and 2000, Realty recorded an
impairment on real estate assets, mortgages and notes receivable of $39,520,000
and $61,126,000, respectively.
During the three months ended June 30, 2001, 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 an
impairment on assets held for sale of $2,938,000 and assets held for use of
$22,657,000 during the three months ended June 30, 2001. During the three months
ended June 30, 2001, Realty recorded an impairment on real estate mortgages and
notes receivable of $8,172,000.
The Companies recorded an impairment on assets held for sale of $13,253,000
for the three months ended June 30, 2000. During the three months ended June 30,
2000, Realty recorded an impairment related to the mortgage portfolio of
$47,873,000.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
During the six months ended June 30, 2001 and 2000, Realty recorded an
impairment on real estate assets, mortgages and notes receivable of $60,608,000
and $61,126,000, respectively.
During the six months ended June 30, 2001, 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 an impairment on
assets held for sale of $16,280,000 during the six months ended June 30, 2001.
During the six months ended June 30, 2001, Realty recorded an impairment on real
estate mortgages and notes receivable of $20,597,000 (of which $10,530,000
related to working capital and other notes receivables classified as fees,
interest and other receivables). In addition, during the six months ended June
30, 2001, Realty recorded an impairment of $23,731,000 on real estate assets
held for use where current facts, circumstances and analysis indicate that the
assets might be impaired.
Realty recorded an impairment on assets held for sale of $13,253,000 for
the six months ended June 30, 2000. During the six months ended June 30, 2000,
Realty recorded an impairment related to the mortgage portfolio of $47,873,000.
OTHER INCOME AND EXPENSES
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
During the three months ended June 30, 2001 and 2000, Realty recorded
approximately $503,000 in other income and $8,756,000 in other expense,
respectively, as described below.
33
In June 2000, the Boards approved a plan to reduce the number of employees,
primarily in the financial and legal groups, of the Realty Needham,
Massachusetts offices. For the three months ended June 30, 2001 and 2000, Realty
recorded $678,000 and $7,312,000, respectively, of other expense related to
severance and retention incentive compensation earned by the healthcare segment
employees based on achievement of asset sale goals and compliance with specified
employment terms in order to facilitate the sale of certain healthcare assets
and closing of the Needham office by December 2002. Realty also incurred
approximately $121,000 of professional fees during the three months ended June
30, 2000 related to the implementation of the Five Point Plan.
During the three months ended June 30, 2001 and 2000, Realty recorded
provisions and other expenses of approximately $458,000 and $2,518,000,
respectively, on interest and other receivables management considers
uncollectable. The Companies also recorded approximately $1,639,000 and
$1,195,000, respectively, of bad debt recoveries during the three months ended
June 30, 2001 related to receivables written off in prior periods.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
During the six months ended June 30, 2001 and 2000, Realty recorded
approximately $9,517,000 and $21,120,000, respectively, in other expenses as
described below.
In June 2000, the Boards approved a plan to reduce the number of employees,
primarily in the financial and legal groups, of the Companies' Needham,
Massachusetts offices. For the six months ended June 30, 2001 and 2000, Realty
recorded $1,223,000 and $7,312,000, respectively, of other expense related to
severance and retention incentive compensation earned by the healthcare segment
employees based on achievement of asset sale goals and compliance with specified
employment terms in order to facilitate the sale of certain healthcare assets
and closing of the Needham office by December 2002. The amount for the six
months ended June 30, 2000 includes a cash payment of approximately $9,460,000
made to the former Chief Executive Officer, President and Treasurer of Realty
pursuant to a separation and consulting agreement executed in January 2000. In
addition, other expenses for the six months ended June 30, 2000 included
accelerated amortization on unearned compensation of $2,461,000 related to
certain restricted paired common shares which were part of this separation
agreement. Realty also incurred approximately $280,000 of professional fees
during the six months ended June 30, 2000 related to the implementation of the
Five Point Plan.
During the six months ended June 30, 2001 and 2000, Realty recorded
provisions and other expenses of approximately $9,933,000 and $2,802,000,
respectively, on interest and other receivables management considers
uncollectable. The Companies also recorded approximately $1,639,000 and
$1,195,000, respectively, of bad debt recoveries during the six months ended
June 30, 2001 related to receivables written off in prior periods.
