UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-9109 Commission file number 0-9110
MEDITRUST CORPORATION MEDITRUST OPERATING COMPANY
(Exact name of registrant as specified (Exact name of registrant as specified
in its charter) in its 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.)
197 FIRST AVENUE, SUITE 300 197 FIRST AVENUE, SUITE 100
NEEDHAM HEIGHTS, MASSACHUSETTS 02494-9127 NEEDHAM HEIGHTS, MASSACHUSETTS 02494-9127
(Address of principal executive (Address of principal executive
offices including zip code) offices including zip code)
(781) 433-6000 (781) 453-8062
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
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 23, 1999 were:
Meditrust Corporation 142,437,141
Meditrust Operating Company 141,131,764
THE MEDITRUST COMPANIES
FORM 10-Q
INDEX
PAGE(S)
-------
Part I. Item 1. Financial Information
The Meditrust Companies
Combined Consolidated Balance Sheets As of June 30, 1999
(unaudited) and December 31, 1998 1
Combined Consolidated Statements of Operations for the three months
ended June 30, 1999 (unaudited) and 1998 (unaudited) 2
Combined Consolidated Statements of Operations for the six months
ended June 30, 1999 (unaudited) and 1998 (unaudited) 3
Combined Consolidated Statements of Cash Flows for the six
months ended June 30, 1999 (unaudited) and 1998 (unaudited) 4
Meditrust Corporation
Consolidated Balance Sheets As of June 30, 1999 (unaudited)
and December 31, 1998 5
Consolidated Statements of Operations for the three months ended
June 30, 1999 (unaudited) and 1998 (unaudited) 6
Consolidated Statements of Operations for the six months ended
June 30, 1999 (unaudited) and 1998 (unaudited) 7
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 (unaudited) and 1998 (unaudited) 8
Meditrust Operating Company
Consolidated Balance Sheets As of June 30, 1999 (unaudited)
and December 31, 1998 9
Consolidated Statements of Operations for the three months ended
June 30, 1999 (unaudited) and 1998 (unaudited) 10
Consolidated Statements of Operations for the six months ended
June 30, 1999 (unaudited) and 1998 (unaudited) 11
Consolidated Statements of Cash Flows for the six months ended
June 30, 1999 (unaudited) and 1998 (unaudited) 12
Notes to Combined Consolidated Financial Statements (unaudited) 13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 25
Part II. Other Information
Item 4. Submission of Matters to a Vote of Securityholders 41
Item 5. Other Information 41
Item 6. Exhibits and Reports on Form 8-K 41
Signatures 43
ITEM I. FINANCIAL INFORMATION
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
------------ ------------
(unaudited)
ASSETS
Real estate investments, net $ 4,967,248 $ 5,086,736
Cash and cash equivalents 25,687 305,456
Fees, interest and other receivables 56,009 54,712
Goodwill, net 478,731 486,051
Net assets of discontinued operations - 305,416
Other assets, net 221,040 221,180
------------ ------------
Total assets $ 5,748,715 $ 6,459,551
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Notes payable, net $ 1,156,369 $ 1,155,837
Convertible debentures, net 185,278 185,013
Bank notes payable, net 1,252,468 1,831,336
Bonds and mortgages payable, net 121,196 129,536
------------ ------------
Total indebtedness 2,715,311 3,301,722
Accounts payable, accrued expenses and other liabilities 259,452 206,901
------------ ------------
Total liabilities 2,974,763 3,508,623
------------ ------------
Commitments and contingencies - -
Shareholders' equity:
Meditrust Corporation Series A Preferred Stock, $.10 par value; 6,000
shares authorized; 700 shares issued and outstanding at June 30, 1999 and
December 31, 1998; stated liquidation preference of $250 per share 70 70
Paired Common Stock, $.20 combined par value; 500,000 shares
authorized; 141,131 and 149,326 paired shares issued and
outstanding at June 30, 1999 and December 31, 1998,
respectively (including treasury shares at December 31, 1998) 28,226 29,865
Additional paid-in-capital 3,631,288 3,891,987
Treasury stock at cost, 1,635 paired common shares at
December 31, 1998 - (163,326)
Unearned compensation (9,088) (6,718)
Accumulated other comprehensive income 14,803 16,971
Distributions in excess of net income (891,347) (817,921)
------------ ------------
Total shareholders' equity 2,773,952 2,950,928
------------ ------------
Total liabilities and shareholders' equity $ 5,748,715 $ 6,459,551
------------ ------------
------------ ------------
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, 1998, are an integral part of these financial statements.
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
----------- -----------
Revenue:
Rental $ 41,809 $ 49,403
Interest 35,631 38,567
Hotel 162,274 -
----------- -----------
239,714 87,970
----------- -----------
Expenses:
Interest 58,686 24,695
Depreciation and amortization 34,223 10,087
Amortization of goodwill 5,539 1,578
General and administrative (Note 13) 8,612 3,923
Hotel operations 71,441 -
Rental property operations 8,814 1,457
Gain on sale of assets (13) -
Income from unconsolidated joint venture - (337)
Other 4,316 -
----------- -----------
191,618 41,403
----------- -----------
Income from continuing operations before income taxes 48,096 46,567
Income tax expense 453 -
----------- -----------
Income from continuing operations 47,643 46,567
Discontinued operations:
Income from operations, net - 1,836
----------- -----------
Net income 47,643 48,403
Preferred stock dividends (3,938) (613)
----------- -----------
Net income available to Paired
Common shareholders $ 43,705 $ 47,790
----------- -----------
----------- -----------
Basic earnings per Paired Common Share:
Income from continuing operations $ .31 $ .46
Discontinued operations - .02
----------- -----------
Net income $ .31 $ .48
----------- -----------
----------- -----------
Diluted earnings per Paired Common Share:
Income from continuing operations $ .31 $ .45
Discontinued operations - .02
----------- -----------
Net income $ .31 $ .47
----------- -----------
----------- -----------
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, 1998, are an integral part of these financial statements.
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
----------- -----------
Revenue:
Rental $ 85,521 $ 93,059
Interest 69,833 77,146
Hotel 310,808 -
Other 856 26,000
----------- -----------
467,018 196,205
----------- -----------
Expenses:
Interest 125,343 50,112
Depreciation and amortization 68,082 20,545
Amortization of goodwill 10,847 3,154
General and administrative (Note 13) 17,918 8,307
Hotel operations 138,043 -
Rental property operations 17,721 2,722
Gain on sale of assets (12,284) -
Income from unconsolidated joint venture - (448)
Other 39,203 21,541
----------- -----------
404,873 105,933
----------- -----------
Income from continuing operations before benefit for income taxes 62,145 90,272
Income tax benefit (373) -
----------- -----------
Income from continuing operations 62,518 90,272
Discontinued operations:
Income from operations, net - 9,752
Gain (loss adjustment) on disposal of Santa Anita, net 1,875 -
Gain (loss adjustment) on disposal of Cobblestone Golf Group, net 2,994 -
----------- -----------
Net income 67,387 100,024
Preferred stock dividends (7,876) (613)
----------- -----------
Net income available to Paired
Common shareholders $ 59,511 $ 99,411
----------- -----------
----------- -----------
Basic earnings per Paired Common Share:
Income from continuing operations $ .38 $ .94
Discontinued operations .03 .10
----------- -----------
Net income $ .41 $ 1.04
----------- -----------
----------- -----------
Diluted earnings per Paired Common Share:
Income from continuing operations $ .38 $ .92
Discontinued operations .03 .10
----------- -----------
Net income $ .41 $ 1.02
----------- -----------
----------- -----------
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, 1998, are an integral part of these financial statements.
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS) 1999 1998
---------- ----------
Cash Flows from Operating Activities:
Net income $ 67,387 $ 100,024
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of real estate 64,037 22,934
Goodwill amortization 10,847 3,474
Gain on sale of assets and disposal of discontinued operations (17,153) -
Shares issued for compensation 125 288
Equity in income of joint venture, net of dividends received - 802
Other depreciation, amortization and other items, net 19,601 6,376
Other non cash items 4,836 10,444
---------- ----------
Cash Flows from Operating Activities
Available for Distribution 149,680 144,342
Net change in other assets and liabilities of discontinued operations (148) -
Net change in other assets and liabilities (19,169) (18,492)
---------- ----------
Net cash provided by operating activities 130,363 125,850
---------- ----------
Cash Flows from Financing Activities:
Proceeds from issuance of paired common and Realty preferred stock - 456,713
Purchase of treasury stock (103,269) -
Proceeds from borrowings on bank notes payable 790,000 550,000
Repayment of bank notes payable (1,379,671) (600,000)
Equity offering and debt issuance costs (801) (11,339)
Principal payments on bonds and mortgages payable (8,392) (7,159)
Dividends to shareholders (140,813) (112,879)
Proceeds from exercise of stock options 318 3,836
---------- ----------
Net cash provided by (used in ) financing activities (842,628) 279,172
---------- ----------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding (94,061) (347,603)
Investment in real estate mortgages and development funding (25,032) (133,666)
Prepayment proceeds and principal payments received on real estate mortgages 66,598 266,260
Net proceeds from sale of assets 482,358 4,709
Acquisition of Cobblestone - (178,523)
Cash acquired in Cobblestone merger - 723
Working capital and notes receivable advances, net of repayments and collections,
and other items 2,633 922
---------- ----------
Net cash provided by (used in) investing activities 432,496 (387,178)
---------- ----------
Net increase (decrease) in cash and cash equivalents (279,769) 17,844
Cash and cash equivalents at:
Beginning of period 305,456 43,732
---------- ----------
End of period $ 25,687 $ 61,576
---------- ----------
---------- ----------
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, 1998, are an integral part of these financial statements.
MEDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
------------ ------------
(unaudited)
ASSETS
Real estate investments, net $ 4,946,953 $ 5,067,217
Cash and cash equivalents 24,216 292,694
Fees, interest and other receivables 37,023 42,039
Goodwill, net 444,794 451,672
Net assets of discontinued operations - 280,330
Other assets, net 184,852 187,033
------------ ------------
Total assets $ 5,637,838 $ 6,320,985
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Notes payable, net $ 1,156,369 $ 1,155,837
Convertible debentures, net 185,278 185,013
Bank notes payable, net 1,252,468 1,831,336
Bonds and mortgages payable, net 121,196 129,536
------------ ------------
Total indebtedness 2,715,311 3,301,722
------------ ------------
Due to Meditrust Operating Company 14,024 29,169
Accounts payable, accrued expenses and other liabilities 172,710 116,741
------------ ------------
Total liabilities 2,902,045 3,447,632
------------ ------------
Commitments and contingencies - -
Shareholders' equity:
Series A Preferred Stock, $.10 par value; 6,000 shares authorized; 700
shares issued and outstanding at June 30, 1999 and December
31, 1998; stated liquidation preference of $250 per share 70 70
Common Stock, $.10 par value; 500,000 shares authorized; 142,437
and 150,631 shares issued and outstanding at June 30, 1999 and December
31, 1998, respectively (including treasury shares at
December 31, 1998) 14,244 15,063
Additional paid-in-capital 3,563,898 3,820,436
Treasury stock at cost, 1,635 common shares at
December 31, 1998 - (160,223)
Unearned compensation (6,275) (6,718)
Accumulated other comprehensive income 14,803 16,971
Distributions in excess of net income (834,876) (799,118)
------------ ------------
2,751,864 2,886,481
Due from Meditrust Operating Company (2,943) -
Note receivable - Meditrust Operating Company (13,128) (13,128)
------------ ------------
Total shareholders' equity 2,735,793 2,873,353
------------ ------------
Total liabilities and shareholders' equity $ 5,637,838 $ 6,320,985
------------ ------------
------------ ------------
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, 1998, are an integral part of these financial statements.
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
----------- -----------
Revenue:
Rental $ 41,809 $ 49,338
Interest 35,741 38,446
Rent from Meditrust Operating Company 77,322 65
Interest from Meditrust Operating Company - 213
Royalty from Meditrust Operating Company 3,970 -
Hotel operating revenue 3,147 -
----------- -----------
161,989 88,062
----------- -----------
Expenses:
Interest 58,654 24,695
Interest to Meditrust Operating Company 1,589 -
Depreciation and amortization 32,210 10,087
Amortization of goodwill 5,318 1,376
General and administrative 4,224 3,274
Hotel operations 1,007 -
Rental property operations 8,814 1,457
Gain on sale of assets (13) -
Income from unconsolidated joint venture - (337)
Other 4,316 -
----------- -----------
116,119 40,552
----------- -----------
Income from continuing operations 45,870 47,510
Discontinued operations:
Income from operations, net - 4,038
----------- -----------
Net income 45,870 51,548
Preferred stock dividends (3,938) (613)
----------- -----------
Net income available to Common
shareholders $ 41,932 $ 50,935
----------- -----------
----------- -----------
Basic earnings per Common Share:
Income from continuing operations $ .29 $ .46
Discontinued operations - .04
----------- -----------
Net income $ .29 $ .50
----------- -----------
----------- -----------
Diluted earnings per Common Share:
Income from continuing operations $ .29 $ .45
Discontinued operations - .04
----------- -----------
Net income $ .29 $ .49
----------- -----------
----------- -----------
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, 1998, are an integral part of these financial statements.
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
----------- -----------
Revenue:
Rental $ 85,521 $ 92,994
Interest 69,771 76,958
Rent from Meditrust Operating Company 145,570 65
Interest from Meditrust Operating Company - 424
Royalty from Meditrust Operating Company 7,590 -
Hotel operating revenue 6,357 -
Other 856 26,000
----------- -----------
315,665 196,441
----------- -----------
Expenses:
Interest 125,201 50,112
Interest to Meditrust Operating Company 1,589 -
Depreciation and amortization 64,268 20,545
Amortization of goodwill 10,405 2,751
General and administrative 9,149 7,068
Hotel operations 1,950 -
Rental property operations 17,721 2,722
Gain on sale of assets (12,284) -
Income from unconsolidated joint venture - (448)
Other 8,705 21,541
----------- -----------
226,704 104,291
----------- -----------
Income from continuing operations 88,961 92,150
Discontinued operations:
Income from operations, net - 11,100
Gain (loss adjustment) on disposal of Santa Anita, net 6,655 -
Gain (loss adjustment) on disposal of Cobblestone Golf Group, net 9,439 -
----------- -----------
Net income 105,055 103,250
Preferred stock dividends (7,876) (613)
----------- -----------
Net income available to Common
shareholders $ 97,179 $ 102,637
----------- -----------
----------- -----------
Basic earnings per Common Share:
Income from continuing operations $ .56 $ .94
Discontinued operations .11 .12
----------- -----------
Net income $ .67 $ 1.06
----------- -----------
----------- -----------
Diluted earnings per Common Share:
Income from continuing operations $ .56 $ 93
Discontinued operations .11 .11
----------- -----------
Net income $ .67 $ 1.04
----------- -----------
----------- -----------
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, 1998, are an integral part of these financial statements.
