1
EXHIBIT 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of Meditrust:
We have audited the accompanying consolidated balance sheets of
Meditrust as of December 31, 1995 and 1994, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Meditrust at December 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Boston, Massachusetts
January 29, 1996
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CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------
1995 1994
-------- -------
(In thousands)
ASSETS
Real estate investments (Notes 1, 3, 4 and 7):
Land........................................ $ 47,993 $ 42,060
Buildings and improvements, net of
accumulated depreciation of $77,204
and $65,918, respectively................. 621,182 518,428
Real estate mortgages ...................... 1,108,623 923,741
---------- ----------
Total real estate investments............. 1,777,798 1,484,229
Other assets, net............................. 49,400 54,246
Fees, interest and other receivables.......... 20,406 16,718
Cash and cash equivalents..................... 44,248 39,937
---------- ----------
Total assets.............................. $1,891,852 $1,595,130
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness (Notes 6 and 12):
Notes payable, net.......................... $ 300,813 $ -
Convertible debentures, net................. 295,209 231,277
Bank notes payable, net..................... 113,709 168,645
Bonds and mortgages payable, net............ 52,560 59,264
Senior unsecured notes, net................. - 285,360
Senior mortgage notes, net.................. - 21,206
---------- ----------
Total indebtedness........................ 762,291 765,752
Deferred income............................... 9,222 12,559
Accrued expenses and other liabilities........ 58,584 46,672
---------- ----------
Total liabilities......................... 830,097 824,983
---------- ----------
Commitments and contingencies (Notes 3,
8 and 9)
Shareholders' equity (Notes 5, 6, 10 and 12):
Shares of beneficial interest without
par value:
Unlimited shares authorized; 51,177
and 39,619 shares issued and
outstanding in 1995 and 1994,
respectively 1,192,612 860,071
Distributions in excess of net income (130,857) (89,924)
---------- ----------
Total shareholders' equity.................. 1,061,755 770,147
---------- ----------
Total liabilities and shareholders' equity 1,891,852 $1,595,130
========== ==========
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED STATEMENTS OF INCOME
For The Year Ended December 31,
------------------------------------
1995 1994 1993
(In thousands except per Share data)
Revenues:
Rental income................. $ 85,616 $ 82,063 $ 80,004
Interest income............... 123,753 90,930 70,371
-------- -------- --------
Total revenues............ 209,369 172,993 150,375
-------- -------- --------
Expenses:
Interest...................... 64,163 67,479 62,193
Depreciation and amortization. 18,176 17,171 16,277
General and administrative.... 7,058 7,883 8,269
-------- -------- --------
Total expenses............ 89,397 92,533 86,739
-------- -------- --------
Net income before extraordinary item.. $119,972 $ 80,460 $ 63,636
Extraordinary item:
Loss on prepayment of debt
(Note 6) ......................... 33,454 - -
-------- -------- --------
Net income............................ $ 86,518 $ 80,460 $ 63,636
======== ======== ========
Per Share:
Net income before extraordinary item.. $ 2.52 $ 2.28 $ 2.03
Extraordinary item:
Loss on prepayment of debt....... 0.70 - -
-------- -------- --------
Net income............................ $ 1.82 $ 2.28 $ 2.03
======== ======== ========
Weighted average Shares outstanding... 47,563 35,314 31,310
======== ======== ========
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Shares Amount
-------- --------
(In thousands except per Share data)
Balance, December 31, 1992. . . . . . . . . . . . . . . . . . 26,767 $ 431,483
Proceeds from issuance of shares of beneficial
interest, net of offering costs of $5,135. . . . . . . . . 3,277 95,239
Issuance of shares of beneficial interest associated with:
Conversion of debentures, net of unamortized issue
costs of $2,414 . . . . . . . . . . . . . . . . . . 2,508 67,263
Exercise of warrants . . . . . . . . . . . . . . . . . . . 182 3,646