EXTRAORDINARY ITEM
During the six months ended June 30, 2000, Realty retired $58,496,000 of
debt at a discount prior to its maturity date 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.
CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001, Realty applied the provisions of SFAS No. 133, which
states that if the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative will either be offset against the
change in fair value of the hedged assets or liabilities through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. It further states that gains or losses on a derivative instrument not
designated as a hedging instrument shall be recognized currently in earnings. As
of March 31, 2001, the interest rate swap was not designated as a hedging
instrument and, therefore, $1,236,000 was recorded as a charge to earnings
during the three months ended March 31, 2001 comprised of an increase in
interest expense of approximately $2,092,000 and a partially offsetting entry to
reflect the cumulative effect of a change in accounting principle (through
December 31, 2000) of $856,000. On June 27, 2001, the interest rate swap was
settled and $670,000 (the difference between the settlement value, $566,000, and
the fair value of the interest rate swap at March 31, 2001) was charged to
earnings as a result.
OPERATING - CONSOLIDATED RESULTS OF OPERATIONS
Operating reported a net loss available to paired shareholders of
$13,746,000 or $0.10 per diluted common share for the quarter ended June 30,
2001, compared to net loss of $13,563,000 or $0.10 per diluted common share for
the second quarter of 2000. For the six months ended June 30, 2001, Operating
reported a net loss available to paired common shareholders of $24,441,000 or
$0.17 per diluted share compared to a net loss of $20,378,000 or $0.14 per
diluted share for the same period in 2000. The net loss per common share amount
increased primarily as a result of increases in operating expenses partially
offset by an increase in total revenue for the six months ended June 30, 2001
when compared to the same period in fiscal year 2000.
34
REVENUES AND EXPENSES
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
Lodging revenues for the three months ended June 30, 2001 and 2000 were
$156,338,000 and $157,453,000, respectively. During the second quarter of 2000,
approximately $147,647,000, or 94.4%, of lodging revenues were derived from room
rentals. Lodging operating revenues generally are measured as a function of the
ADR and occupancy. The ADR decreased to $61.80 during the three months ended
June 30, 2001 from $63.16 during the three months ended June 30, 2000, a
decrease of $1.36 or 2.2%. Occupancy increased 0.9 percentage points to 68.3% in
the three months ended June 30, 2001 from 67.4% for the three months ended June
30, 2000. Revenue per available room ("RevPAR"), which is the product of
occupancy percentage and ADR, decreased 0.9% (or 1.0% for comparable hotels) to
$42.21 in the three months ended June 30, 2001 from $42.58 in the three months
ended June 30, 2000. The decrease in ADR and RevPAR resulted from competitive
pricing strategies implemented in response to declining demand during the three
months ended June 30, 2001. TeleMatrix sales are included in lodging revenues
and increased $901,000 to $4,683,000 for the three month period ending June 30,
2001.
Total recurring expenses for the three months ended June 30, 2001 were
$170,098,000 compared to $172,011,000 for the same period in 2000, a decrease of
$1,913,000. The decrease in recurring expenses is due to decreases in direct
expenses such as salaries and benefits, bad debt and other inn expenses as well
as a decrease in general and administrative expenses which included the impact
of expenses related to employment and severance agreements entered into during
in the second quarter of 2000. The decreases in direct expense and general and
administrative expenses were partially offset by rising energy and insurance
costs, increases in marketing costs and increase in information services costs
related to the transition of certain information services to a third-party
provider during fiscal year 2001. Direct lodging labor decreased in the three
months ended June 30, 2001 due to implementation of certain cost control
measures including new policies, procedures and efficiencies. TeleMatrix costs
of sales increased $659,000 to $2,844,000 for the three months ended June 30,
2001 due to increases in sales activity in business and residential product
lines.
Operating experienced an increase in rent to La Quinta Properties, Inc.
during the three months ended June 30, 2001 compared to the three months ended
June 30, 2000. The $1,123,000 increase from $76,641,000 for the three months
ended June 30, 2000 to $77,764,000 for the three months ended June 30, 2001 was
primarily due to a $1,705,000 increase during the second quarter of 2001 in the
annual base rate Realty charges Operating to adjust for a change in the Consumer
Price Index. This increase was partially offset by a decrease in contingent rent
which is driven by revenue.