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS) 1999 1998
-------- --------
Cash Flows from Operating Activities:
Net income $ 105,055 $ 103,250
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of real estate 61,645 21,959
Goodwill amortization 10,405 3,071
Gain on sale of assets and disposal of discontinued operations (28,378) -
Shares issued for compensation 99 282
Equity in income of joint venture, net of dividends received - 802
Other depreciation, amortization and other items, net 15,919 5,377
Other non cash items (3,033) 8,405
-------- --------
Cash Flows from Operating Activities Available for Distribution 161,712 143,146
Net change in other assets and liabilities (11,145) (10,781)
-------- --------
Net cash provided by operating activities 150,567 132,365
-------- --------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock and preferred stock - 447,044
Purchase of treasury stock (101,303) -
Proceeds from borrowings on bank notes payable 790,000 550,000
Repayment of bank notes payable (1,379,671) (600,000)
Equity offering and debt issuance costs (801) (11,234)
Interentity lending, net 11,908 4,534
Principal payments on bonds and mortgages payable (8,392) (7,159)
Dividends to shareholders (140,813) (112,879)
Proceeds from exercise of stock options 312 3,763
-------- --------
Net cash provided by (used in) financing activities (828,760) 274,069
-------- --------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding (92,969) (347,603)
Investment in real estate mortgages and development funding (25,032) (133,666)
Prepayment proceeds and principal payments received on real estate
mortgages 66,598 266,260
Net proceeds from sale of real estate 458,485 4,709
Acquisition of Cobblestone - (178,523)
Cash acquired from Cobblestone merger - 723
Working capital and notes receivable advances, net of
repayments and collections, and other items 2,633 922
-------- --------
Net cash provided by (used in) investing activities 409,715 (387,178)
-------- --------
Net increase (decrease) in cash and cash equivalents (268,478) 19,256
Cash and cash equivalents at:
Beginning of period 292,694 24,059
-------- --------
End of period $ 24,216 $ 43,315
-------- --------
-------- --------
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, 1998, are an integral part of these financial statements.
MEDITRUST OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
----------- -----------
(unaudited)
ASSETS
Cash and cash equivalents $ 1,471 $ 12,762
Fees, interest and other receivables 18,986 12,673
Due from Meditrust Corporation - 46,874
Other current assets, net 10,764 10,423
--------- --------
Total current assets 31,221 82,732
Investment in common stock of Meditrust Corporation 37,581 37,581
Goodwill, net 33,937 34,379
Property, plant and equipment, less accumulated depreciation
of $1,882 and $760, respectively 35,785 30,895
Other non-current assets 10,189 12,603
--------- --------
Total assets $ 148,713 $198,190
--------- --------
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 17,198 $ 18,349
Accrued payroll and employee benefits 30,270 33,457
Accrued expenses and other current liabilities 33,739 30,980
Due to Meditrust Corporation 12,472 -
--------- --------
Total current liabilities 93,679 82,786
Note payable to Meditrust Corporation 13,128 13,128
Other non-current liabilities 5,790 7,629
Net liabilities of discontinued operations - 16,140
--------- --------
Total liabilities 112,597 119,683
--------- --------
Commitments and contingencies -
Shareholders' equity:
Common Stock, $.10 par value; 500,000 shares authorized; 141,131 and
149,326 shares issued and outstanding at June 30, 1999 and
December 31, 1998, respectively (including treasury shares at
December 31, 1998) 14,113 14,933
Additional paid-in-capital 104,840 109,001
Unearned compensation (2,813) -
Treasury stock at cost, 1,635 common shares at December 31, 1998 - (3,103)
Retained earnings (deficit) (56,471) (18,803)
--------- ---------
59,669 102,028
Due from Meditrust Corporation (23,553) (23,521)
--------- ---------
Total shareholders' equity 36,116 78,507
--------- --------
Total liabilities and shareholders' equity $ 148,713 $198,190
--------- --------
--------- --------
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, 1998, are an integral part of these financial statements.
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
--------- --------
Revenue:
Hotel $ 159,127 $ -
Interest (110) 121
Interest from Meditrust Corporation 1,589 -
Other - 65
---------- --------
160,606 186
Expenses:
Hotel operations 70,434 -
Depreciation and amortization 2,013 -
Amortization of goodwill 221 202
Interest and other 32 -
Interest to Meditrust Corporation - 213
General and administrative 4,388 649
Royalty to Meditrust Corporation 3,970 -
Rent to Meditrust Corporation 77,322 65
---------- --------
158,380 1,129
---------- --------
Income (loss) from continuing operations before benefit for income taxes 2,226 (943)
Income tax expense 453 -
---------- --------
Income (loss) from continuing operations 1,773 (943)
Discontinued operations:
Loss from operations, net - (2,202)
---------- --------
Net income (loss) $ 1,773 $ (3,145)
---------- --------
---------- --------
Basic earnings per Common Share:
Income (loss) from continuing operations $ .01 $ (.01)
Discontinued operations - (.02)
---------- --------
Net income (loss) $ .01 $ (.03)
---------- --------
---------- --------
Diluted earnings per Common Share:
Income (loss) from continuing operations $ .01 $ (.01)
Discontinued operations - (.02)
---------- --------
Net income (loss) $ .01 $ (.03)
---------- --------
---------- --------
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, 1998, are an integral part of these financial statements.
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
--------- --------
Revenue:
Hotel $ 304,451 $ -
Interest 62 188
Interest from Meditrust Corporation 1,589 -
Other - 65
--------- --------
306,102 253
--------- --------
Expenses:
Hotel operations 136,093 -
Depreciation and amortization 3,814 -
Amortization of goodwill 442 403
Interest and other 142 -
Interest to Meditrust Corporation - 424
General and administrative 8,769 1,239
Royalty to Meditrust Corporation 7,590 -
Rent to Meditrust Corporation 145,570 65
Other 30,498 -
--------- --------
332,918 2,131
--------- --------
Loss from continuing operations before benefit for income taxes (26,816) (1,878)
Income tax benefit (373) -
--------- --------
Loss from continuing operations (26,443) (1,878)
Discontinued operations:
Loss from operations, net - (1,348)
Loss adjustment on disposal of Santa Anita, net (4,780) -
Loss adjustment on disposal of Cobblestone Golf Group, net (6,445) -
--------- --------
Net loss $ (37,668) $ (3,226)
--------- --------
--------- --------
Basic earnings per Common Share:
Loss from continuing operations $ (.18) $ (.02)
Discontinued operations (.08) (.01)
--------- --------
Net loss $ (.26) $ (.03)
--------- --------
--------- --------
Diluted earnings per Common Share:
Loss from continuing operations $ (.18) $ (.02)
Discontinued operations (.08) (.01)
--------- --------
Net loss $ (.26) $ (.03)
--------- --------
--------- --------
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, 1998, are an integral part of these financial statements.
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
---------- ----------
Cash Flows from Operating Activities:
Net loss $ (37,668) $ (3,226)
Adjustment to reconcile net loss to cash used in operating activities:
Goodwill amortization 442 403
Loss on sale of assets and disposal of discontinued operations 11,225 -
Shares issued for compensation 26 6
Other depreciation and amortization 6,074 1,974
Other items 7,869 2,039
Net change in other assets and liabilities of discontinued operations (148) -
Net change in other assets and liabilities (8,024) (7,711)
---------- ----------
Net cash used in operating activities (20,204) (6,515)
---------- ----------
Cash Flows from Financing Activities:
Proceeds from issuance of common stock - 9,669
Purchase of treasury stock (1,966) -
Equity offering costs - (105)
Interentity lending, net (11,908) (4,534)
Proceeds from stock option exercises 6 73
---------- ----------
Net cash provided by (used in) financing activities (13,868) 5,103
---------- ----------
Cash Flows from Investing Activities:
Capital improvements to real estate (1,092) -
Net proceeds from sale of assets 23,873 -
---------- ----------
Net cash provided by investing activities 22,781 -
---------- ----------
Net decrease in cash and cash equivalents (11,291) (1,412)
Cash and cash equivalents at:
Beginning of period 12,762 19,673
---------- ----------
End of period $ 1,471 $ 18,261
---------- ----------
---------- ----------
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, 1998, are an integral part of these financial statements.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted in this Form 10-Q in accordance with the Rules
and Regulations of the Securities and Exchange Commission.
The 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, 1999 and the results of operations
for each of the three and six month periods ended June 30, 1999 and 1998 and
cash flows for each of the six month periods ended June 30, 1999 and 1998. The
results of operations for the six month period ended June 30, 1999 are not
necessarily indicative of the results which may be expected for any other
interim period or for the entire year.
In the opinion of Meditrust Corporation ("Realty") and Meditrust Operating
Company and subsidiaries ("Operating Company" or "Operating" and collectively
with Realty the "Companies" or "The Meditrust Companies"), the 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, 1998 for additional information relevant to significant
accounting policies followed by the Companies.
BASIS OF PRESENTATION AND CONSOLIDATION
Separate financial statements have been presented for Realty and for Operating
Company. Combined Realty and Operating Company financial statements have been
presented as The Meditrust Companies. All significant intercompany and
inter-entity balances and transactions have been eliminated in combination. The
Meditrust Companies and Realty use an unclassified balance sheet presentation.
The consolidated financial statements of Realty and Operating Company include
the accounts of the respective entity and its majority-owned subsidiaries,
including unincorporated partnerships and joint ventures, after the elimination
of all significant intercompany accounts and transactions.
On July 17, 1998, Realty acquired La Quinta Inns, Inc. and its subsidiaries (all
wholly owned) and its unincorporated partnership and joint venture ("La Quinta",
"The La Quinta Merger"). La Quinta is a fully-integrated lodging company that
focuses on the ownership, operation and development of hotels. As of June 30,
1999, the portfolio of hotels operated under the La Quinta name included 300
operating hotels, and two hotels under development with approximately 39,000
rooms located in the western and southern regions of the United States. The La
Quinta Merger was accounted for under the purchase method of accounting.
Accordingly, the financial statements, including the results of operations and
cash flows, do not include the operations of La Quinta prior to July 17, 1998.
On November 11, 1998, the Boards of Directors of Realty and Operating Company
approved a comprehensive restructuring plan (the "Plan") designed to strengthen
the Companies' financial position and clarify their investment and operating
strategy by focusing on the healthcare and lodging businesses. Significant
components of the Plan include selling more than $1,000,000,000 of non-strategic
assets, including their portfolio of golf-related real estate and operating
properties ("Cobblestone Golf Group"), the Santa Anita Racetrack and adjacent
property, and approximately $550,000,000 of non-strategic healthcare properties.
As a result of the Plan, the Companies have reflected the Cobblestone Golf Group
and Santa Anita Racetrack as discontinued operations and certain healthcare
properties as assets held for sale, in the accompanying financial statements.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
RECLASSIFICATION
Certain reclassifications have been made to the 1998 presentation to conform to
the 1999 presentation.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SUPPLEMENTAL CASH FLOW INFORMATION
Details of interest and income taxes paid and non-cash investing and financing
transactions follow:
THE MEDITRUST COMPANIES:
SIX MONTHS ENDED
JUNE 30,
--------------------------------
(IN THOUSANDS) 1999 1998
--------------------------------
Interest paid during the period $ 125,663 $ 49,598
Interest capitalized during the period 4,779 3,442
Non-cash investing and financing transactions:
Value of real estate acquired(sold):
Land and buildings - 17,294
Retirements and write-offs of project costs (2,998) -
Accumulated depreciation of buildings sold 17,471 4,179
5,637 -
Debt assumed by buyer of Cobblestone Golf Group
Increase (reduction) in real estate mortgages net of participation 316 (31,597)
reduction
Change in market value of equity securities in excess of cost (2,168) 14,798
Value of shares issued for conversion of debentures - 6,917
MEDITRUST CORPORATION:
SIX MONTHS ENDED
JUNE 30,
--------------------------------
(IN THOUSANDS) 1999 1998
--------------------------------
Interest paid during the period $ 125,521 $ 49,561
Interest capitalized during the period 4,779 3,442
Non-cash investing and financing transactions:
Value of real estate acquired (sold):
Land and buildings - 17,294
Retirements and write-offs of project costs (2,998) -
Accumulated depreciation of buildings sold 17,471 4,179
Debt assumed by buyer of Cobblestone Golf Group 5,637 -
Increase (reduction) in real estate mortgages net of participation reduction 316 (31,597)
Change in market value of equity securities in excess of cost (2,168) 14,798
Value of shares issued for conversion of debentures - 6,786
MEDITRUST OPERATING COMPANY:
SIX MONTHS ENDED
JUNE 30,
--------------------------------
(IN THOUSANDS) 1999 1998
--------------------------------
Interest paid during the period $ 142 $ 91
Non-cash investing and financing transactions:
Value of shares issued for conversion of debentures - 131
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. DISCONTINUED OPERATIONS
On December 10, 1998, the Companies sold certain assets, leases, and licenses
used in connection with the horseracing business conducted at Santa Anita
Racetrack and recorded a loss on sale of $67,913,000 for the year ended December
31, 1998. During the six months ended June 30, 1999, the Companies recorded an
adjustment of $1,875,000 to the estimated final selling price of the Santa Anita
Racetrack. The Companies anticipate the final adjustment for this transaction to
be completed during 1999.
The Companies recorded a provision for loss on the disposition of Cobblestone
Golf Group of approximately $237,035,000, which included estimated income taxes
of $56,848,000, as of December 31, 1998, based upon the estimated proceeds to be
realized upon sale. At December 31, 1998, the net assets subject to sale totaled
$305,416,000 and were classified as net assets of discontinued operations on the
combined consolidated balance sheet. On March 31, 1999, the Companies sold the
Cobblestone Golf Group for approximately $393,000,000 before working capital and
other adjustments, and reduced the loss on disposition by $2,994,000. The
adjustment reflects an estimate of selling costs and an estimate of the
adjustment relating to working capital balances at the sale date, both of which
are being finalized. The Companies anticipate the final adjustment for this
transaction to be completed during 1999.