Employee compensation and stock options. . . . . . . . . . 102 2,851
Distributions paid ($2.54 per Share). . . . . . . . . . . . . - (78,323)
Net income for the year ended December 31, 1993 . . . . . . . - 63,636
------ ----------
Balance, December 31, 1993. . . . . . . . . . . . . . . . . . 32,836 585,795
Proceeds from issuance of shares of beneficial
interest, net of offering costs of $8,371. . . . . . . . . 4,500 130,566
Issuance of shares of beneficial interest associated with:
Conversion of debentures, net of unamortized issue
costs of $1,632. . . . . . . . . . . . . . . . . . . 2,037 57,370
Exercise of warrants . . . . . . . . . . . . . . . . . . . 122 2,431
Employee compensation and stock options. . . . . . . . . . 124 3,485
Distributions paid ($2.62 per Share). . . . . . . . . . . . . - (89,960)
Net income for the year ended December 31, 1994 . . . . . . . - 80,460
------ ----------
Balance, December 31, 1994. . . . . . . . . . . . . . . . . . 39,619 770,147
Proceeds from issuance of shares of beneficial
interest, net of offering costs of $16,703. . . . . . . . . 10,250 294,953
Issuance of shares of beneficial interest associated with:
Conversion of debentures, net of unamortized issue
costs of $628. . . . . . . . . . . . . . . . . . . . 1,067 30,670
Employee compensation and stock options . . . . . . . . . . . 241 6,918
Distributions paid ($2.70 per Share). . . . . . . . . . . . . - (127,451)
Net income for the year ended December 31, 1995 . . . . . . . - 86,518
------ ----------
Balance, December 31, 1995. . . . . . . . . . . . . . . . . . . 51,177 $1,061,755
====== ==========
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Year Ended December 31,
------------------------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . $ 86,518 $ 80,460 $ 63,636
Loss on prepayment of debt . . . . . . . . . . . . . 33,454 - -
Depreciation of real estate. . . . . . . . . . . . . 16,582 15,209 14,548
Goodwill amortization. . . . . . . . . . . . . . . . 1,557 1,557 1,557
Shares issued for compensation . . . . . . . . . . . 959 863 826
Other depreciation, amortization and
provision for losses (Note 4) . . . . . . . . . . 2,764 6,916 12,317
Gain on sale of real estate and mortgage
prepayments, net (Note 4) . . . . . . . . . . . . - (3,726) (8,005)
Other items, net . . . . . . . . . . . . . . . . . . (284) (766) (48)
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
AVAILABLE FOR DISTRIBUTION. . . . . . . . . . . . . . . . . 141,550 100,513 84,831
Net change in other assets and liabilities (Note 2). 8,447 306 (5,540)
-------- -------- --------
Net cash provided by operating activities . . . . . 149,997 100,819 79,291
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from equity offerings . . . . . . . . . . . 311,656 138,937 100,374
Proceeds from debt issuance. . . . . . . . . . . . . 835,700 460,004 278,370
Repayment of bank notes payable. . . . . . . . . . . (492,200) (270,595) (130,000)
Repayment of senior unsecured and
mortgage notes payable . . . . . . . . . . . . . . (309,300) (23,300) (43,800)
Debt prepayment charges. . . . . . . . . . . . . . . (31,228) - -
Equity offering and debt issuance costs. . . . . . . (21,962) (11,484) (10,618)
Principal payments on bonds and mortgages payable. . (6,727) (847) (868)
Distributions to shareholders. . . . . . . . . . . . (127,451) (89,960) (78,323)
Proceeds from warrant conversions and stock options. 5,961 5,053 5,671
-------- -------- --------
Net cash provided by financing activities. . . . . 164,449 207,808 120,806
-------- -------- --------
The accompanying notes are an integral part of these financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Year Ended December 31,
---------------------------------------
1995 1994 1993
-------- -------- --------
(In thousands)
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate. . . . . . . . . . . . . . . $(94,187) $(20,210) $(18,272)
Investment in real estate mortgages and
development funding. . . . . . . . . . . . . . . . . (259,162) (291,027) (210,295)
Prepayment proceeds and principal payments
on real estate mortgages . . . . . . . . . . . . . . 49,847 23,470 42,045
Proceeds from sale of real estate 7,800 4,000 5,194
Working capital advances and acquisition of