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
Lodging revenues for the six months ended June 30, 2001 and 2000 were
$306,383,000 and $304,499,000, respectively. During the six months ended June
30, 2001, approximately $288,378,000, or 94.1%, of lodging revenues were derived
from room rentals. Lodging operating revenues generally are measured as a
function of the ADR and occupancy. The ADR decreased to $62.47 during the six
months ended June 30, 2001 from $63.72 during the six months ended June 30,
2000, a decrease of $1.25 or 2.0%. Occupancy increased 2.0 percentage points to
66.3% in the six months ended June 30, 2001 from 64.3% for the six months ended
June 30, 2000. Revenue per available room ("RevPAR"), which is the product of
occupancy percentage and ADR, increased 1.2% (or 1.0% for comparable hotels) to
$41.44 in the six months ended June 30, 2001 from $40.95 in the six months ended
June 30, 2000. The increase in RevPAR is due to the increase in occupancy
attributable to promotional efforts and was partially offset by a decrease in
ADR. TeleMatrix sales are included in lodging revenues and increased $2,257,000
to $9,574,000 for the six month period ending June 30, 2001.
Total recurring expenses for the six months ended June 30, 2001 were
$330,844,000 compared to $325,909,000 for the same period in 2000, an increase
of $4,935,000. The increase in recurring expenses is primarily due to increases
in hotel operating expenses and rent to Realty. Lodging operating expenses
increased $2,781,000 during the six months ended June 30, 2001 over the lodging
operating expenses in the same period in 2000. The increase was primarily due to
an increase in utility and energy costs, marketing costs, billboard advertising
and insurance expense. The increases were partially offset by decreases in
salaries and benefits, bad debt expense, and other inn expenses. Direct lodging
labor costs decreased due to implementation of new policies, procedures and
efficiencies during the six months ended June 30, 2001. TeleMatrix costs of
sales in Operating increased $1,719,000 to $5,382,000 for the six months ended
June 30, 2001 due to increases in sales activity in business and residential
product lines in the six months ended June 30, 2001.
Operating experienced an increase in rent to La Quinta Properties, Inc.
during the six months ended June 30, 2001 compared to the six months ended June
30, 2000. The $3,811,000 increase from $145,521,000 for the six months ended
June 30, 2000 to $149,332,000 for the six months ended June 30, 2001 was
primarily due to a $3,625,000 increase in the annual base rate Realty charges
Operating to adjust for a change in the Consumer Price Index. This increase was
partially offset by a decrease in contingent rent which is driven by revenue.
35
THE LA QUINTA COMPANIES, REALTY, AND OPERATING - COMBINED LIQUIDITY AND CAPITAL
RESOURCES
The Companies earn revenue by (i) owning and operating 227 La Quinta Inns
and 70 La Quinta Inns and Suites; (ii) leasing 89 healthcare facilities under
long-term triple net leases in which the rental rate is generally fixed with
annual escalators and (iii) providing mortgage financing for 20 healthcare
facilities in which the interest is generally fixed with annual escalators
subject to certain conditions. At June 30, 2001, approximately $150,000,000 of
the Companies' debt obligations were floating rate obligations in which interest
rate and related cash flows vary with the movements in the London Interbank
Offered Rate ("LIBOR"). 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. As of June 30, 2001, the
Companies have no interest rate swaps outstanding.
Operating does not have independent access to financing and is a
co-borrower on a portion of Realty's debt. As a result, the liquidity and
capital resources discussion related to Realty is also relevant to Operating.
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash used to fund future operating expenses and
recurring capital expenditures for the Companies, Realty and Operating will be
generated from cash flows provided by operating activities and in the case of
Operating the deferral of rent and royalties payable to Realty. The Companies,
Realty and Operating anticipate that cash flow provided by operating activities
will provide the necessary funds on a short and long-term basis to meet
operating cash requirements, i.e., exclusive of debt maturities. 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 sale of healthcare related assets. As part of the Five Point Plan,
the Companies and Realty may sell additional healthcare related assets to meet
their debt commitments and to provide 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. The Companies and Realty obtain short-term financing through the use of
bank lines of credit, which may be replaced with long-term financing as
appropriate. From time to time, the Companies and Realty utilize interest rate
swaps to attempt to hedge interest rate volatility.