Combined operating results of discontinued golf operations for the six months
ended June 30, 1999 (exclusive of any interest expense, depreciation and
corporate charges) follow. Operating results arose from the period between
January 1, 1999 and March 29, 1999:
COBBLESTONE
GOLF GROUP
-----------
(IN THOUSANDS)
Revenues $ 26,337
Operating expenses 22,268
-------------
Contribution 4,069
Other expenses 430
-------------
Income before income taxes 3,639
Income tax benefit 1,420
-------------
Net income $ 5,059
-------------
-------------
4. REAL ESTATE INVESTMENTS
The following is a summary of the Companies' real estate investments:
JUNE 30, DECEMBER 31,
(IN THOUSANDS) 1999 1998
------------ -----------
Land $ 470,888 $ 475,376
Buildings and improvements, net of accumulated depreciation
and other provisions of $240,620 and $186,594 3,312,090 3,381,392
Real estate mortgages and loans receivable, net of a valuation
allowance of $19,191 and $18,991 1,156,184 1,197,634
Assets held for sale, net of accumulated depreciation and other
provisions of $36,414 and $41,562 28,086 32,334
------------ -----------
$ 4,967,248 $ 5,086,736
------------ -----------
------------ -----------
During the six months ended June 30, 1999, the Companies provided net funding of
$28,031,000 for ongoing construction of healthcare facilities committed to prior
to 1999. The Companies also provided net funding of $58,030,000 for construction
and capital improvements to hotels acquired in The La Quinta Merger, and net
funding of approximately $8,000,000 for capital improvements to golf courses
which were included in net assets of discontinued operations as of December 31,
1998 and subsequently sold on March 31, 1999. Also during the six months ended
June 30, 1999, Realty provided $25,032,000 for ongoing
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. REAL ESTATE INVESTMENTS (CONTINUED)
construction of mortgaged facilities already in the portfolio.
During the six months ended June 30, 1999, Realty received net proceeds of
$108,264,000 from the sale of one long-term care facility, one rehabilitation
facility and 17 assisted living facilities. Realty realized a net gain on these
sales of $12,284,000. In connection with these sales, $856,000 in lease
breakage fees were received and have been included in other income in the
consolidated statements of operations. Realty also received $2,943,000 from the
sale of a hotel and land held for development. There was no gain or loss
realized on the sale.
On March 31, 1999, Realty sold 43 golf courses (or leasehold interests in golf
courses) as part of the sale of Cobblestone Golf Group (See Note 3). These golf
courses were included in net assets of discontinued operations as of December
31, 1998.
During the six months ended June 30, 1999, Realty received principal payments of
$66,598,000 on real estate mortgages. Of this amount $61,868,000 represents
payments in accordance with the Plan (see Note 1).
At June 30, 1999, Realty was committed to provide additional financing of
approximately $72,000,000 relating to three long-term care facilities, seven
assisted living facilities and two hotel facilities currently under construction
as well as additions to existing facilities in the portfolio.
5. INDEBTEDNESS
On July 17, 1998, Realty entered into a credit agreement (the "Credit
Agreement") which provided Realty with up to $2,250,000,000 in credit
facilities, replacing Realty's then existing $365,000,000 revolving credit
facilities. The Credit Agreement provided for borrowings in four separate
tranches (each a "Tranche"): Tranche A, a $1,000,000,000 revolving loan, amounts
of which if repaid may be reborrowed, which matures July 17, 2001; Tranche B, a
term loan in the amount of $500,000,000, amounts of which if repaid may not be
reborrowed, which matures July 17, 1999 which had a $250,000,000 mandatory
principal payment on April 17, 1999; Tranche C, a term loan in the amount of
$250,000,000, amounts of which if repaid may not be reborrowed, which matures
July 17, 1999 with a six month extension option that was exercised in June,
1999; and Tranche D, a term loan in the amount of $500,000,000, amounts of which
if repaid may not be reborrowed, which matures July 17, 2001.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its Forward Equity Issuance Transaction
("FEIT"), the amendment of certain financial covenants to accommodate asset
sales, to exclude the impact of non-recurring charges in certain covenant
calculations, and to provide for future operating flexibility. The amendment
also provided for an increase to the LIBOR pricing of the credit facility by
approximately 125 basis points, and the pledge of stock of the Companies'
subsidiaries. This pledge of subsidiary stock also extended on a pro rata basis
to entitled bondholders. Realty also agreed to a 25 basis point increase to the
LIBOR pricing in the event that an equity offering of at least $100,000,000 had
not been completed by February 1, 1999. On February 1, 1999 this increase went
into effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that
was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment, which was subject to
the successful completion of the sale of Cobblestone Golf Group, provided for a
portion of the sale proceeds to be applied to settle a portion of the FEIT. The
second amendment also provided for, among other things, deletion of limitations
on certain healthcare investments and lowering the Tranche A loan commitments to
$850,000,000. On March 31, 1999, the Companies completed the sale of Cobblestone
Golf Group.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature in July
1999.
Of the $850,000,000 revolving tranche commitment, approximately $298,000,000 was
available at June 30, 1999, carrying interest at Realty's option of the base
rate (9.75%) or LIBOR plus 2.875% (7.88% weighted average rate at June 30,
1999).
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. INDEBTEDNESS (CONTINUED)
During July 1998, Realty entered into interest rate swap agreements to reduce
the impact on interest expense of fluctuating interest rates on $1,250,000,000
of its Credit Agreement. Realty agreed with the counterparty to exchange, on a
monthly basis, the difference between Realty's fixed pay rate and the
counterparty's variable pay rate of one month LIBOR. During January and April
1999, Realty cancelled two $250,000,000 contracts from the interest rate swap
agreement in connection with the repayments described above. At June 30, 1999,
Realty was a fixed rate payor of approximately 5.7% and received a variable rate
of approximately 5.0%. Differentials in the swapped amounts are recorded as
adjustments to interest expense of Realty.
6. SHAREHOLDERS' EQUITY
On March 10, 1999, the Companies entered into an agreement with Merrill Lynch
International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc.
(collectively with its agent and successor in interest, "MLI") and certain of
its affiliates to use the proceeds from the sale of the Cobblestone Golf Group
in excess of $300,000,000 to repurchase all or a portion of the remaining paired
common shares outstanding under the FEIT. MLI agreed not to sell any shares of
the remaining paired common shares until March 31, 1999, while the Companies
completed the sale of Cobblestone Golf Group. On March 31, 1999, the Companies
completed the sale of Cobblestone Golf Group and on April 1, 1999, the Companies
settled the FEIT by paying MLI approximately $89,840,000. MLI returned
approximately 6,865,000 paired common shares representing all of the remaining
outstanding paired common shares under the FEIT on that date.
As of June 30, 1999, the following classes of Preferred Stock, Excess Stock and
Series Common Stock were authorized; no shares were issued or outstanding at
either June 30, 1999 or December 31, 1998:
Meditrust Operating Company Preferred Stock $.10 par value; 6,000,000
shares authorized;
Meditrust Corporation Excess Stock $.10 par value; 25,000,000 shares
authorized;
Meditrust Operating Company Excess Stock $.10 par value; 25,000,000
shares authorized;
Meditrust Corporation Series Common Stock $.10 par value; 30,000,000
shares authorized;
Meditrust Operating Company Series Common Stock $.10 par value;
30,000,000 shares authorized.
During January 1999, 200,000 restricted shares of the Companies' stock were
issued to key employees under The Meditrust Corporation 1995 Share Award Plan
and The Meditrust Operating Company 1995 Share Award Plan (collectively known as
the "Share Award Plan").
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 exceeding
eight years. Participants vest in the restricted shares granted on the earliest
of eight years after the date of issuance, upon achieving the performance goals
as defined, or as the Boards of Directors may determine.
Unearned compensation was charged for the market value of the restricted shares
on the date of grant and is being amortized over the restricted period. The
unamortized unearned compensation value is shown as a reduction of shareholders'
equity in the accompanying consolidated and combined consolidated balance
sheets.
7. COMPREHENSIVE INCOME AND OTHER ASSETS
As of June 30, 1999, Realty had invested approximately $57,204,000 in Nursing
Home Properties Plc ("NHP Plc"), a property investment group which specializes
in the financing, through sale leaseback transactions, of nursing homes located
in the United Kingdom. The investment includes approximately 26,606,000 shares
of NHP Plc, representing an ownership interest in NHP Plc of 19.99% of which
Realty has voting rights with respect to 9.99%. The difference between the
current market value and the cost, $13,736,000 is included in shareholders'
equity in the accompanying balance sheet.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
7. COMPREHENSIVE INCOME AND OTHER ASSETS (CONTINUED)
As of June 30, 1999, Realty owns 331,000 shares of stock and warrants to
purchase 755,000 shares of stock in Balanced Care Corporation ("BCC"), a
healthcare operator that leases properties from and has mortgages payable to
Realty. The stock and warrants have a current market value of $2,171,000. The
difference between current market value and the cost of the BCC investment,
$1,067,000, is included in shareholders' equity in the accompanying balance
sheet.
The following is a summary of the Companies' comprehensive income:
SIX MONTHS ENDED
JUNE 30,
---------------------------------
(IN THOUSANDS) 1999 1998
------------ ------------
Net income $ 67,387 $ 100,024
Other comprehensive income:
Changes in market value of equity securities in excess of cost (2,168) 14,798
------------ ------------
Comprehensive income $ 65,219 $ 114,822
------------ ------------
------------ ------------
Other assets includes investments in NHP Plc and BCC, as well as La Quinta
intangible assets, furniture, fixtures and equipment, and other receivables.
8. DISTRIBUTIONS PAID TO SHAREHOLDERS
On February 16, 1999, Realty paid a dividend of $.46 per share of common stock
to shareholders of record on January 29, 1999. On March 31, 1999, Realty paid a
dividend of $.5625 per depository share of preferred stock to shareholders of
record on March 15, 1999 of its 9.00% Series A cumulative redeemable preferred
stock. On May 14, 1999, Realty paid a dividend of $0.46 per share of common
stock to shareholders of record on April 30, 1999. On June 30, 1999, Realty
paid a dividend of $0.5625 per depository share of preferred stock to holders of
record on June 15, 1999 of its 9.00% Series A cumulative redeemable preferred
stock.
9. OTHER EXPENSES
During the six months ended June 30, 1999, the Companies recorded approximately
$39,203,000 in other expenses.
On May 10, 1999, The Meditrust Companies entered into a separation agreement
with Abraham D. Gosman, former Director and Chairman of the Companies and
Chief Executive Officer and Treasurer of Operating Company. Under the terms
of the separation agreement, Mr. Gosman received severance payments totaling
$25,000,000 in cash and the continuation of certain life insurance benefits.
The Meditrust Companies established a Special Committee of The Boards of
Directors of Realty and Operating Company (the "Special Committee") to
evaluate the applicability of Mr. Gosman's employment contract and whether
such severance or other payments were appropriate. Based on the results of
the evaluation and recommendation of the Special Committee, the Boards of
Directors concluded that the separation agreement was in the long-term best
interest of the shareholders of the Companies and approved the separation
agreement.
The Companies incurred approximately $10,205,000 of non-recurring costs
($4,316,000 in the second quarter) associated with the development and
implementation of the Plan. These costs primarily relate to the early
repayment and modification of certain debt, other advisory fees related to
the Plan, and other professional fees related to the separation agreement
with Mr. Gosman.
Also, in conjunction with the implementation of the Plan, which included a
change in the focus of the lodging division to internal growth, La Quinta
management performed a review of the front desk system under development for its
lodging facilities, and made a decision to abandon the project. The decision was
based primarily on management's intent to integrate the front desk system with
new revenue management software, availability of more suitable and flexible
externally developed software and a shift in information systems philosophy
toward implementation of externally developed software and outsourcing of
related support services. A charge of approximately $3,998,000 to write-off
certain internal and external software development costs related to the project
was recorded during the six months ended June 30, 1999.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. LA QUINTA MERGER
On July 17, 1998, Realty completed its merger with La Quinta whereby La Quinta
merged with and into Realty, with Realty as the surviving corporation.
The following unaudited pro forma condensed combined consolidated results of
operations of Realty and Operating Company have been prepared as if the La
Quinta Merger had occurred on January 1, 1998.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS ENDED, FOR THE SIX MONTHS ENDED,
JUNE 30, 1998 JUNE 30, 1998
------------- -------------
Revenue $ 239,080 $ 480,641
Net income from continuing operations $ 60,103 $ 110,692
Basic earnings per paired common share from continuing operations $ .41 $ .73
Weighted average paired common shares outstanding $ 143,473 $ 139,115
The pro forma condensed combined consolidated results do not purport to be
indicative of results that would have occurred had the La Quinta Merger been in
effect for the periods presented, nor do they purport to be indicative of the
results that will be obtained in the future.
11. EARNINGS PER SHARE
COMBINED CONSOLIDATED EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS
ENDED JUNE 30,
-----------------------------
1999 1998
----------- -----------
Income from continuing operations $ 47,643 $ 46,567
Preferred stock dividends (3,938) (613)
----------- -----------
Income from continuing operations available to
common shareholders $ 43,705 $ 45,954
----------- -----------
----------- -----------
Average outstanding shares of paired common stock 141,129 100,193
Dilutive effect of:
Contingently issuable shares - 1,277
Stock options 5 430
----------- -----------
Dilutive potential paired common stock 141,134 101,900
----------- -----------
----------- -----------
Earnings per share:
Basic $ .31 $ .46
----------- -----------
----------- -----------
Diluted $ .31 $ .45
----------- -----------
----------- -----------
Options to purchase 5,083,000 and 2,904,000 paired common shares at prices
ranging from $13.44 to $36.46 were outstanding during the three months ended
June 30, 1999 and 1998, respectively, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the average
market price of the paired common shares. The options, which expire on dates
ranging from December 1999 to December 2008, were still outstanding at June 30,
1999.