receivables. . . . . . . . . . . . . . . . . . . . . (45,026) (44,297) (47,153)
Collection of receivables and repayment of working
capital advances . . . . . . . . . . . . . . . . . . 30,593 43,068 19,832
-------- -------- --------
Net cash used in investing activities (310,135) (284,996) (208,649)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . . . . 4,311 23,631 (8,552)
Cash and cash equivalents at:
Beginning of year . . . . . . . . . . . . . . . . . . 39,937 16,306 24,858
-------- -------- --------
End of year . . . . . . . . . . . . . . . . . . . . . $ 44,248 $ 39,937 $ 16,306
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid during the period . . . . . . . . . . . . . . . . $ 55,544 $ 63,323 $ 59,746
Non-cash investing and financing transactions:
Acquisition and lease of real estate (Notes
3 and 4):
Value of real estate (sold) acquired:
Land and buildings. . . . . . . . . . . . . . . . . (34,386) (94,000) 106,566
Accumulated depreciation. . . . . . . . . . . . . . 3,486 22,463 -
Increase (reduction) of real estate
mortgages net of participation reduction. . . . . . 37,872 85,000 (88,493)
Issuance of demand note payable
related to participation reduction. . . . . . . . . - - (18,073)
Value of Shares issued for conversion of debentures. . 31,298 59,002 69,677
The accompanying notes are an integral part of these financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Meditrust (the "Company"), a real estate investment trust, invests
primarily in health care facilities, including nursing homes, assisted living
facilities, medical office buildings, rehabilitation hospitals and other health
care related facilities. These facilities are located throughout the United
States and are operated by regional and national health care providers. The
Company's more significant accounting policies follow:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and its majority-owned partnerships
after the elimination of all significant intercompany accounts and
transactions.
REAL ESTATE INVESTMENTS
Land, buildings and improvements are stated at cost. Depreciation is
provided for on a straight-line basis over 40 years, the expected useful lives
of the buildings and major improvements. Financial statements prepared in
conformity with generally accepted accounting principles require management to
make estimates and assumptions affecting reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates. The Company provides reserves for potential losses based upon
management's periodic review of its assets and classifies these reserves as
appropriate reductions to the related assets or includes such reserves in
accrued expenses and other liabilities.
CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST
The Company capitalizes interest costs associated with funds used to
finance the construction of facilities. The amount capitalized is based upon
the borrowings outstanding during the construction period using the rate of
interest which approximates the Company's cost of financing.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of certificates of deposit and other
investments with less than 90-day maturities at the time of purchase and are
stated at cost which approximates fair market value.
OTHER ASSETS
Other assets include cash restricted for specified disbursement in
accordance with certain facility acquisitions and mortgage financings and the
corresponding liabilities are reflected in accrued expenses and other
liabilities. Other assets also include facilities' operating receivables,
working capital advances and goodwill associated with the acquisition of the
Company's previous investment advisor which is being amortized on a
straight-line basis over a ten-year period.
DEBT ISSUANCE COSTS
Debt issuance costs have been deferred and are being amortized using
primarily the effective interest method over the term of the related
borrowings.
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REVENUE RECOGNITION
Rental income from operating leases is recognized as earned over the
life of the lease agreements. Interest income on real estate mortgages is
recognized on the accrual basis. Deferred income consists principally of fees
which are being amortized over the term of the lease, the mortgage or the
construction period related to such facilities.