Effective June 8, 2001, the Companies entered into a new credit
agreement with a bank group which provided for a $350,000,000 credit facility
("the new Credit Facility"), consisting of a $200,000,000 revolving line of
credit and a $150,000,000 term loan. Borrowings under the new Credit Facility
bear interest at LIBOR plus 3.5% (approximately 7.34% at June 30, 2001). The
new Credit Facility matures on May 31, 2003 and may be extended under certain
conditions at the Companies option. Proceeds from the new facility were
immediately used to payoff existing bank term debt maturing on July 17, 2001
of approximately $43,800,000
On July 31, 2001, the revolving line of credit under the new Credit
Facility was increased from $200,000,000 to $225,000,000.
The new Credit Facility includes covenants with respect to maintaining
certain financial benchmarks, limitations on certain types of investment,
limitations on dividends of Realty and Operating Company and other restrictions.
During the six months ended June 30, 2001 the Companies borrowed
$95,000,000 on the Tranche A revolving line of credit under an amended credit
agreement entered into in July 1998 (the "1998 credit facility"). This borrowing
was fully repaid in April 2001 with proceeds from the sale of healthcare assets.
Also, during the six months ended June 30, 2001, the Companies repaid
$400,000,000 on the Tranche D term loan of its 1998 credit facility with
proceeds from the sale of certain healthcare assets and proceeds drawn on the
new Credit Facility, as more fully described above.
36
The following is a summary of the Companies' future debt maturities as of June
30, 2001:
(IN MILLIONS)
NOTES CONVERTIBLE BANK BONDS AND
YEAR PAYABLE DEBENTURES NOTES MORTGAGES TOTAL
- --------------------------------------- -------------- -------------- -------------- --------------- -------------
2001 $ - (a) $ - $ - $ $ -
123 5 12 140
2002 36 (b) 54 (c) 10 2 102
2003 205 (d) - 135 2 342
2004 250 (e) - - 2 252
2005 116 - - - 116
2006 and thereafter 287 - - 14 301
-------------- -------------- -------------- --------------- -------------
Total debt........... $ 1,017 $ 54 $ 150 $ 32 $ 1,253
============== ============== ============== =============== =============
(a) On July 16, 2001, the Companies repaid $75,050,000 in notes payable at
maturity with proceeds from the new Credit Facility.
(b) In July 2001, the Companies repaid $11,000,000 of notes payable
scheduled to mature in August 2002.
(c) On July 30, 2001, the Companies redeemed $54,036,000 in convertible
debentures which were scheduled to mature in January and July 2002
with proceeds from the new Credit Facility.
(d) Assumes $175 million of Notes due in 2026 are put to the Companies.
(e) Assumes $150 million of Notes due in 2011 are put to the Companies.
At June 30, 2001, the Companies' gross real estate investments totaled
approximately $3,271,333,000 consisting of 297 lodging facilities in service, 12
long-term care facilities, 86 assisted living facilities, 4 medical office
buildings, one acute care hospital campus and 6 other healthcare facilities.
The Companies had shareholders' equity of $2,291,217,000 and debt
constituted 35.4% of the Companies' total capitalization as of June 30, 2001. At
June 30, 2001, Realty had shareholders' equity of $2,357,960,000 and Operating
had a shareholders' deficit of $28,911,000.
The Companies and Realty have an effective shelf registration statement
on file with the SEC under which the Companies may issue $1,625,000,000 of
securities including common stock, preferred stock, debt, series common
stock, convertible debt and warrants to purchase common stock, preferred
stock, debt, series common stock and convertible debt.
The Companies believe that their various sources of capital, including cash
on hand, availability under Realty's new Credit Facility maturing May 31, 2003,
operating cash flows from both Realty and Operating, and proceeds from the sale
of certain healthcare assets as contemplated under the Five Point Plan are
adequate to finance their operations as well as their existing commitments,
including financial commitments related to certain healthcare facilities and
repayment of debt maturing during the remainder of 2001.