Convertible debentures outstanding for the three months ended June 30, 1999 and
1998, representing 6,540,000 and 7,957,000, paired common shares, if converted,
respectively, are not included in the computation of diluted EPS because the
inclusion would result in an antidilutive effect.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. EARNINGS PER SHARE (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------------
1999 1998
----------- -----------
Income from continuing operations $ 62,518 $ 90,272
Preferred stock dividends (7,876) (613)
----------- -----------
Income from continuing operations available to
common shareholders $ 54,642 $ 89,659
----------- -----------
----------- -----------
Average outstanding shares of paired common stock 144,537 95,835
Dilutive effect of:
Contingently issuable shares - 851
Stock options 11 476
----------- -----------
Dilutive potential paired common stock 144,548 97,162
----------- -----------
----------- -----------
Earnings per share:
Basic $ .38 $ .94
----------- -----------
----------- -----------
Diluted $ .38 $ .92
----------- -----------
----------- -----------
Options to purchase 1,919,000 and 2,868,000 paired common shares at prices
ranging from $21.85 to $36.46 were outstanding during the six months ended June
30, 1999 and 1998, respectively, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the paired common shares. The options, which expire on dates
ranging from October 2001 to April 2008, were still outstanding at June 30,
1999.
Convertible debentures outstanding for the six months ended June 30, 1999 and
1998, representing 6,540,000 and 8,014,000, paired common shares, if converted,
respectively, are not included in the computation of diluted EPS because the
inclusion would result in an antidilutive effect.
MEDITRUST CORPORATION EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS
ENDED JUNE 30,
---------------------------
1999 1998
---------- -----------
Income from continuing operations $ 45,870 $ 47,510
Preferred stock dividends (3,938) (613)
---------- -----------
Income from continuing operations available to
common shareholders $ 41,932 $ 46,897
---------- -----------
---------- -----------
Average outstanding shares of common stock 142,434 101,498
Dilutive effect of:
Contingently issuable shares - 1,277
Stock options 5 430
---------- -----------
Dilutive potential common stock 142,439 103,205
---------- -----------
---------- -----------
Earnings per share:
Basic $ .29 $ .46
---------- -----------
---------- -----------
Diluted $ .29 $ .45
---------- -----------
---------- -----------
Options to purchase 3,312,000 and 2,636,000 paired common shares at prices
ranging from $13.44 to $36.46 were outstanding during the three months ended
June 30, 1999 and 1998, respectively, but were not included in the computation
of diluted EPS because the options' exercise price was greater than the average
market price of the common shares. The options, which expire on dates ranging
from October 2001 to December 2008, were still outstanding at June 30, 1999.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. EARNINGS PER SHARE (CONTINUED)
Convertible debentures outstanding for the three months ended June 30, 1999 and
1998, representing 6,540,000 and 7,957,000 paired common shares, if converted,
respectively, are not included in the computation of diluted EPS because the
inclusion would result in an antidilutive effect.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE SIX MONTHS
ENDED JUNE 30,
---------------------------
1999 1998
---------- -----------
Income from continuing operations $ 88,961 $ 92,150
Preferred stock dividends (7,876) (613)
---------- -----------
Income from continuing operations available to
common shareholders $ 81,085 $ 91,537
---------- -----------
---------- -----------
Average outstanding shares of common stock 145,842 97,140
Dilutive effect of:
Contingently issuable shares - 851
Stock options 11 476
---------- -----------
Dilutive potential common stock 145,853 98,467
---------- -----------
---------- -----------
Earnings per share:
Basic $ .56 $ .94
---------- -----------
---------- -----------
Diluted $ .56 $ .93
---------- -----------
---------- -----------
Options to purchase 1,919,000 and 2,618,000 paired common shares at prices
ranging from $21.85 to $36.46 were outstanding during the six months ended June
30, 1999 and 1998, respectively, but were not included in the computation of
diluted EPS because the options' exercise price was greater than the average
market price of the common shares. The options, which expire on dates ranging
from October 2001 to October 2007, were still outstanding at June 30, 1999.
Convertible debentures outstanding for the six months ended June 30, 1999 and
1998, representing 6,540,000 and 8,014,000 paired common shares, if converted,
respectively, are not included in the computation of diluted EPS because the
inclusion would result in an antidilutive effect.
MEDITRUST OPERATING COMPANY EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS
ENDED JUNE 30,
----------------------------
1999 1998
----------- -----------
Income (loss) from continuing operations available to
common shareholders $ 1,773 $ (943)
----------- -----------
----------- -----------
Average outstanding shares of common stock 141,129 100,193
Dilutive effect of:
Contingently issuable shares -
Stock options 5
----------- -----------
Dilutive potential common stock 141,134 100,193
----------- -----------
----------- -----------
Earnings per share:
Basic $ .01 $ (.01)
----------- -----------
----------- -----------
Diluted $ .01 $ (.01)
----------- -----------
----------- -----------
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. EARNINGS PER SHARE (CONTINUED)
Options to purchase 1,771,000 and 268,000 paired common shares at prices ranging
from $13.46 to $31.44 were outstanding during the three months ended June 30,
1999 and 1998, respectively, but were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares. The options, which expire on dates ranging from
December 1999 to December 2008, were still outstanding at June 30, 1999.
Convertible debentures outstanding for the three months ended June 30, 1999 and
1998, representing 6,540,000 and 7,957,000 paired common shares, if converted,
respectively, are not included in the computation of diluted EPS because the
inclusion would result in an antidilutive effect.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------------
1999 1998
----------- ------------
Loss from continuing operations available to
common shareholders $ (26,443) $ (1,878)
----------- ------------
----------- ------------
Average outstanding shares of common stock 144,537 95,835
Dilutive effect of:
Contingently issuable shares
Stock options
Dilutive potential common stock 144,537 95,835
----------- ------------
----------- ------------
Earnings per share:
Basic $ (.18) $ (.02)
----------- ------------
----------- ------------
Diluted $ (.18) $ (.02)
----------- ------------
----------- ------------
Options to purchase 250,000 paired common shares at $31.44 were outstanding
during the six months ended June 30, 1998 but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of the paired common shares. The options, which expire
in April 2008, were still outstanding at June 30, 1999.
Convertible debentures outstanding for the six months ended June 30, 1999 and
1998, representing 6,540,000 and 8,014,000 paired common shares, if converted,
respectively, are not included in the computation of diluted EPS because the
inclusion would result in an antidilutive effect.
Operating Company holds common shares of Realty which are unpaired pursuant to a
stock option plan approved by the shareholders. The common shares held totaled
1,305,377 as of June 30, 1999. These shares affect the calculations of Realty's
net income per common share but are eliminated in the calculation of net income
per paired common share for The Meditrust Companies.
12. TRANSACTIONS BETWEEN REALTY AND OPERATING COMPANY
Operating Company leases hotel facilities from Realty and its subsidiaries. The
hotel facility lease arrangements between Operating Company and Realty include
base and additional rent provisions and require Realty to assume costs
attributable to property taxes and insurance.
In connection with certain acquisitions, Operating Company issued shares to
Realty and recorded a receivable. Due to the affiliation of Realty and Operating
Company, the receivable from Realty has been classified in Operating Company's
shareholders' equity.
Periodically, Realty and Operating Company issue shares under the Share Award
Plan. Amounts due from Realty and Operating Company in connection with awards of
shares under the Share Award Plan are shown as a reduction of shareholders'
equity in the
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. TRANSACTIONS BETWEEN REALTY AND OPERATING COMPANY (CONTINUED)
accompanying consolidated balance sheets of Realty and Operating Company,
respectively.
Realty provides certain services to Operating Company primarily related to
general tax preparation and consulting, legal, accounting, and certain aspects
of human resources. In the opinion of management, the costs associated with
these services were not material and have been excluded from the financial
statements.
13. SEGMENT REPORTING
MEASUREMENT OF SEGMENT PROFIT OR LOSS
The Companies evaluate performance based on contribution from each reportable
segment. Contribution is defined by the Companies as income from operations
before interest expense, depreciation, amortization, gains and losses on sales
of assets, provisions for losses on disposal or impairment of assets, income or
loss from unconsolidated entities, income taxes and nonrecurring income and
expenses. The measurement of each of these segments is made on a combined basis
with revenue from external customers, and excludes lease income between Realty
and Operating Company. The Companies account for Realty and Operating Company
transactions as if the transactions were to third parties, that is, at current
market prices. Segment contribution for the six months ended June 30, 1998
includes only healthcare. The lodging segment was acquired on July 17, 1998. 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.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. SEGMENT REPORTING (CONTINUED)
SIX MONTHS ENDED
JUNE 30,
------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998
------------- ------------
Healthcare:
Rental income $ 85,521 $ 93,059
Interest income 69,833 77,146
Rental property operating costs (4,296) (2,722)
General and administrative expenses (9,136) (8,307)
------------- ------------
Healthcare Contribution 141,922 159,176
------------- ------------
Lodging:
Room revenue 291,728
Guest services and other 19,080
Operating expenses (138,043)
General and administrative expenses (8,782)
Rental property operating costs (13,425)
-------------
Lodging Contribution 150,558
-------------
Combined Contribution 292,480 159,176
------------- ------------
Reconciliation to Combined Consolidated Financial Statements:
Other income (856) (26,000)
Interest expense 125,343 50,112
Depreciation and amortization 68,082 20,545
Amortization of goodwill 10,847 3,154
Gain on sale of assets (12,284)
Income from unconsolidated joint venture (448)
Other expenses 39,203 21,541
------------- ------------
230,335 68,904
------------- ------------
Income from continuing operations
before benefit for income taxes 62,145 90,272
Income tax benefit (373)
------------- ------------
Income from continuing operations 62,518 90,272
Discontinued operations:
Income from discontinued operations 9,752
Gain (loss adjustment) on disposal of discontinued operations 4,869
------------- ------------
Net income 67,387 100,024
Preferred stock dividends (7,876) (613)
------------- ------------
Net income available to Paired Common shareholders $ 59,511 $ 99,411
------------- ------------
------------- ------------
14. SUBSEQUENT EVENTS
On July 12, 1999, the Board of Directors of Realty declared a dividend of $.46
per share of common stock payable on August 16, 1999 to shareholders of record
on July 30, 1999.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN MATTERS DISCUSSED HEREIN CONSTITUTE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE
MEDITRUST COMPANIES (THE "COMPANIES"), CONSISTING OF MEDITRUST CORPORATION
("REALTY") AND MEDITRUST OPERATING COMPANY ("OPERATING"), INTEND SUCH
FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR
FORWARD-LOOKING STATEMENTS, AND ARE INCLUDING THIS STATEMENT FOR PURPOSES OF
COMPLYING WITH THESE SAFE HARBOR PROVISIONS. ALTHOUGH THE COMPANIES BELIEVE THE
FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, THE COMPANIES
CAN GIVE NO ASSURANCE THAT THEIR EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS
AND TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR
CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS,
INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND REAL ESTATE CONDITIONS, THE
CONDITIONS OF THE CAPITAL MARKETS AT THE TIME OF THE PROPOSED SPIN-OFF OF THE
HEALTHCARE DIVISION, THE IDENTIFICATION OF SATISFACTORY PROSPECTIVE BUYERS FOR
THE NON-STRATEGIC ASSETS AND THE AVAILABILITY OF FINANCING FOR SUCH PROSPECTIVE
BUYERS, THE AVAILABILITY OF EQUITY AND DEBT FINANCING FOR THE COMPANIES' CAPITAL
INVESTMENT PROGRAM, INTEREST RATES, COMPETITION FOR HOTEL SERVICES IN A GIVEN
MARKET, THE ENACTMENT OF LEGISLATION IMPACTING THE COMPANIES' STATUS AS A PAIRED
SHARE REAL ESTATE INVESTMENT TRUST ("REIT") OR REALTY'S STATUS AS A REIT, THE
FURTHER IMPLEMENTATION OF REGULATIONS GOVERNING PAYMENTS TO THE OPERATORS OF
REALTY'S HEALTHCARE FACILITIES, UNANTICIPATED DELAYS OR EXPENSES ON THE PART OF
THE COMPANIES AND THEIR SUPPLIERS IN ACHIEVING YEAR 2000 COMPLIANCE AND OTHER
RISKS DETAILED FROM TIME TO TIME IN THE FILINGS OF REALTY AND OPERATING WITH THE
SECURITIES AND EXCHANGE COMMISSION ("SEC"), INCLUDING, WITHOUT LIMITATION, JOINT
QUARTERLY REPORTS ON FORM 10-Q, JOINT CURRENT REPORTS ON FORM 8-K AND 8-K/A, AND
JOINT ANNUAL REPORTS ON FORM 10-K AND 10-K/A.
OVERVIEW
The basis of presentation includes Management's Discussion and Analysis of
Financial Condition and Results of Operations for the combined and separate SEC
registrants. Management of the Companies believes that combined presentation is
most beneficial to the reader.
On November 5, 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" or "Santa Anita Mergers"). Upon completion of the Santa Anita Mergers,
Santa Anita Realty Enterprises, Inc. changed its corporate name to "Meditrust
Corporation" and Santa Anita Operating Company changed its corporate name to
"Meditrust Operating Company." The Santa Anita Mergers were accounted for as
reverse acquisitions whereby Meditrust's Predecessor and Meditrust Acquisition
Company were treated as the acquirers for accounting purposes. Accordingly, the
financial history is that of Meditrust's Predecessor and Meditrust Acquisition
Company prior to the Santa Anita Mergers.
After completing the Santa Anita Merger, the Companies began pursuing a strategy
of diversifying into additional new businesses. Implementation of this strategy
included the evaluation of numerous potential acquisition targets. On January 3,
and January 11, 1998, Realty entered into definitive merger agreements to
acquire La Quinta Inns, Inc. and its wholly owned subsidiaries and its
unincorporated partnership and joint venture (collectively "La Quinta" and "La
Quinta Merger") and Cobblestone Holdings, Inc. and its wholly owned subsidiary
(collectively "Cobblestone" and "Cobblestone Merger"), respectively. In February
1998, legislation was proposed which limited the ability of the Companies to
utilize the paired share structure. Accordingly, the Companies ceased any
further evaluation of potential merger candidates and began a process of
evaluating its healthcare portfolio.