NET INCOME PER SHARE
Net income per share of beneficial interest ("Shares") is computed
using the weighted average number of Shares outstanding during the year of
computation. The effect of common stock equivalents is immaterial.
INCOME TAXES
The Company has elected to be taxed as a real estate investment trust
under the Internal Revenue Code of 1986, as amended, and believes it has met
all the requirements for qualification as such. Accordingly, the Company will
not be subject to federal income taxes on amounts distributed to shareholders,
provided it distributes annually at least 95% of its real estate investment
trust taxable income and meets certain other requirements for qualifying as a
real estate investment trust. Therefore, no provision for federal income taxes
is believed necessary in the financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made in the prior years'
consolidated financial statements to conform with the current year's
presentation.
2. SUPPLEMENTAL CASH FLOW INFORMATION
Details of net change in other assets and liabilities (excluding
noncash items, deferred income recognized in excess of cash received and
changes in restricted cash and related liabilities) follow:
For The Year Ended December 31,
---------------------------------------
1995 1994 1993
------- ------- -------
(In thousands)
Increase in fees, interest and other receivables. . . . . . . $(3,360) $(4,392) $(1,705)
Increase in other assets . . . . . . . . . . . . . . . . . . (3,838) (434) (1,630)
(Decrease) increase in deferred income. . . . . . . . . . . . 4,331 (176) 2
Increase (decrease) in accrued expenses . . . . . . . . . . .
and other liabilities. . . . . . . . . . . . . . . . . . . 11,314 5,308 (2,207)
------- ------- -------
$ 8,447 $ 306 $(5,540)
======= ======= =======
3. REAL ESTATE INVESTMENTS
During 1995, the Company provided permanent mortgage financing of
$100,376,000 for
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six long-term care facilities located in Arizona, Massachusetts,
Michigan, Tennessee and Washington, three medical office buildings in
Florida and Tennessee, one assisted living facility in Michigan, two
retirement living centers located in Nevada and Utah, two alcohol and
substance abuse facilities and one psychiatric facility located in New York.
The New York facilities were previously financed for $72,397,000 with a
previous borrower. The previous borrower prepaid this loan with the proceeds
from the sale to the Company of four long-term care facilities in Maryland,
Massachusetts and New Jersey and one rehabilitation hospital in New Jersey.
The Company also provided $51,840,000 in additional permanent mortgage
financing secured by 18 long-term care facilities located in Kansas, Kentucky,
Massachusetts, Missouri, Nevada, Pennsylvania, Tennessee, Texas, Washington and
Wyoming, and two retirement facilities located in Nebraska and Wyoming. In
addition, the Company provided development financing of $106,946,000 for ten
long-term care facilities, eleven medical office buildings and one assisted
living facility. During the year ended December 31, 1995 the Company received
annual principal payments on real estate mortgages of $6,615,000 and received
$43,232,000 in mortgage prepayments for seven long-term care facilities and one
rehabilitation facility.
During 1995, the Company acquired for $88,700,000 an acute care
hospital campus located in Arizona, and five long-term care facilities located
in Ohio and West Virginia. The Company also provided $2,487,000 for additions
to three facilities, and $3,000,000 for land at one facility that are currently
owned by the Company. In addition, the Company received proceeds of $7,800,000
from the sale of a long-term care facility in Illinois.
From time to time, the Company enters into transactions with related
parties. As of December 31, 1995, the Company had total commitments of
$160,383,000 of which $83,348,000 was funded, to entities in which the
Company's Chairman and Chief Executive Officer owned or was expected to own a
controlling equity interest. During 1995, the Company recognized interest
income of $2,593,000 from investments with these entities. The Company
expects, from time to time, to enter into additional transactions with related
parties in the future. All of the terms and conditions of such transactions
are subject to approval by the independent Trustees of the Company.
Minority interest in partnerships relating to the Company's
investments in seven rehabilitation facilities is $2,204,000 and $2,562,000 as
of December 31, 1995 and 1994 and is included in accrued expenses and other
liabilities in the consolidated financial statements. The Company has a 94%
equity interest in these partnerships.