Although the Companies intend to continue to sell healthcare assets, 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 63 of the Joint Annual Report on Form 10-K for the
year ending December 31, 2000 contains additional factors that could impact the
Companies' efforts, and the success of those efforts, in selling healthcare
assets.
The above-described factors (including those set forth in "Certain Factors
You Should Consider") 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 and pay down additional debt will be successful.
37
INFORMATION REGARDING OPERATORS OF HEALTHCARE ASSETS
As of June 30, 2001, the healthcare portfolio comprised approximately
19% of the net book value of the Companies' total real estate investments
before impairments. Alterra Healthcare Corporation, Balanced Care
Corporation, and Tenet Healthcare/Iasis currently operate approximately 10%
of the total real estate investments, or 54% of the healthcare portfolio
before impairments. A schedule of significant healthcare operators follows:
PORTFOLIO BY OPERATOR # of
(IN THOUSANDS, EXCEPT NUMBER OF Gross Net Book Operating % of # of # of
PROPERTIES AND PERCENTAGES) Investment Value(2) Properties Portfolio Mortgages Properties Leases Leases
------------- --------- ------------- --------- ----------- ----------- -------- -------
LODGING:
Hotel (1) ........................ $2,702,812 $2,423,168 297
HEALTHCARE PORTFOLIO:
Alterra .......................... 151,425 138,101 49 26% $ -- -- $ 138,101 49
Balanced Care Corporation ........ 93,495 91,851 19 17% 36,572 7 55,279 12
Other Non-Public Operators ....... 70,387 70,387 8 13% 70,387 8 -- --
Tenet Healthcare/Iasis ........... 65,650 55,390 1 11% -- -- 55,390 1
Other Public Operators ........... 55,687 47,867 6 9% -- -- 47,867 6
CareMatrix Corporation ........... 35,440 35,440 3 7% 35,440 3 -- --
Assisted Living Concepts ......... 31,487 28,400 16 5% -- -- 28,400 16
ARV Assisted Living, Inc. ........ 28,982 26,461 4 5% -- -- 26,461 4
Life Care Centers of America, Inc. 26,212 26,212 2 5% 26,212 2 -- --
Paramount Real Estate Services ... 9,756 8,902 1 2% -- -- 8,902 1
------------- --------- ------------- --------- ----------- ----------- -------- -------
568,521 529,011 109 100% 168,611 20 360,400 89
Impairment........................ (122,735) (36,592) (86,143)
------------- --------- ------------- ----------- --------
568,521 406,276 109 $ 132,019 $ 274,257
------------- --------- ------------- =========== =========
Total Real Estate Portfolio ...... $3,271,333 $2,829,444 406
============= ========== =============
(1) The lodging portfolio net book value is net of the impairment balance
of $14,019,000.
(2) Net book value shown above includes non-operating properties, including
undeveloped land and two flood-damaged hotels undergoing renovation.
At June 30, 2001, companies in the assisted living sector of the
healthcare industry approximate 11% of the net book value of the Companies'
total real estate investments (and approximately 56% of the healthcare
portfolio before impairments), while companies in the long term care sector
approximate 3% of the net book value of Realty's total real estate
investments (and approximately 18% of the healthcare portfolio before
impairments).
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 or loss, funds available from operations, its
ability to make distributions to its shareholders and meet debt obligations. The
operations of the long-term care companies have been negatively impacted by
changes in Medicare reimbursement rates, 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 and
their access to capital.
38
OPERATORS IN BANKRUPTCY
As of June 30, 2001, the Companies had exposure to two operators, Sun
Healthcare Group, Inc. ("Sun") and CareMatrix Corporation ("CareMatrix"), who
have filed for bankruptcy protection under Chapter 11. The following table
describes the number of facilities, net assets by lease/mortgage and the
lease/mortgage income for each of the operators which are in Chapter 11
proceedings:
(IN THOUSANDS, EXCEPT Six months ended
FOR NUMBER OF FACILITIES) Leases Mortgages June 30, 2001
------------------------ ------------------------ -----------------------
Total Rental Interest
Operator Date filed Facilities Facilities Net Assets Facilities Net Assets Income Income
- ----------------- ---------- ---------- ---------- ---------- ---------- ---------- ------ --------
CareMatrix 11/9/2000 3 - $ - 3 $35,440 N/A $1,718(1)
Sun 10/14/1999 1 1 10,762 - - $ 710 N/A
---------- ---------- ---------- ---------- ---------- ------ --------
Totals 4 1 $10,762 3 $35,440 $ 710 $1,718
========== ========== ========== ========== ========== ====== ========
(1) Mortgages related to CareMatrix have been placed on non-accrual status
and interest income is recorded only as payments are received.