The Companies consummated the Cobblestone Merger and the La Quinta Merger on May
29, 1998 and July 17, 1998, respectively. On July 22, 1998, the President of the
United States signed into law the Internal Revenue Service Restructuring and
Reform Act of 1998 (the "Reform Act"), which limits the Companies' ability to
continue to grow through use of the paired share structure. While the Companies'
use of the paired share structure in connection with the Cobblestone Merger and
the La Quinta Merger was "grandfathered" under the Reform Act, the ability to
continue to use the paired share structure to acquire additional real estate and
operating businesses conducted with the real estate assets (including the golf
and lodging industries) was substantially limited. In addition, during the
summer of 1998, the debt and equity capital markets available to REITs
deteriorated, thus limiting the Companies' access to cost-efficient capital.
The Companies began an analysis of the impact of the Reform Act, the Companies'
limited ability to access the capital markets, and the operating strategy of the
Companies' existing businesses. This analysis included advice from outside
professional advisors and presentations by management on the different
alternatives available to the Companies. The analysis culminated in the
development of a comprehensive restructuring plan (the "Plan") designed to
strengthen the Companies' financial position and clarify its investment and
operating strategy by focusing on the healthcare and lodging business segments.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
The Plan was announced on November 12, 1998 and included the following
components:
- - Pursue the separation of the Companies' primary businesses, healthcare and
lodging, by creating two separately traded publicly listed REITs. The
Companies intend to spin off the healthcare financing business into a
stand-alone REIT;
- - Continue to operate the Companies' healthcare and lodging businesses using
the existing paired share REIT structure until the healthcare spin-off
takes place;
- - Sell more than $1 billion of non-strategic assets, including the portfolio
of golf-related real estate and operating properties ("Cobblestone Golf
Group"), the Santa Anita Racetrack and approximately $550 million of
non-strategic healthcare properties;
- - Use the proceeds from these asset sales to achieve significant near-term
debt reduction;
- - Settle the Companies' forward equity issuance transaction
("FEIT") with Merrill Lynch;
- - Reduce capital investments to reflect the
current operating condition in each industry;
- - Reset Realty's annual dividend to $1.84 per common share.
Following the announcement of the Plan, the Companies classified the golf and
horseracing activities as discontinued operations for financial reporting
purposes. Accordingly, management's discussion and analysis of financial
condition and results of operations is focused on the Companies' primary
businesses, healthcare and lodging.
The Companies' ability to complete the separation of the two primary
businesses is dependent upon capital market conditions, which are beyond the
control of the Companies. These conditions may materially impact the timing
of the separation and the Companies' ability to successfully implement the
separation. The Companies cannot be certain that the capital markets will be
amenable to the separation and the creation of two distinct separately traded
companies. Based on the current state of the healthcare capital markets, the
Companies do not believe that the separation will occur in 1999.
The joint annual report on Form 10-K, filed for the year ended December 31,
1998, and the joint quarterly report on Form 10-Q, filed for the three months
ended March 31, 1999, summarized progress in implementing, and in some cases
completing, significant components of the Plan during 1998 and in early 1999.
This joint quarterly report on Form 10-Q provides an update since those
documents were filed.
THE MEDITRUST COMPANIES--COMBINED RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998
Revenue for the three months ended June 30, 1999, was $239,714,000 compared
to $87,970,000 for the three months ended June 30, 1998, an increase of
$151,744,000. Revenue growth was primarily attributable to the addition of
hotel operating revenues of $162,274,000, which was partially offset by a net
decrease to rental and interest income of $10,530,000. The decrease primarily
resulted from asset sales and mortgage repayments over the last year net of
the effect of additions to real estate investments made during the same
period. There are no comparative hotel operating revenues for the three
months ended June 30, 1998 as the La Quinta Merger was not consummated until
July 17, 1998, however, certain factors can be compared to the predecessor
entity. Hotel operating revenues generally are measured as a function of the
average daily rate ("ADR") and occupancy. The ADR decreased to $60.45 in 1999
from $61.20 in 1998, a decrease of $.75 or 1.2%. Occupancy percentage
increased .4 percentage points to 73.0% in 1999 from 72.6% in 1998. Revenue
per available room ("RevPAR"), which is the product of occupancy percentage
and ADR, decreased .6% over 1998. The decrease in RevPAR is primarily due to
a greater increase in the supply of available rooms than in demand in the
southwest region. The relationship between supply and demand varies by
region, however, it has impacted La Quinta to a greater extent than its
competitors due to its concentration of hotels in the southwest. The revenue
impact of the oversupply of available rooms was partially mitigated by
revenue increases resulting from a higher proportion of room rental income
from the Inn & Suites hotels as compared to the Inns during the comparable
three-month periods. Inn & Suites hotels generally have higher room rental
income per night than the Inns.
For the three months ended June 30, 1999, total recurring operating expenses
were $88,867,000 compared to $5,380,000 for the three months ended June 30,
1998, an increase of $83,487,000. This increase was primarily attributable to
the addition of hotel expenses which include operating expenses of
$71,441,000 and general and administrative expenses of $4,394,000. General
and administrative expenses include $4,173,000 in overhead for the lodging
segment and $221,000 for allocated expenses of the paired share structure.
Hotel operating and general and administrative expenses include costs
associated with the operation such as salaries, wages, utilities, repair and
maintenance, credit card discounts and room supplies as well as corporate
expenses, such as the costs of general management, office rent, training and
field supervision of hotel managers and other marketing and administrative
expenses. Rental property operating expenses related to the hotels were
$6,772,000 and principally consist of property taxes on hotel facilities. For
the three months ended June 30, 1999, rental property operating expenses
attributable to the healthcare business were $2,042,000 compared to
$1,457,000 for the three months ended June 30, 1998, an increase of $585,000.
The increase was primarily a result of expenses associated with medical
office buildings purchased over the last twelve months. Rental property
operating expenses attributed to the healthcare business principally consist
of expenses for the management and operation of medical office buildings.
General and administrative expenses related to healthcare increased by
$295,000 primarily due to increases in state franchise taxes resulting from
acquisitions made over the last twelve months.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
The Companies consider contribution from each primary business in evaluating
performance. Contribution includes revenue from each business, excluding
non-recurring or unusual income, less operating expenses, rental property
operating expenses and general and administrative expenses. The combined
contribution of the healthcare and lodging businesses was $150,847,000 for the
three months ended June 30, 1999, of which $71,180,000 related to healthcare and
$79,667,000 related to lodging. The contribution of the healthcare business
decreased $11,410,000 from $82,590,000 for the comparative three months ended
June 30, 1998. The decrease was primarily a result of the impact on revenue of
asset sales and mortgage repayments over the last year and increases to state
franchise taxes related to mergers completed in the last year.
The lodging contribution was $79,667,000 or 49.1% of lodging revenues during the
three months ended June 30, 1999, compared to 47.8% for the same period in 1998.
This improvement is reflective of a greater number of Inn & Suites hotels which
generally operate at higher margins than La Quinta Inns and a continuing focus
on cost controls and reduced corporate overhead.
Interest expense increased by $33,991,000 due to increases in the borrowing rate
and in debt outstanding as a result of a new bank facility added in 1998, the
acquisitions of La Quinta and Cobblestone, net of amounts repaid from various
asset sales made over the past year. Depreciation and amortization increased by
$28,097,000 which was primarily a result of increased real estate investments
and amortization of goodwill from the La Quinta acquisition completed on July
17, 1998.
ASSET SALES
During the three months ended June 30, 1999, Realty realized gains on the sale
of healthcare real estate assets of $13,000. Sales of healthcare properties were
completed pursuant to the Plan and included two assisted living facilities.
OTHER EXPENSES
During the second quarter of 1999, the Companies recorded approximately
$4,316,000 in other expenses. These are non-recurring costs associated with
the implementation of the Plan and primarily relate to the early repayment
and modification of certain debt as well as professional and other advisory
fees.
DISCONTINUED OPERATIONS
Pursuant to the Plan, the Companies have classified golf and horseracing
activities as discontinued operations for financial reporting purposes. There
was no income from discontinued operations nor adjustments to the loss on
disposal of discontinued operations during the three months ended June 30, 1999.
The Companies anticipate the final adjustments on the disposal of the golf and
horseracing segments to be completed during 1999. For the three months ended
June 30, 1998, the Companies have presented income from discontinued operations
of $1,836,000 which was related to the horseracing and golf segments.
NET INCOME
The resulting net income available for common shareholders, after deducting
preferred share dividends, for the three months ended June 30, 1999, was
$43,705,000 compared to net income of $47,790,000 for the three months ended
June 30, 1998. The net income per paired common share (diluted) for the three
months ended June 30, 1999 was $.31 compared to net income per paired common
share (diluted) of $.47 for the three months ended June 30, 1998. The per paired
common share amount decreased primarily due to other expenses and the issuance
of 43,280,000 additional paired common shares to consummate the La Quinta
Merger.
SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
Revenue for the six months ended June 30, 1999, was $467,018,000 compared to
$196,205,000 for the six months ended June 30, 1998, an increase of
$270,813,000 Revenue growth was primarily attributable to the addition of
hotel operating revenues of $310,808,000, which was partially offset by a net
decrease to rental and interest income of $14,851,000. The decrease primarily
resulted from asset sales and mortgage repayments over the last year net of
the effect of additions to real estate investments made during the same
period. Other non-recurring income for the six months ended June 30, 1999 was
$856,000, which arose from lease breakage fees received from the sale of
healthcare-owned properties. There are no comparative hotel operating
revenues for the six months ended June 30, 1998 as the La Quinta Merger was
not consummated until July 17, 1998, however, certain factors can be compared
to the predecessor entity. Hotel operating revenues generally are measured as
a function of the ADR and occupancy. The ADR decreased to $61.06 in 1999 from
$61.07 in 1998, a decrease of $.01 or .02%. Occupancy percentage increased .5
percentage points to 70.1% in 1999 from 69.6% in 1998. RevPAR, which is the
product of occupancy percentage and ADR, increased .7% over 1998. The
increase in RevPAR is primarily due to a higher proportion of room rental
income from the Inn & Suites hotels as compared to the Inns during the
comparable six-month periods. Inn & Suites hotels generally have
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
higher room rental income per night than the Inns. These increases were
partially offset by a greater increase in the supply of available rooms than
in demand in the southwest region, particularly in the second quarter of
1999. The relationship between supply and demand varies by region, however,
it has impacted La Quinta to a greater extent than its competitors due to its
concentration of hotels in the southwest.
For the six months ended June 30, 1999, total recurring operating expenses
were $173,682,000 compared to $11,029,000 for the six months ended June 30,
1998, an increase of $162,653,000. This increase was primarily attributable
to the addition of hotel expenses which include operating expenses of
$138,043,000 and general and administrative expenses of $8,782,000. General
and administrative expenses include $8,294,000 in overhead for the lodging
segment and $488,000 for allocated expenses of the paired share structure.
Hotel operating and general and administrative expenses include costs
associated with the operation such as salaries, wages, utilities, repair and
maintenance, credit card discounts and room supplies as well as corporate
expenses, such as the costs of general management, office rent, training and
field supervision of hotel managers and other marketing and administrative
expenses. Rental property operating expenses related to the hotels were
$13,425,000 and principally consist of property taxes on hotel facilities.
For the six months ended June 30, 1999, rental property operating expenses
attributable to the healthcare business were $4,296,000 compared to
$2,722,000 for the six months ended June 30, 1998, an increase of $1,574,000.
The increase was primarily a result of expenses associated with medical
office buildings purchased over the last twelve months. Rental property
operating expenses attributed to the healthcare business principally consist
of expenses for the management and operation of medical office buildings.
General and administrative expenses related to healthcare increased by
$829,000 primarily due to increases in state franchise taxes resulting from
acquisitions made over the last twelve months.
The Companies consider contribution from each primary business in evaluating
performance. Contribution includes revenue from each business, excluding
non-recurring or unusual income, less operating expenses, rental property
operating expenses and general and administrative expenses. The combined
contribution of the healthcare and lodging businesses was $292,480,000 for the
six months ended June 30, 1999, of which $141,922,000 related to healthcare and
$150,558,000 related to lodging. The contribution of the healthcare business
decreased $17,254,000 from $159,176,000 for the comparative six months ended
June 30, 1998. The decrease was primarily a result of the impact on revenue of
asset sales and mortgage repayments over the last year and increases to state
franchise taxes related to mergers completed in the last year.
The lodging contribution was $150,558,000 or 48.4% of lodging revenues during
the six months ended June 30, 1999, compared to 47.0% for the same period in
1998. This improvement is reflective of a greater number of Inn & Suites hotels
which generally operate at higher margins than La Quinta Inns and a continuing
focus on cost controls and reduced corporate overhead.
Interest expense increased by $75,231,000 due to increases in the borrowing rate
and in debt outstanding as a result of a new bank facility added in 1998, the
acquisitions of La Quinta and Cobblestone, net of amounts repaid from various
asset sales made over the past year. Depreciation and amortization increased by
$55,230,000 which was primarily a result of increased real estate investments
and amortization of goodwill from the La Quinta acquisition completed on July
17, 1998.
ASSET SALES
During the six months ended June 30, 1999, Realty realized gains on the sale of
healthcare real estate assets of $12,284,000. Sales of healthcare properties
were completed pursuant to the Plan and included one rehabilitation facility,
one long-term care facility, and 17 assisted living facilities. Realty also sold
a hotel and land held for development on which there was no gain or loss
realized.
OTHER EXPENSES
During the six months ended June 30, 1999, the Companies recorded approximately
$39,203,000 in other expenses.
On May 10, 1999, the Companies entered into a separation agreement with Abraham
D. Gosman, former Director and Chairman of the Companies and Chief Executive
Officer and Treasurer of Operating. Under the terms of the separation agreement,
Mr. Gosman received severance payments totaling $25,000,000 in cash and the
continuation of certain life insurance benefits. The Companies established a
Special Committee of The Boards of Directors of Realty and Operating (the
"Special Committee") to evaluate the applicability of Mr. Gosman's employment
contract and whether such severance or other payments were appropriate. Based on
the results of the evaluation and recommendation of the Special Committee, the
Boards of Directors concluded that the separation agreement was in the long-term
best interest of the shareholders of the Companies and approved the separation
agreement.