At December 31, 1995, the Company was committed to providing
additional financing of approximately $102,701,000 relating to six long-term
care facilities, ten medical office buildings, and one assisted living facility
currently under construction and additions to permanent mortgages secured by
five long-term care facilities. As of December 31, 1995, 42% of the Company's
gross real estate portfolio was invested with two operators. Each operator
represents 21% of the Company's portfolio.
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4. MERGER BETWEEN SUN HEALTHCARE AND MEDIPLEX
In June 1994, Sun Healthcare Group, Inc. ("Sun") merged with The Mediplex
Group, Inc. ("Mediplex"). The merged entities comprise approximately 21% of
the Company's portfolio of gross real estate investments as of December 31,
1995. A condition of the Company's consent to this merger was the extension of
all existing Mediplex lease and mortgage terms to between 2004 and 2008 and the
addition of annual rate escalators.
In connection with this transaction, the Company (a) terminated its leases
with Mediplex on three properties (two alcohol and substance abuse treatment
facilities and one psychiatric hospital located in New York) with a net book
value of $101,537,000 and replaced these leases with mortgages from Sun totaling
$74,000,000, (b) loaned $11,000,000 to Sun which was collateralized by a
mortgage on a rehabilitation facility located in Colorado and (c) entered into
sale/leaseback transactions with Sun totaling $30,000,000 for two rehabilitation
facilities located in Kentucky and Massachusetts and for a long-term care
facility located in Connecticut. This transaction resulted in a deferred gain
of $13,463,000 at December 31, 1994. During 1995, these facilities were sold by
Sun, and the Company recognized the previously deferred gain. This gain was
offset by an addition to the valuation allowance for approximately the same
amount. During 1995, approximately $17,733,000 of receivables purchased by the
Company were charged off against the valuation allowance. At December 31, 1995
the valuation allowance aggregated $13,947,000.
5. SHARES OF BENEFICIAL INTEREST
Distributions paid to shareholders are determined by the Company's
Board of Trustees based on an analysis of cash flows from operating activities.
Cash flows from operating activities available for distribution differ from net
income primarily due to the extraordinary loss on prepayment of debt; and
depreciation and amortization expense, a noncash item. Distributions in excess
of net income as reflected on the Company's consolidated balance sheets are
primarily a result of an accumulation of this difference. All Shares
participate equally in distributions and in net assets available for
distribution to shareholders on liquidation or termination of the Company.
The Trustees of the Company have the authority to effect certain Share
redemptions or prohibit the transfer of Shares under certain circumstances.
Total distributions to shareholders during the years ended December
31, 1995, 1994 and 1993 included a return of capital per Share of $.8292,
$.3306, and $.3797, respectively. The 1995 and 1993 distribution also includes
long-term capital gain distributions of $.2851 and $.1351 per Share,
respectively.