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.
Management has initiated various actions to protect the Companies'
interests under its leases and mortgages including the draw down 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 losses 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 the 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 $87,169,000 and
$94,429,000 for the six months ended June 30, 2001 and 2000, respectively.
Effective January 1, 2000 the National Association of Real Estate Investment
Trusts ("NAREIT") adopted a new definition of FFO.
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 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 does not reflect working capital
changes, cash expenditures for capital improvements or principal payments on
indebtedness.
39
The following reconciliation of net loss and income available to common
shareholders to FFO illustrates the difference between the two measures of
operating performance for the six months ended June 30, 2001 and 2000. Certain
reconciling items include amounts reclassified from discontinued operations and,
accordingly, do not agree to revenue and expense captions in the Companies'
financial statements.
SIX MONTHS ENDED JUNE 30,
-------------------------
(IN THOUSANDS) 2001 2000
---- ----
Net loss available to common shareholders ................ $(32,789) $(80,793)
Depreciation of real estate and intangible amortization 62,377 73,255
Other capital gains and losses ........................ (2,291) 4,363
Other expenses (a) .................................... 60,335 99,007
Income tax expense .................................... 393 --
Extraordinary item .................................... -- (1,403)
Cumulative effect of change in accounting principle ... (856) --
-------- --------
Funds from Operations .................................... $ 87,169 $ 94,429
======== ========
(a) Other expenses include provisions for assets and mortgages of
$60,608,000 (of which $10,530,000 relates to working capital and other
notes receivables) offset by recoveries on prior year impairments of
$273,000 for the six months ended June 30, 2001.
Weighted average paired common shares outstanding:
Basic............................................. 142,992 141,330
Diluted........................................... 142,992 141,330
REIT QUALIFICATION ISSUES
The Ticket to Work and Work Incentives Improvement Act of 1999 (the "Ticket
to Work Act") modified certain provisions of federal income tax law applicable
to REITs. All of the changes described below became effective with respect to
the Companies after 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, a taxable REIT subsidiary cannot directly or indirectly
operate or manage a lodging or healthcare facility. A taxable REIT subsidiary
may own a lodging facility (i.e., a hotel) or lease one from the REIT (provided
no gambling revenues are derived from the hotel or its premises), provided that
the lodging facility is operated by an "eligible independent contractor". An
eligible independent contractor is an independent contractor that is actively
engaged in the trade or business of operating lodging facilities for persons or
entities unrelated to the REIT. Due to 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 is 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 and certain other limited exceptions.
Accordingly, and taking into account the Companies' general inability to utilize
taxable REIT subsidiaries in the conduct of its lodging and healthcare
operations, 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 paired share REIT provided for in the Reform Act,
the Ticket to Work Act limits 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
healthcare assets and consequent loss of related qualifying
40
rental and interest income. Due to recent sales of healthcare assets and the
resulting loss of qualifying rental and interest income, disqualifying income
has increased as a percentage of Realty's gross income. 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
exceed the five percent gross income limit for non-qualifying income, resulting
in REIT disqualification and/or substantial costs to avoid such
disqualification. Based on the Five Point Plan and the Companies' announced
intention to increase its focus on its lodging business (including franchising,
which will generate royalty income) 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.
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 a REIT.
Restructuring the operations of Realty and Operating to comply with the
Ticket to Work Act and the Reform Act may cause one or both of the Companies to
incur substantial tax liabilities and other costs, to recognize an impairment
loss on their goodwill asset related to the acquisition of the paired share
structure or to take other actions that may otherwise adversely affect one or
both of the Companies.
NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") approved
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. SFAS No. 142 will be
effective for fiscal years beginning after December 15, 2001 and will require
1) intangible assets (as defined in SFAS No. 141) to be reclassified into
goodwill, 2) the ceasing of amortization of goodwill, and 3) the testing of
goodwill for impairment at transition and on an annual basis (more frequently
if the occurrence of an event or circumstance indicates an impairment). The
Companies will adopt SFAS No. 142 on January 1, 2002. The Companies have not
yet determined what the impact of SFAS No. 142 will be on the Companies'
results of operations and financial position.
In January 2001, the Emerging Issues Task Force of the Financial
Accounting Standards Board (the "EITF") reached a consensus ("the Consensus")
on a portion of the EITF Issue No. 00-22 "Accounting for `Points' and Certain
Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free
Products or Services to Be Delivered in the Future." The Consensus addresses
the recognition of a cash rebate or refund obligation as a reduction of
revenue based on a systematic and rational allocation of cost. In January
2001, Operating implemented a customer retention program which provides a
cash rebate. In accordance with the consensus, Operating classified such cash
rebates or refunds as a reduction of revenues. In addition, the EITF will
address incentive or loyalty programs such as the "La Quinta Returns Club."
Operating has historically reported the cost that it would refund the hotel
for the free night as offsetting components of marketing expense and lodging
revenues and reflected a zero economic impact of the "free night stay." In
2001, Operating has presented this revenue as a reduction of costs. The 2000
comparable marketing expense and lodging revenue components have been
reclassified to conform with the fiscal year 2001 financial statement
presentation. The Companies will re-evaluate the impact of the final
consensus of the EITF on the Companies' accrual of the "minimal" value of a
night's stay award and will make any necessary adjustments and revision to
accounting policy upon implementation of EITF issue No. 00-22.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which
replaced SFAS No. 125 of the same name. The Statement provides consistent
standards for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The Statement is effective for transfers
and servicing of financial assets and extinguishments of liabilities occurring
after June 30, 2001. The Statement is also effective for recognition and
reclassification of collateral and for disclosures relating to securitization
transactions and collateral for fiscal years ending after December 15, 2000.
Disclosures for prior comparative financial statements are not required. The
Companies are currently not affected by the Statement's requirements.
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.
41
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 1. LEGAL PROCEEDINGS
On June 27, 2001, a complaint was filed in the United States District
Court for the District of Massachusetts, entitled Steadfast Insurance Co. v.
Meditrust Corp., et al., Civ Action No. 01-CV-1115-MEL. The complaint, which
has not yet been served on Meditrust Corp. or on any other of the named
defendants, and which was filed by the plaintiff under seal, names Meditrust
Corp. and certain of its present and former directors and officers as
defendants. The plaintiff, which claims to be the subrogee or assignee of the
claims of various entities, alleges purported causes of action including
breach of contract, negligence, violation of 15 USC Section 771, violation of
Mass. Gen. L. c. 110, Section 410, negligent misrepresentation, and violation
of Mass. Gen. L. c. 93A Section 11, arising out of an alleged
misrepresentation in the offering memorandum for Meditrust Corp.'s 7.114%
Exercisable Put Option Securities and seeks approximately $15 million plus
other potential damages. The Companies believe that it has meritorious
defenses to the lawsuit, as well as claims against non-parties to the lawsuit
that may satisfy all or part of any potential liability that may be found
against Meditrust Corp. The Companies are currently determining its response
to this lawsuit.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of La Quinta Properties, Inc. and La
Quinta Corporation held on June 28, 2001, the vote recorded for each of the
following matters submitted to the shareholders of the Companies was as follows:
1. Election of Directors of La Quinta Properties, Inc.: William G. Byrnes
and Francis W. Cash were nominated and duly elected to hold office as
Directors of La Quinta Properties, Inc., 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 Byrnes 118,178,332
Francis W. Cash 118,183,036
The following persons continued as Directors of La Quinta Properties,
Inc. 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
2. To approve the appointment of independent auditors:
The public accounting firm of PricewaterhouseCoopers, LLP was approved
as independent auditors for La Quinta Properties, Inc. by the number of
votes set forth below:
For 118,234,658
Against 116,106
Abstaining 217,896
3. Election of Directors of La Quinta Corporation: William G. Byrnes and
Francis W. Cash were nominated and duly elected to hold office as
Directors of La Quinta 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 Byrnes 118,176,660
Francis W. Cash 118,185,994
The persons listed below continued as Directors of La Quinta
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
42
4. To approve the appointment of independent auditors:
The public accounting firm of PricewaterhouseCoopers, LLP was approved
as independent auditors for La Quinta Corporation by the number of
votes set forth below:
For 118,246,891
Against 107,924
Abstaining 213,845
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4.1 Specimen certificate for paired Included in this filing
shares of common stock, $0.10 par
value, of La Quinta Properties, Inc.