The Companies incurred approximately $10,205,000 of non-recurring costs
associated with the development and implementation of the Plan. These costs
primarily relate to the early repayment and modification of certain debt,
other advisory fees related to the Plan, and other professional fees related
to the separation agreement with Mr. Gosman.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Also, in conjunction with the implementation of the Plan, which included a
change in the focus of the lodging division to internal growth, La Quinta
management performed a review of the front desk system under development for its
lodging facilities, and made a decision to abandon the project. The decision was
based primarily on management's intent to integrate the front desk system with
new revenue management software, availability of more suitable and flexible
externally developed software and a shift in information systems philosophy
toward implementation of externally developed software and outsourcing of
related support services. A charge of approximately $3,998,000 to write-off
certain internal and external software development costs related to the project
was recorded during the six months ended June 30, 1999.
DISCONTINUED OPERATIONS
As part of the Plan, the Companies sold the Santa Anita Racetrack during the
fourth quarter of 1998 and sold the Cobblestone Golf Group during the first
quarter of 1999. The Companies have reflected the financial results for 1999 and
1998 of Santa Anita and Cobblestone as discontinued operations. During the first
half of 1999, the Companies adjusted the provision for loss on disposal of the
Cobblestone Golf Group by recording a gain of approximately $2,994,000 which
includes an estimate of a working capital adjustment to the final selling price.
In addition, the Companies recorded $1,875,000 as an adjustment to the estimated
selling price of the Santa Anita Racetrack. The Companies anticipate the final
adjustments for both of these transactions will be finalized during 1999. For
the six months ended June 30, 1998, the Companies have presented income from
discontinued operations of $9,752,000 which was related to the horseracing and
golf segments.
NET INCOME
The resulting net income available for the common shareholders, after deducting
preferred share dividends, for the six months ended June 30, 1999, was
$59,511,000 compared to net income of $99,411,000 for the six months ended June
30, 1998. The net income per paired common share (diluted) for the six months
ended June 30, 1999 was $.41 compared to net income per paired common share
(diluted) of $1.02 for the six months ended June 30, 1998. The per paired common
share amount decreased primarily due to other expenses and the issuance of
43,280,000 additional paired common shares to consummate the La Quinta Merger.
THE MEDITRUST COMPANIES - COMBINED LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund the Companies' future operating
expenses, interest expense, recurring capital expenditures and distribution
payments will be cash flow provided by operating activities. The Companies
anticipate that cash flow provided by operating activities will provide the
necessary funds on a short and long-term basis to meet operating cash
requirements including all distributions to shareholders.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
The Companies provide funding for new investments, debt repayments and costs
associated with the restructuring through a combination of long-term and
short-term financing including, both debt and equity, as well as the
previously announced sale of assets. The Companies may decide to sell
additional assets to meet their commitments and provide them with additional
liquidity. The Companies obtain long-term financing through the issuance of
shares, long-term unsecured notes, convertible debentures and the assumption
of mortgage notes. The Companies obtain short-term financing through the use
of bank lines of credit, which are replaced with long-term financing as
appropriate. From time to time, the Companies may utilize interest rate caps
or swaps to attempt to hedge interest rate volatility. It is the Companies'
objective to match mortgage and lease terms with the terms of their
borrowings. The Companies attempt to maintain an appropriate spread between
their borrowing costs and the rate of return on their investments. When
development loans convert to sale/leaseback transactions or permanent
mortgage loans, the base rent or interest rate, as appropriate, is fixed at
the time of such conversion. There is, however, no assurance that the
Companies will satisfactorily achieve, if at all, the objectives set forth in
this paragraph.
On July 17, 1998, Realty entered into a credit agreement (the "Credit
Agreement") which provided Realty with up to $2,250,000,000 in credit
facilities, replacing Realty's then existing $365,000,000 revolving credit
facilities. The Credit Agreement provided for borrowings in four separate
tranches (each a "Tranche"): Tranche A, a $1,000,000,000 revolving loan, amounts
of which if repaid may be reborrowed, which matures July 17, 2001; Tranche B, a
term loan in the amount of $500,000,000, amounts of which if repaid may not be
reborrowed, which matures July 17, 1999 with a $250,000,000 mandatory principal
payment on April 17, 1999; Tranche C, a term loan in the amount of $250,000,000,
amounts of which if repaid may not be reborrowed, which
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
matures July 17, 1999 with a six month extension option which management
exercised for a fee of 12.5 basis points; and Tranche D, a term loan in the
amount of $500,000,000, amounts of which if repaid may not be reborrowed, which
matures July 17, 2001.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT, the amendment of certain
financial covenants to accommodate asset sales, to exclude the impact of
non-recurring charges in certain covenant calculations, and to provide for
future operating flexibility. The amendment also provided for an increase to the
LIBOR pricing of the credit facility by approximately 125 basis points, and the
pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock
also extended on a pro rata basis to entitled bondholders. Realty also agreed to
a 25 basis point increase to the LIBOR pricing in the event that an equity
offering of at least $100,000,000 had not been completed by February 1, 1999. On
February 1, 1999 this increase went into effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that
was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provided for, among other things, upon the sale of Cobblestone Golf Group,
elimination of limitations on certain healthcare investments and a lowering of
the commitment on the revolving tranche to $850,000,000.
On March 10, 1999, the Companies entered into an agreement with Merrill Lynch
International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co.,
Inc. (collectively with its agent and successor in interest, "MLI") and
certain of its affiliates to use the proceeds from the sale of the
Cobblestone Golf Group in excess of $300,000,000 to repurchase all or a
portion of the remaining paired common shares, outstanding under the FEIT.
MLI agreed not to sell any of the remaining paired common shares outstanding
under the FEIT until March 31, 1999, while the Companies completed the sale
of Cobblestone Golf Group. On March 31, 1999, the Companies completed the
sale of Cobblestone Golf Group and on April 1, 1999, the Companies settled
the FEIT by paying MLI $89,840,000 for the repurchase of 6,865,000 paired
common shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on July
17, 1999.
As of June 30, 1999, approximately $1,806,000 in charges related to the Plan
remained unpaid. Payments made during the quarter included professional and
advisory fees and severance paid to former employees.
As of June 30, 1999, the Companies' gross real estate investments totaled
approximately $5,263,473,000 consisting of 212 long-term care facilities, 140
retirement and assisted living facilities, 34 medical office buildings, one
acute care hospital campus, seven other healthcare facilities and 300 hotel
facilities in service with two more under construction. At June 30, 1999, Realty
was committed to provide additional financing of approximately $72,000,000
relating to three long-term care facilities, seven assisted living facilities
and two hotel facilities currently under construction as well as additions to
existing facilities in the portfolio.
The Companies had shareholders' equity of $2,773,952,000 and debt constituted
49% of the Companies' total capitalization as of June 30, 1999.
On July 12, 1999, the Board of Directors of Realty declared a dividend of $0.46
per share of common stock payable on August 16, 1999 to shareholders of record
on July 30, 1999. Realty anticipates paying the same dividend in the fourth
quarter but no assurances can be given that Realty will continue to pay the
dividend in this amount.
Of the $850,000,000 revolving tranche commitment, approximately $287,000,000 was
available at July 23, 1999, at Realty's option of the base rate (10.0%) or LIBOR
plus 2.875% (8.06% at July 23, 1999).
The Companies have an effective shelf registration statement on file with the
SEC under which the Companies may issue $1,825,000,000 of securities including
shares, preferred stock, debt, series common stock, convertible debt and
warrants to purchase shares, preferred shares, debt, series common stock and
convertible debt.
The Companies believe that their various sources of capital are adequate to
finance their operations as well as their existing commitments, including the
acquisition and/or mortgage financing of certain healthcare facilities, the
completion of the La Quinta Inn & Suites currently under development and
repayment of debt maturing for the next twelve months.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
COMBINED FUNDS FROM OPERATIONS
Combined Funds from Operations of the Companies was $84,619,000 and $62,275,000
for the three months ended and $158,565,000 and $121,360,000 for the six months
ended June 30, 1999 and 1998 respectively.
Management considers Funds from Operations to be a key external measurement of
REIT performance. Funds from Operations represents net income or loss available
to common shareholders (computed in accordance with generally accepted
accounting principles), excluding real estate related depreciation, amortization
of goodwill and certain intangible assets, gains and losses from the sale of
assets and non-recurring income and expenses. For 1999 and 1998, non-recurring
income primarily consists of gains attributable to the prepayment of loans and
lease breakage fees. Non-recurring expenses include charges related to a
separation agreement, comprehensive restructuring costs, write-off of other
capitalized costs related to terminated projects, asset impairments and
provisions on other assets and receivables unrelated to primary businesses.
Funds from Operations 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. Funds from Operations does
not reflect working capital changes, cash expenditures for capital improvements
or principal payments on indebtedness.
The following reconciliation of net income and loss available to common
shareholders to Funds from Operations illustrates the difference between the two
measures of operating performance for the three and six months ended June 30,
1999 and 1998. Certain reconciling items include amounts reclassified from
income from operations or gain on disposal of discontinued operations and,
accordingly, do not necessarily agree to revenue and expense captions in the
Companies' financial statements.
(IN THOUSANDS) Three months ended June 30,
1999 1998
------------- -------------
Net income available to paired common shareholders $ 43,705 $ 47,790
Depreciation of real estate and intangible amortization 36,611 14,485
Gains on sales of assets (13)
Other expenses 4,316
------------- -------------
Funds from Operations $ 84,619 $ 62,275
------------- -------------
------------- -------------
Weighted average paired common shares outstanding:
Basic 141,129 100,193
Diluted 141,134 101,900
(IN THOUSANDS) Six months ended June 30,
1999 1998
------------- -------------
Net income available to paired common shareholders $ 59,511 $ 99,411
Depreciation of real estate and intangible amortization 74,884 26,408
Gains on sales of assets (14,607)
Other income (856) (26,000)
Other expenses 39,633 21,541
------------- -------------
Funds from Operations $ 158,565 $ 121,360
------------- -------------
------------- -------------
Weighted average paired common shares outstanding:
Basic 144,537 95,835
Diluted 144,548 97,162
REALTY--RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998
Revenue for the three months ended June 30, 1999 was $161,989,000 compared to
$88,062,000 for the three months ended June 30, 1998, an increase of
$73,927,000. Revenue growth was primarily attributable to the addition of rent
and royalty income of $81,292,000 from Operating, related to hotel facilities
acquired in the La Quinta Merger and the addition of revenues of $3,147,000 from
hotels operated by Realty. These increases were partially offset by a net
decrease to rental and interest income of
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
$10,447,000. The decrease resulted primarily from asset sales and mortgage
repayments over the last year net of the affect of additions to real estate
investments made during the same period.
For the three months ended June 30, 1999, total recurring expenses increased
by $70,927,000. Interest expense increased $35,548,000 due to increases in
debt outstanding resulting from additional real estate investments made over
the past year and the acquisitions of La Quinta and Cobblestone. Depreciation
and amortization increased by $26,065,000 which was primarily a result of
increased real estate investments and amortization of goodwill from the La
Quinta Merger completed on July 17, 1998. General and administrative expenses
increased by $950,000 primarily due to a higher level of operating costs
associated with the management and activity of the portfolio and as a result
of the La Quinta Merger. Rental and hotel property operating expenses
increased by $8,364,000 primarily due to property taxes incurred at hotel
facilities, expenses related to the operation of two hotels and management
and operation of medical office buildings that were purchased in 1998.
ASSET SALES
During the three months ended June 30, 1999, Realty realized gains on the sale
of healthcare real estate assets of $13,000. Sales of healthcare properties were
completed pursuant to the plan and included two assisted living facilities.
Proceeds of asset sales were used to repay debt prior to maturity and de-lever
the balance sheet.
OTHER EXPENSES
During the three months ended June 30, 1999, other non-recurring expenses of
$4,316,000 were incurred which related to the Plan. These expenses consisted of
approximately $1,000,000 of capitalized debt costs and $637,000 of breakage fees
associated with swap contracts on repaid debt, and approximately $2,679,000 in
professional and advisory fees that were incurred.
DISCONTINUED OPERATIONS
Pursuant to the Plan, Realty has classified golf and horseracing activities as
discontinued operations for financial reporting purposes. There was no income
from discontinued operations nor adjustments to the loss on disposal during the
three months ended June 30, 1999. Realty anticipates final adjustments on the
disposal of the golf and horseracing segments to be completed during 1999. For
the three months ended June 30, 1998, Realty has presented income from
discontinued operators of $4,038,000, which was related to the horseracing and
golf segments.
NET INCOME
The resulting net income available for common shareholders, after deducting
preferred share dividends, for the three months ended June 30, 1999, was
$41,932,000 compared to net income of $50,935,000 for the three months ended
June 30, 1998. The net income per common share (diluted) for the three months
ended June 30, 1999 was $.29 compared to net income per common share (diluted)
of $0.49 for the three months ended June 30, 1998. The per common share amount
decreased primarily due to the issuance of 43,280,000 additional common shares
to consummate the La Quinta Merger.
SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
Revenue for the six months ended June 30, 1999 was $315,665,000 compared to
$196,441,000 for the six months ended June 30, 1998, an increase of
$119,224,000. Revenue growth was primarily attributable to the addition of rent
and royalty income of $153,160,000 from Operating, related to hotel facilities
acquired in the La Quinta Merger and the addition of revenues of $6,357,000 from
hotels operated by Realty. These increases were partially offset by a net
decrease to rental and interest income of $15,084,000. The decrease resulted
primarily from asset sales and mortgage repayments over the last year net of the
affect of additions to real estate investments made during the same period.
Other non-recurring income for the six months ended June 30, 1999 was $856,000,
which arose from lease breakage fees received from the sale of healthcare-owned
properties.
For the six months ended June 30, 1999, total recurring expenses increased by
$147,085,000. Interest expense increased $76,678,000 due to increases in debt
outstanding resulting from additional real estate investments made over the past
year and the acquisitions of La Quinta and Cobblestone. Depreciation and
amortization increased by $51,377,000 which was primarily a result of increased
real estate investments and amortization of goodwill from the La Quinta Merger
completed on July 17, 1998. General and administrative expenses increased by
$2,081,000 primarily due to a higher level of operating costs associated with
the management and activity of the portfolio and as a result of the La Quinta
Merger. Rental and hotel property operating expenses
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
increased by $16,949,000 primarily due to property taxes incurred at hotel
facilities, expenses related to the operation of the two hotels and management
and operation of medical office buildings that were purchased in 1998.