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6. INDEBTEDNESS
Indebtedness of the Company at December 31, 1995 and 1994 is as
follows:
1995 1994
-------- --------
(In thousands)
Notes payable, net:
Principal payments of $125,000,000 due in July 2000,
and $80,000,000 due in July 2001, interest ranging from
7.375% to 7.6% . . . . . . . . . . . . . . . . . . . . . . $203,115 $ -
Principal payments of $98,500,000 due from August 1999
to August 2015, bearing interest at rates between 7.25%
and 8.625% . . . . . . . . . . . . . . . . . . . . . . . . 97,698 -
-------- --------
300,813 -
-------- --------
Convertible debentures, net:
9% interest, convertible at $27.00 per Share, due
January 2002. . . . . . . . . . . . . . . . . . . . . . . 8,188 18,158
7% interest, convertible at $30.625 per Share, due
March 1998 . . . . . . . . . . . . . . . . . . . . . . . 20,379 40,789
6 7/8% interest, convertible at $37.125 per Share, due
November 1998 . . . . . . . . . . . . . . . . . . . . . . 84,935 84,471
7 1/2% interest, convertible at $36.18 per Share, due
March 2001. . . . . . . . . . . . . . . . . . . . . . . . 88,356 87,859
8.54% interest, convertible at $32.625 per Share, due
July 2000 . . . . . . . . . . . . . . . . . . . . . . . . 42,582 -
8.56% interest, convertible at $32.625 per Share due
July 2002 . . . . . . . . . . . . . . . . . . . . . . . . 50,769 -
-------- --------
295,209 231,277
-------- --------
Bank notes payable, net:
Revolving credit agreement expiring June 30, 1997. . 113,709 168,645
-------- --------
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6. INDEBTEDNESS, continued
1995 1994
------ -------
(In thousands)
Bonds and mortgages payable, net:
Mortgage notes, interest ranging from 3.8% to 12.2%,
monthly principal and interest payments ranging from
$36,000 to $78,000 and maturing from January 1998
through March 2001, collateralized by eight facilities . . . 49,085 55,739
Manatee County, Florida Industrial Revenue Bonds, Series
1983, serial payments ranging from $45,000 to $90,000 due
in 1995 through 2000 and $345,000 due in December 2003
and $2,770,000 due in December 2013, interest ranging from
12.0% to 13.5%, collateralized by one facility . . . . . . . 3,475 3,525
------ --------
52,560 59,264
------ --------
Senior unsecured notes, net:
Principal payments of $20,000,000 and $16,000,000
with interest ranging from 10.00% to 10.57%; repaid
in July and August 1995. . . . . . . . . . . . . . . . . . . - 99,711
Principal payments of $20,000,000 with interest at 10.22%;
repaid in July and August 1995 . . . . . . . . . . . . . . . - 99,145
Principal payments of $12,500,000 with interest at 10.86%;
repaid in July and August 1995 . . . . . . . . . . . . . . . - 86,504
-------- --------
- 285,360
-------- --------
Senior mortgage notes, net:
Principal payments of $10,800,000 and $200,000 with interest
at 10.75%; repaid in July and August 1995. . . . . . . . . . - 21,206
-------- --------
Total indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . $762,291 $765,752
======== ========
Convertible Debentures
The 9% convertible debentures issued in April 1992 are subject to
redemption by the Company on or after April 23, 1995 at 100% of the principal
amount plus accrued interest. During the year ended December 31, 1995,
$10,287,000 of debentures were converted into 380,977 Shares. During the year
ended December 31, 1994, $25,210,000 of debentures were converted into 933,684
Shares.
The 7% debentures issued in February 1993 are subject to redemption by
the Company on or after March 1, 1996 at 100% of the principal amount plus
accrued interest. During the year ended December 31, 1995, $21,011,000 of
debentures were converted into 686,062 Shares. During the year ended December
31, 1994, $33,792,000 of debentures were converted into 1,103,404 Shares.
The 6 7/8% debentures issued in November 1993, the 7 1/2 % debentures
issued in March 1994, and the 8.54% and 8.56% debentures issued in July 1995
are subject to redemption by the Company at 100% of the principal amount plus
accrued interest to the extent necessary to preserve the Company's status as a
real estate investment trust.
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Bank Notes Payable
The Company has unsecured revolving lines of credit expiring June 30,
1997 in the amount of $205,000,000 bearing interest at the lender's prime rate
(8.5%) or LIBOR plus 1.00% (6.6875%) at December 31, 1995.
Bonds and Mortgages Payable
The notes payable, convertible debentures, bank notes payable, bonds
and mortgages payable, senior unsecured notes and senior mortgage notes are
presented net of unamortized debt issuance costs of $8,174,000 and $8,537,000
at December 31, 1995 and 1994, respectively. Amortization expense associated
with the debt issuance costs amounted to $4,994,000, $3,028,000 and $2,961,000
for the years ended December 31, 1995, 1994 and 1993, respectively, and is
reflected in interest expense.