and La Quinta Corporation
4.2 Amended and Restated Sixth Incorporated by reference
Supplemental Indenture, dated to Exhibit 99.2 to Joint
as of June 12, 2001, by and Current Report of Form 8-K
between Meditrust Corporation, of Meditrust Corporation
as successor by merger to and Meditrust Operating
Meditrust, a Massachusetts Company, event dated
business trust, and State June 12, 2001
Street Bank and Trust
Company, as successor trustee
to Fleet National Bank
10.1 Purchase and Sale Agreement, Incorporated by reference
dated as of December 20, 2000, to Exhibit 2.1 to Joint
by and among THCI MT, LLC and Current Report of Form 8-K
Meditrust Healthcare Corporation, of Meditrust Corporation
Meditrust Mortgage Investments, and Meditrust Operating
Inc. and Meditrust of Massachusetts, Company, event dated
Meditrust of Bedford, Inc. and April 2, 2001
New Meditrust Company LLC
10.2 First Amendment to Purchase Incorporated by reference to
Agreement, dated as of Exhibit 2.2 to Joint Current
March 8, 2001, by and among THCI Report of Form 8-K of
MT, LLC and Meditrust Corporation, Meditrust Corporation and
Meditrust Healthcare Corporation, Meditrust Operating Company,
Meditrust Mortgage Investments, Inc., event dated April 2, 2001
San Joaquin Health Care Associates
Limited Partnership, Meditrust of
California, Inc. and Meditrust of
Massachusetts, Meditrust of Bedford,
Inc. and New Meditrust Company LLC
10.3 Second Amendment to Purchase Agreement, Incorporated by reference
dated as of March 29, 2001, by and to Exhibit 2.3 to Joint
among THCI MT, LLC and Meditrust Current Report of Form
Corporation, Meditrust Healthcare Corporation, Meditrust
Investments, Inc., San Joaquin Mortgage 8-K of Meditrust
Health Care Associates Limited Corporation and Meditrust
Partnership, Meditrust of California, Operating Company, event
Inc. and Meditrust of Massachusetts, dated April 2, 2001
LLC, Meditrust of Bedford, Inc., New
Meditrust Company LLC and Care
Realty L.L.C.
10.4 Credit Agreement dated Included in this filing
as of June 6, 2001 by and
among Meditrust Corporation,
Meditrust Operating Company,
Canadian Imperial Bank of
Commerce and the other banks
set forth therein.
10.5 Pledge and Security Agreement Included in this filing
dated as of June 6, 2001 by and
among Meditrust Corporation,
Meditrust Operating Company, the
Subsidiary Grantors listed therein
and Canadian Imperial Bank of
Commerce, as collateral agent.
43
(b) Reports on Form 8-K
The Companies filed a Joint Current Report on Form 8-K for event dated
April 2, 2001, and a Form 8-K/A was filed on June 18, 2001 to amend such Form
8-K.
The Companies elected to file a Joint Current Report on Form 8-K, pursuant
to Item 9 thereof, for event dated June 12, 2001.
44
LA QUINTA PROPERTIES, INC. AND LA QUINTA CORPORATION
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.
August 9, 2001 LA QUINTA PROPERTIES, INC.
- ------------------------- --------------------------
(Date)
/S/ DAVID L. REA
David L. Rea
Chief Financial Officer and Treasurer
(duly authorized officer and principal
financial officer)
August 9, 2001 LA QUINTA CORPORATION
- ------------------------- --------------------------
(Date)
/S/ DAVID L. REA
David L. Rea
Chief Financial Officer and Treasurer
(duly authorized officer and principal
financial officer)
45