ASSET SALES
During the six months ended June 30, 1999, Realty realized gains on the sale of
healthcare real estate assets of $12,284,000. Sales of healthcare properties
were completed pursuant to the Plan and included one rehabilitation facility,
one long-term care facility, and 17 assisted living facilities. Realty also sold
a hotel and land held for development on which there was no gain or loss
realized. Proceeds of asset sales were used to repay debt prior to maturity and
de-lever the balance sheet.
OTHER EXPENSES
During the six months ended June 30, 1999, other non-recurring expenses of
$8,705,000 were incurred which related to the Plan. These expenses consisted of
approximately $4,907,000 of capitalized debt costs and $1,119,000 of breakage
fees associated with swap contracts on repaid debt and approximately $2,679,000
in professional and advisory fees that were incurred.
DISCONTINUED OPERATIONS
Pursuant to the Plan, Realty has classified golf and horseracing activities as
discontinued operations for financial reporting purposes. Accordingly, Realty
has presented as discontinued operations approximately $16,094,000 of gains on
disposal of the golf and horseracing segments during the six months ended June
30, 1999. Realty has recorded a gain of $9,439,000 related to the sale of the
Cobblestone Golf Group, which was sold on March 31, 1999. The horseracing
segment was sold on December 10, 1998. During the six months ended June 30,
1999, a gain of $6,655,000 was recorded which related to an adjustment of the
selling price between Realty and Operating. Realty anticipates final adjustments
on the disposal of the golf and horseracing segments to be completed during
1999. For the six months ended June 30, 1998, Realty has presented income from
discontinued operations of $11,100,000, which was related to the horseracing and
golf segments.
NET INCOME
The resulting net income available for common shareholders, after deducting
preferred share dividends, for the six months ended June 30, 1999, was
$97,179,000 compared to net income of $102,637,000 for the six months ended June
30, 1998. The net income per common share (diluted) for the six months ended
June 30, 1999 was $.67 compared to net income per common share (diluted) of
$1.04 for the six months ended June 30, 1998. The per common share amount
decreased primarily due to the issuance of 43,280,000 additional common shares
to consummate the La Quinta Merger.
REALTY -LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund Realty's future operating
expenses, interest expense, recurring capital expenditures and distribution
payments will be cash flow provided by operating activities. Realty anticipates
that cash flow provided by operating activities will provide the necessary funds
on a short and long-term basis to meet operating cash requirements including all
distributions to shareholders.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
Realty provides funding for new investments, debt repayments and costs
associated with the restructuring through a combination of long-term and
short-term financing including, both debt and equity, as well as the
previously announced sale of assets. Realty may decide to sell additional
assets to meet its commitments and to provide it with additional liquidity.
Realty obtains long-term financing through the issuance of shares, long-term
unsecured notes, convertible debentures and the assumption of mortgage notes.
Realty obtains short- term financing through the use of bank lines of credit,
which are replaced with long-term financing as appropriate. From time to
time, Realty may utilize interest rate caps or swaps to attempt to hedge
interest rate volatility. It is Realty's objective to match mortgage and
lease terms with the terms of its borrowings. Realty attempts to maintain an
appropriate spread between its borrowing costs and the rate of return on its
investments. When development loans convert to sale/leaseback transactions or
permanent mortgage loans, the base rent or interest rate, as appropriate, is
fixed at the time of such conversion. There is, however, no assurance that
Realty will satisfactorily achieve, if at all, the objectives set forth in
this paragraph.
On July 17, 1998, Realty entered into a Credit Agreement which provided Realty
with up to $2,250,000,000 in credit facilities, replacing Realty's then existing
$365,000,000 revolving credit facilities. The Credit Agreement provided for
borrowings in four separate Tranches: Tranche A, a $1,000,000,000 revolving
loan, amounts of which if repaid may be reborrowed, which matures
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
July 17, 2001; Tranche B, a term loan in the amount of $500,000,000, amounts of
which if repaid may not be reborrowed, which matures July 17, 1999 with a
$250,000,000 mandatory principal payment on April 17, 1999; Tranche C, a term
loan in the amount of $250,000,000, amounts of which if repaid may not be
reborrowed, which matures July 17, 1999 with a six month extension option which
management exercised for a fee of 12.5 basis points; and Tranche D, a term loan
in the amount of $500,000,000, amounts of which if repaid may not be reborrowed,
which matures July 17, 2001.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT, the amendment of certain
financial covenants to accommodate asset sales, to exclude the impact of
non-recurring charges in certain covenant calculations, and to provide for
future operating flexibility. The amendment also provided for an increase to the
LIBOR pricing of the credit facility by approximately 125 basis points, and the
pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock
also extended on a pro rata basis to entitled bondholders. Realty also agreed to
a 25 basis point increase to the LIBOR pricing in the event that an equity
offering of at least $100,000,000 had not been completed by February 1, 1999. On
February 1, 1999 this increase went into effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that
was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provided for, among other things, upon the sale of Cobblestone Golf Group,
elimination of limitations on certain healthcare investments and a lowering of
the commitment on the revolving tranche to $850,000,000.
On March 10, 1999, the Companies entered into an agreement with MLI and
certain of its affiliates to use the proceeds from the sale of the
Cobblestone Golf Group in excess of $300,000,000 to repurchase all or a
portion of the remaining paired common shares outstanding under the FEIT. MLI
agreed not to sell any shares of the remaining paired common shares until
March 31, 1999, while the Companies completed the sale of Cobblestone Golf
Group. On March 31, 1999, the Companies completed the sale of Cobblestone
Golf Group and on April 1, 1999, the Companies settled the FEIT by paying MLI
$89,840,000 for the repurchase of 6,865,000 paired common shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on July
17, 1999.
As of June 30, 1999, approximately $1,000,000 in charges related to the Plan
remained unpaid. Payments made during the quarter included professional and
advisory fees and severance paid to former employees.
As of June 30, 1999, Realty's gross real estate investments totaled
approximately $5,242,677,000 consisting of 212 long-term care facilities, 140
retirement and assisted living facilities, 34 medical office buildings, one
acute care hospital campus, seven other healthcare facilities and 298 hotel
facilities in service with 2 more under construction. At June 30, 1999, Realty
was committed to provide additional financing of approximately $72,000,000
relating to three long-term care facilities, seven assisted living facilities
and two hotel facilities currently under construction as well as additions to
existing facilities in the portfolio.
Realty had shareholders' equity of $2,735,793,000 and debt constituted 50% of
Realty's total capitalization as of June 30, 1999.
On July 12, 1999, the Board of Directors of Realty declared a dividend of $0.46
per share of common stock payable on August 16, 1999 to shareholders of record
on July 30, 1999. Realty anticipates paying the same dividend in the fourth
quarter but no assurances can be given that Realty will continue to pay the
dividend in this amount.
Of the $850,000,000 revolving tranche commitment, approximately $287,000,000 was
available at July 23, 1999, at Realty's option of the base rate (10.0%) or LIBOR
plus 2.875% (8.06% at July 23, 1999).
The Companies have an effective shelf registration statement on file with the
SEC under which the Companies may issue $1,825,000,000 of securities including
shares, preferred stock, debt, series common stock, convertible debt and
warrants to purchase shares, preferred shares, debt, series common stock and
convertible debt.
Realty believes that various sources of capital, including proceeds from the
sale of assets, are adequate to finance operations as well as existing
commitments, including the acquisition and/or mortgage financing of certain
healthcare facilities, the completion of the La Quinta Inn & Suites currently
under development and repayment of the debt maturing over the next twelve
months.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
OPERATING--RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998
Operating has derived its revenue primarily from hotel operations since the
consummation of the La Quinta Merger on July 17, 1998. Hotel revenues for the
three months ended June 30, 1999 were $159,127,000. Approximately
$152,677,000 or 96% of hotel revenues were derived from room rentals. Hotel
operating revenues generally are measured as a function of the ADR and
occupancy percentage. The ADR for the three months ended June 30, 1999 was
$60.45 compared to ADR for the three months ended June 30,1998 of $61.20, a
decrease of $.75 or 1.2%. Occupancy percentage increased to 73% from 72.6%,
an increase of .4 percentage points. RevPAR, which is a product of the
occupancy percentage and ADR, decreased .6% in the three months ended June
30,1999 compared to the three months ended June 30,1998. The decrease in
RevPAR is primarily due to a greater increase in the supply of available
rooms than in demand in the southwest region. The relationship between supply
and demand varies by region, however, it has impacted La Quinta to a greater
extent than its competitors due to its concentration of hotels in the
southwest. The revenue impact of the oversupply of available rooms was
partially mitigated by revenue increases resulting from a higher proportion
of room rental income from the Inn & Suites hotels as compared to the Inns
during the comparable three-month periods. Inn & Suites hotels generally have
higher room rental income per night than the Inns.
Other sources of hotel revenues during the three months ended June 30, 1999
include: guest services revenue of approximately $3,787,000, which is derived
from charges to guests for long distance service, fax use and laundry service;
and approximately $2,065,000 related to meeting and banquet rentals, restaurant
rental and management services. Commission revenue of approximately $598,000 was
earned on phone, movie and vending services. Interest and other income was
$1,479,000 for the three months ended June 30, 1999 compared to $186,000 for the
same period in 1998. For the three months ended June 30, 1998, Operating derived
its revenue from horseracing and golf, which are now classified as discontinued
operations.
For the three months ended June 30,1999, total recurring expenses were
$158,380,000 compared to $1,129,000 for the same period in 1998. Expenses for
the three months ended June 30, 1999 were primarily attributable to the
addition of recurring lodging costs, which include hotel operating costs,
general and administrative expenses, interest, rent and royalties paid to
Realty. For the three months ended June 30, 1998, Operating expenses were
related to horseracing and golf, which are now classified as discontinued
operations. For the three months ended June 30, 1999, total hotel operating
costs were $70,434,000 and general and administrative expenses were
$4,388,000 including $4,167,000 of overhead and $221,000 of allocated
expenses of the paired share structure. Salaries, wages and related costs,
represent approximately 39.8% of total hotel operating costs and overhead.
Other major categories of lodging operating expense include utilities,
supplies, advertising and administrative costs. General and administrative
expenses related to Operating for the three months ended June 30, 1998 were
$649,000. Interest, royalty and rent expenses due to Realty of $81,292,000 as
well as $32,000 of interest due to third parties were incurred during the
three months ended June 30,1999 compared to $278,000 for the same period in
1998. Depreciation and amortization expense for the three months ended June
30, 1999 was $2,234,000 compared to $202,000 for the same period in 1998. The
increase was primarily related to depreciation of furniture and fixtures and
other intangible assets acquired in the La Quinta Merger.
At June 30, 1999, La Quinta operated 300 hotels (including 232 Inns and 68
Inn & Suites) with approximately 39,000 rooms, compared to 280 hotels
(including 233 Inns and 47 Inn & Suites) with approximately 36,000 rooms at
the merger date of July 17, 1998. La Quinta's unit growth program is based
primarily on the construction of new Inn & Suites hotels. La Quinta
anticipates opening both of its Inn & Suites under construction in the third
quarter of 1999.
DISCONTINUED OPERATIONS
Pursuant to the Plan, Operating has classified golf and horseracing
activities as discontinued operations for financial reporting purposes. There
was no income from discontinued operations nor adjustments to the loss on
disposal of discontinued operations during the three months ended June 30,
1999. Operating anticipates final adjustments on the disposal of the golf and
horseracing segments to be completed during 1999. For the three months ended
June 30, 1998, Operating has presented a loss from discontinued operations of
$2,202,000 which was related to the horseracing and golf segments.
NET LOSS
The resulting net income available for common shareholders for the three months
ended June 30, 1999, was $1,773,000 compared to a net loss of $3,145,000 for the
three months ended June 30, 1998. The net income per common share for the three
months
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
ended June 30, 1999 was $.01 compared to a net loss of $0.03 for the three
months ended June 30, 1998. The per common share amount increased primarily due
to the addition of net income related to the hotel operations.
SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
Operating has derived its revenue primarily from hotel operations since the
consummation of the La Quinta Merger on July 17, 1998. Hotel revenues for the
six months ended June 30, 1999 were $304,451,000. Approximately $291,728,000
or 96% of hotel revenues were derived from room rentals. Hotel operating
revenues generally are measured as a function of the ADR and occupancy
percentage. The ADR for the six months ended June 30, 1999 was $61.06
compared to ADR for the six months ended June 30, 1998 of $61.07, a decrease
of $.01 or .02%. Occupancy percentage increased to 70.1% from 69.6%, an
increase of .5 percentage points. RevPAR, which is a product of the occupancy
percentage and ADR, increased .7% in the six months ended June 30, 1999
compared to the six months ended June 30, 1998. The increase in RevPAR is
primarily due to a higher proportion of room rental income from the Inn &
Suites hotels as compared to the Inns during the comparable six-month
periods. Inn & Suites hotels generally have higher room rental income per
night than the Inns. These increases were partially offset by a greater
increase in the supply of available rooms than in demand in the southwest
region, particularly in the second quarter of 1999. The relationship between
supply and demand varies by region, however, it has impacted La Quinta to a
greater extent than its competitors due to its concentration of hotels in the
southwest.
Other sources of hotel revenues during the six months ended June 30, 1999
include: guest services revenue of approximately $7,252,000, which is derived
from charges to guests for long distance service, fax use and laundry service;
and approximately $4,237,000 related to meeting and banquet rentals, restaurant
rental and management services. Commission revenue of approximately $1,234,000
was earned on phone, movie and vending services. Interest and other income was
$1,651,000 for the six months ended June 30, 1999 compared to $253,000 for the
same period in 1998. For the six months ended June 30, 1998, Operating derived
its revenue from horseracing and golf, which are now classified as discontinued
operations.
For the six months ended June 30, 1999, total recurring expenses were
$302,420,000 compared to $2,131,000 for the same period in 1998. Expenses for
the six months ended June 30, 1999, were primarily attributable to the
addition of recurring lodging costs, which include hotel operating costs,
general and administrative expenses, interest, rent and royalties paid to
Realty. For the six months ended June 30, 1998, Operating expenses were
related to horseracing and golf, which are now classified as discontinued
operations. For the six months ended June 30, 1999, total hotel operating
expenses were $136,093,000, and general and administrative expenses were
$8,769,000 including $8,281,000 of overhead and $488,000 of allocated
expenses of the paired share structure. Salaries, wages and related costs,
represent approximately 40% of total hotel operating costs and overhead.