All debt instruments contain certain covenants, the most restrictive
of which limits the ratio of total liabilities to consolidated tangible
shareholders' equity.
The aggregate maturities of notes payable, convertible debentures, and
bonds and mortgages payable, excluding the bank notes payable, for the five
years subsequent to December 31, 1995, are as follows:
1996...................... $ 818,000
1997...................... 967,000
1998...................... 122,432,000
1999...................... 31,912,000
2000...................... 174,046,000
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are subjective in nature and are dependent on a
number of significant assumptions associated with each financial instrument or
group of financial instruments. Because of a variety of permitted calculations
and assumptions regarding estimates of future cash flows, risks, discount rates
and relevant comparable market information, reasonable comparisons of the
Company's fair value information with other companies cannot necessarily be
made.
The following methods and assumptions were used to estimate the fair
value of financial instruments for which it is practicable to estimate that
value:
Real Estate Mortgages
The fair value of real estate mortgages have been estimated by
discounting future cash flows using current interest rates at which similar
loans would be made to borrowers with similar credit ratings and for the same
remaining maturities. As of December 31, 1995, the fair value of real estate
mortgages amounted to approximately $1,114,000,000.
The quoted market price for the Company's publicly traded convertible
debentures and rates currently available to the Company for debt with similar
terms and remaining maturities were used to estimate fair value of existing
debt. As of December 31, 1995, the fair value of
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the Company's indebtedness amounted to approximately $774,000,000.
8. LEASE COMMITMENTS
The Company's land and facilities are generally leased pursuant to
noncancelable, fixed-term operating leases expiring from 1996 to 2008. The
leases also generally provide multiple, five-year renewal options and the
option to purchase the facilities at fair market value at the end of the
initial term of the lease or at various times during the lease.
The lessees are required to pay aggregate base rent during the lease
term and applicable debt service payments as well as percentage, supplemental
and additional rent (as defined in the lease agreements). For the years ended
December 31, 1995, 1994 and 1993, additional rent from the leases and
additional interest from the mortgages amounted to $9,106,000, $8,156,000 and
$8,657,000 respectively. In addition, the lessees pay all taxes, insurance,
maintenance and other operating costs of the land and facilities.
Future minimum lease payments, including debt service payments (as
defined in the lease agreements) which are based on interest rates in effect at
December 31, 1995, expected to be received by the Company during the initial
term of the leases for the years subsequent to December 31, 1995, are as
follows:
1996 $ 80,207,000
1997 79,493,000
1998 72,651,000
1999 63,665,000
2000 58,754,000
Thereafter 288,906,000
9. LEGAL PROCEEDINGS
In December 1993, the Chapter 11 Trustee of Towers Financial
Corporation commenced an action in the Suffolk County Superior Court for the
Commonwealth of Massachusetts against one of the Company's lessees and in
January, 1994 two subsidiaries of the Company were named as additional
defendants. The plaintiff alleges that it holds a prior security interest in
the accounts receivable of seven health care facilities, one of which is owned
by the Company. The plaintiff demands payment of all such receivables
including those collected by the Company in an amount up to $17,000,000. The
Company is vigorously defending this action. It has filed an answer and
counterclaim denying any liability to the plaintiff and asserting that the
plaintiff does not have a valid prior security interest in any assets of the
Company or its borrowers. The trial on this matter has commenced and is
ongoing. The Company is a party to a number of other claims and lawsuits
arising out of the normal course of business; the Company believes that none of
these claims or pending lawsuits, either individually or in the aggregate, will
have a material adverse affect on the Company's business or on its consolidated
financial position.
10. STOCK OPTION PLANS
Incentive awards under the Company's stock option plans (the "Plans")
which may be granted by the Board of Trustees include nonqualified or
nonstatutory options to purchase Company shares and incentive stock options
(collectively, "options"). The number of Shares
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available for issuance under the Plans is 5% of the number of outstanding
Shares. Up to 500,000 Shares available under each Plan may be issued pursuant
to incentive stock options. Trustees, officers and key employees of the
Company or any other entity providing similar services to the Company and its
officers, directors and key employees, and all persons retained by the Company
solely as consultants are eligible to participate in the Plans. Such options
expire 10 years after the date granted. One third of all options granted
become exercisable at the end of each year following the date of issuance.
Options to purchase 303,000 Shares were exercisable as of December 31, 1995.
Information concerning option activity for the years 1995, 1994 and
1993 is as follows:
Shares Option Price
--------- --------------------
Outstanding at December 31, 1992 598,000 $16.625 to $29.00
Granted . . . . . . . . . . . . . . 126,000 $26.375 to $34.00
Exercised . . . . . . . . . . . . . 83,000 $16.625 to $27.625
Expired . . . . . . . . . . . . . . 23,000 $26.375 to $27.625
---------
Outstanding at December 31, 1993 618,000 $16.625 to $34.00
Granted . . . . . . . . . . . . . . 61,000 $32.375 to $33.00
Exercised . . . . . . . . . . . . . 97,000 $18.750 to $33.125
Expired . . . . . . . . . . . . . . 44,000 $33.00 to $33.625
---------
Outstanding at December 31, 1994 538,000 $16.625 to $34.00
Granted . . . . . . . . . . . . . . 1,054,000 $30.125 to $30.25
Exercised . . . . . . . . . . . . . 211,000 $16.625 to $33.00
Expired . . . . . . . . . . . . . . 55,000 $30.125 to $34.00
---------
Outstanding at December 31, 1995 1,326,000 $16.625 to $34.00
=========
Financial Accounting Standards Board Statement No. 123 "Accounting
for Stock Based Compensation" is effective for years beginning after December
15, 1995. The Company intends to adopt the disclosure requirements of this
pronouncement during 1996 and is in the process of performing an analysis of
the impact that its adoption will have on the financial statements. The
Company does not believe the impact of this pronouncement on its financial
position or results of operations will be material.
The Company entered into a Split-Dollar Life Insurance Agreement
with a trust established by the Chairman and Chief Executive Officer, pursuant
to which the Company has agreed to advance policy premiums on life insurance
policies paying a death benefit to the trust. The Company is entitled to
reimbursement of the amounts advanced, without interest, which right is secured
by an assignment of the life insurance policies and a promissory note of the
Chairman in the amount of the excess, if any, of the premiums paid by the
Company over the cash surrender value of the insurance policies.
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11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following quarterly financial data summarizes the unaudited
quarterly results for the years ended December 31, 1995 and 1994:
Quarter Ended
-------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1995 (In thousands, except per Share amounts)
- ----
Revenues............................ $48,933 $52,437 $52,753 $55,246
Net income before extraordinary
item.............................. 24,183 30,929 31,702 33,158
Extraordinary item:
Loss on prepayment of debt........ - - 33,454 -
Net income (loss)................... 24,183 30,929 (1,752) 33,158
Per Share:
Net income before
extraordinary item.................. .60 .63 .64 .65
Extraordinary item:
Loss on prepayment of
debt..................... - - .68 -
Net income (loss)................... .60 .63 (.04) .65
Quarter Ended
-------------------------------------------------------------
1994 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
(In thousands, except per Share amounts)
Revenues............................ $40,995 $42,378 $43,158 $46,462
Net income.......................... 17,705 19,008 19,817 23,930
Net income per Share................ .53 .56 .57 .62
12. SUBSEQUENT EVENTS
On January 10, 1996, the Board of Trustees of the Company declared a
distribution of $.6875 per Share payable February 15, 1996, to shareholders of
record on January 31, 1996. The distribution related to the period October 1,
1995 through December 31, 1995.
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