Other major categories of lodging operating expense include utilities,
supplies, advertising and administrative costs. General and administrative
expenses related to Operating for the six months ended June 30, 1998 were
$1,239,000. Interest, royalty and rent expenses due to Realty of $153,160,000
as well as $142,000 of interest due to third parties were incurred during the
six months ended June 30, 1999 compared to $489,000 for the same period in
1998. Depreciation and amortization expense for the six months ended June 30,
1999 was $4,256,000 compared to $403,000 for the same period in 1998. The
increase was primarily related to depreciation of furniture and fixtures and
other intangible assets acquired in the La Quinta Merger.
At June 30, 1999, La Quinta operated 300 hotels (including 232 Inns and 68
Inn & Suites) with approximately 39,000 rooms, compared to 280 hotels
(including 233 Inns and 47 Inn & Suites) with approximately 36,000 rooms at
the merger date of July 17, 1998.
La Quinta's unit growth program is based primarily on the construction of new
Inn & Suites hotels. La Quinta anticipates opening both of its Inn & Suites
under construction in the third quarter of 1999.
OTHER EXPENSES
During the first half of 1999, Operating recorded approximately $30,498,000 in
other expenses.
On May 10, 1999, the Companies entered into a separation agreement with Abraham
D. Gosman, former Director and Chairman of the Companies and Chief Executive
Officer and Treasurer of Operating. Under the terms of the separation agreement,
Mr. Gosman received severance payments totaling $25,000,000 in cash and the
continuation of certain life insurance benefits. The Companies established a
Special Committee to evaluate the applicability of Mr. Gosman's employment
contract and whether such severance or other payments were appropriate. Based on
the results of the evaluation and recommendation of the Special Committee, the
Boards of Directors concluded that the separation agreement was in the long-term
best interest of the shareholders of the Companies and approved the separation
agreement.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
In conjunction with the implementation of the Plan, which included a change in
the focus of the lodging division to internal growth, La Quinta management
performed a review of the front desk system under development for its lodging
facilities, and made a decision to abandon the project. The decision was based
primarily on management's intent to integrate the front desk system with new
revenue management software, availability of more suitable and flexible
externally developed software and a shift in information systems philosophy
toward implementation of externally developed software and outsourcing of
related support services. A charge of approximately $3,998,000 to write-off
certain internal and external software development costs related to the project
was recorded in the first quarter of 1999. Operating also incurred approximately
$1,500,000 of non-recurring costs associated with advisory fees related to the
separation agreement with Mr. Gosman.
DISCONTINUED OPERATIONS
Pursuant to the Plan, Operating has classified golf and horseracing activities
as discontinued operations for financial reporting purposes. Accordingly,
Operating has presented as discontinued operations approximately $11,225,000 of
losses on disposal from the golf and horseracing segments during the six months
ended June 30, 1999. Operating has recorded a loss of $6,445,000 related to the
sale of the Cobblestone Golf Group, which was sold on March 31, 1999. The loss
includes an estimate of working capital balances at the sale date which will be
adjusted when a final accounting is complete. The horseracing segment was sold
on December 10, 1998. During the six months ended June 30, 1999, a loss of
$6,655,000 was recorded which related to an adjustment of the selling price
between Realty and Operating. This loss was partially offset by an estimated
gain of $1,875,000 arising from an adjustment relating to working capital
balances at the sale date which are being finalized. Operating anticipates final
adjustments on the disposal of the golf and horseracing segments to be completed
during 1999. For the six months ended June 30, 1998, Realty has presented a loss
from discontinued operations of $1,348,000 which was related to the horseracing
and golf segments.
NET LOSS
The resulting net loss available for common shareholders for the six months
ended June 30, 1999, was $37,668,000 compared to $3,226,000 for the six months
ended June 30, 1998. The net loss per common share for the six months ended June
30, 1999 was $.26 compared to $0.03 for the six months ended June 30, 1998. The
per common share amount decreased primarily due to the loss on disposal of
assets of discontinued operations, other expenses and the issuance of 43,280,000
additional common shares to consummate the La Quinta Merger.
OPERATING - LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund Operating's future operating
expenses and recurring capital expenditures will be cash flow provided by
operating activities. Operating anticipates that cash flow provided by operating
activities will provide the necessary funds on a short and long-term basis to
meet operating cash requirements.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
Operating provides funding for costs associated with the restructuring through a
combination of long-term and short-term financing including, both debt and
equity, as well as the sale of assets. Operating obtains long-term financing
through the issuance of common shares and unsecured notes. Operating obtains
short-term financing through borrowings from Realty. There is, however, no
assurance that the Companies will satisfactorily achieve, if at all, the
objectives set forth in this paragraph.
On July 17, 1998, Realty entered into a Credit Agreement which provided Realty
with up to $2,250,000,000 in credit facilities, replacing Realty's then existing
$365,000,000 revolving credit facilities. The Credit Agreement provided for
borrowings in four separate Tranches: Tranche A, a $1,000,000,000 revolving
loan, amounts of which if repaid may be reborrowed, which matures July 17, 2001;
Tranche B, a term loan in the amount of $500,000,000, amounts of which if repaid
may not be reborrowed, which matures July 17, 1999 with a $250,000,000 mandatory
principal payment on April 17, 1999; Tranche C, a term loan in the amount of
$250,000,000, amounts of which if repaid may not be reborrowed, which matures
July 17, 1999 with a six month extension option which management exercised for a
fee of 12.5 basis points; and Tranche D, a term loan in the amount of
$500,000,000, amounts of which if repaid may not be reborrowed, which matures
July 17, 2001.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT, the amendment of certain
financial covenants to accommodate asset sales, to exclude the impact of
non-recurring charges in certain covenant calculations, and to provide for
future operating flexibility. The amendment also provided for an increase to the
LIBOR
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
pricing of the credit facility by approximately 125 basis points, and the pledge
of stock of the Companies' subsidiaries. This pledge of subsidiary stock also
extended on a pro rata basis to entitled bondholders. Realty also agreed to a 25
basis point increase to the LIBOR pricing in the event that an equity offering
of at least $100,000,000 had not been completed by February 1, 1999. On February
1, 1999 this increase went into effect.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provided for, among other things, upon the sale of Cobblestone Golf Group,
elimination of limitations on certain healthcare investments and a lowering of
the commitment on the revolving tranche to $850,000,000.
On March 10, 1999, the Companies entered into an agreement with MLI and
certain of its affiliates to use the proceeds from the sale of the
Cobblestone Golf Group in excess of $300,000,000 to repurchase all or a
portion of the remaining paired common shares outstanding under the FEIT. MLI
agreed not to sell any shares of the remaining paired common shares until
March 31, 1999, while the Companies completed the sale of Cobblestone Golf
Group. On March 31, 1999, the Companies completed the sale of Cobblestone
Golf Group and on April 1, 1999, the Companies settled the FEIT by paying MLI
$89,840,000 for the repurchase of 6,865,000 paired common shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on July
17, 1999.
As of June 30, 1999, approximately $806,000 in charges related to the Plan
remained unpaid. Payments made during the quarter included professional and
advisory fees and severance paid to former employees.
Operating had shareholders' equity of $36,116,000 as of June 30, 1999.
The Companies have an effective shelf registration statement on file with the
SEC under which the Companies may issue $1,825,000,000 of securities including
shares, preferred stock, debt, series common stock, convertible debt and
warrants to purchase shares, preferred shares, debt, series common stock and
convertible debt.
Operating believes that various sources of capital available over the next
twelve months are adequate to finance operations as well as pending
acquisitions. Over the next twelve months, as Operating identifies appropriate
operating or investment opportunities, Operating may raise additional capital
through the sale of shares, series common stock or preferred stock, or through
the issuance of long-term debt.
YEAR 2000
The statements in the following section include "Year 2000 readiness disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act of
1998. This "Year 2000 problem" is due to the fact that many existing computer
programs and embedded chip technology systems were developed using only the last
two digits to indicate a year. Thus, such systems may not have the capability of
recognizing a year that begins with "20" as opposed to "19." As a consequence,
these systems could fail altogether, or produce erroneous results.
THE COMPANIES' STATE OF READINESS. The Companies have developed a five-phase
plan to address their Year 2000 issues (their "Year 2000 Plan"). The five phases
are: (i) Awareness, (ii) Assessment, (iii) Remediation, (iv) Testing and (v)
Implementation.
AWARENESS. The Companies have implemented a program to insure that the relevant
employees are aware of the Year 2000 issue and have collected information from
such employees regarding systems that might be affected. Management of each
company has assembled Year 2000 Steering Committees to determine and assess the
risks of the Year 2000 issue, plan and implement necessary upgrades or changes
to make the Companies Year 2000 compliant or institute mitigating actions to
minimize those risks and oversee the Companies' progress with respect to the
implementation of their Year 2000 Plan.
ASSESSMENT. The Companies have substantially completed an assessment of their
internally and externally developed computer information systems. Operating has
obtained written verification from significant vendors to the effect that
externally developed computer information systems acquired from such vendors
correctly distinguish dates before the Year 2000. In addition, the Companies
have engaged outside consultants to review the plan and assessment. Realty has
verified to the best of its knowledge that all of its internal systems and
material vendors are Year 2000 compliant and is in the process of obtaining
written verification from its healthcare operators.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
The Companies have substantially completed their evaluation and assessment of
their other electronic systems that include embedded technology, such as
telecommunications, security, HVAC, elevator, fire and safety systems. The
Companies are aware that such systems contain embedded chips that are often
difficult to identify and test and may require complete replacement because they
cannot be repaired. Failure of the Companies to identify or remediate any
embedded chips (either on an individual or aggregate basis) on which significant
business operations depend, such as phone systems, could have a material adverse
impact on the Companies' business, financial condition and results of
operations. To the extent such issues impact property level systems the
Companies may be required to fund capital expenditures for upgraded equipment
and software if necessary. In addition to the Companies' systems and those of
its vendors and suppliers, there exist others that could have a material impact
on the Companies' businesses if not Year 2000 compliant. Such systems could
affect airline operations and other segments of the lodging and travel
industries. These systems are outside of the Companies' control and their
compliance is not verifiable by the Companies.
The Companies' primary financial service providers are its primary bank, credit
card and payroll processors, many of which have provided written verification to
the Companies that they will be Year 2000 compliant. For the foregoing reasons,
the Companies do not believe that there is a significant risk related to the
failure of vendors or third-party service providers to prepare for the Year
2000; however, the costs and timing of third-party Year 2000 compliance is not
within the Companies' control and no assurances can be given with respect to the
cost or timing of such efforts or the potential effects of any failure to
comply.
REMEDIATION. Operating's primary uses of software systems are the hotel
reservation and front desk system, accounting, payroll and human resources
software. Upgrades to the hotel reservation system to address some Year 2000
compliance issues were installed and implemented during the fourth quarter of
1997 through the second quarter of 1998. Testing of various airline
interfaces with the hotel reservation system was completed by December 1998.
Operating is in the process of implementing a new hotel front desk system for
which it has obtained assurance that the system is Year 2000 compliant. Based
on a current assessment of the progress made to date, Operating anticipates
completion of implementation of this system at all of its hotels by the end
of 1999. If some unforeseen reason prevents full implementation of this
system at all hotels by the end of 1999, Operating has assessed that the most
reasonably likely worst case scenario is that a small number of properties
may not be converted to the new front desk system by the Year 2000. Operating
has written and tested a manual hotel operating contingency plan to be used
in the event an unforeseen reason prevents a full implementation of the new
front desk system by the year 2000. The use of this contingency plan at a
small number of hotels is not anticipated to create material disruption to
the Companies. Operating has engaged outside consultants to assist in this
process with respect to certain Year 2000 compliance efforts. Operating has
implemented Year 2000 compliant upgrades to the existing accounting, payroll
and human resource systems.
TESTING. To attempt to confirm that their computer systems are Year 2000
compliant, the Companies expect to perform limited testing of their computer
information systems and their other computer systems that do not relate to
information technology but include embedded technology; however, unless Year
2000 issues arise in the course of their limited testing, the Companies will
rely on the written verification received from each vendor of their computer
systems that the relevant system is Year 2000 compliant. Nevertheless, there can
be no assurance that the computer systems on which the Companies' business
relies will correctly distinguish dates before the Year 2000 from dates in and
after the Year 2000. Any such failures could have a material adverse effect on
the Companies' business, financial condition and results of operations. The
Companies expect that their testing will be complete by the end of the third
quarter of 1999.
IMPLEMENTATION. The Companies have begun implementation of Year 2000 compliant
software and software upgrades and expect to have them completed by December,
1999.
COSTS TO ADDRESS THE COMPANIES' YEAR 2000 ISSUES. Based on current
information from their review to date, the Companies budgeted $1,650,000 for
the cost of repairing, updating and replacing their standard computer
information systems. The Companies anticipate that the primary cost of Year
2000 compliance will be the cost of consultants and payroll and related
expenses. The Companies currently expect that the installation of above
mentioned upgrades and software will cost approximately $1,560,000 and as of
July 21, 1999, the Companies have spent approximately $600,000 in connection
therewith. In addition, the Companies expect that they will spend
approximately $300,000 to address other Year 2000 related issues, including
upgrades of certain systems with embedded technology. Because the Companies'
Year 2000 assessment is ongoing and additional funds may be required as a
result of future findings, the Companies are not currently able to estimate
the final aggregate cost of addressing the Year 2000 issue. While these
efforts will involve additional costs, the Companies believe, based on
available information, that these costs will not have a material adverse
effect on their business, financial condition or results of operations. The
Companies expect to fund the costs of addressing the Year 2000 issue from
cash flows resulting from operations. While the Companies believe that they
will be Year 2000 compliant by December 31, 1999, if these efforts are not
completed on time, or if the costs associated with updating or replacing the
Companies' computer systems exceed the Companies' estimates, the Year 2000
issue could have a material adverse effect on the Companies' business,
financial condition and results of operations.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
RISKS PRESENTED BY YEAR 2000 ISSUES. The Companies are still in the process of
evaluating potential disruptions or complications that might result from Year
2000 related problems; however, at this time the Companies have not identified
any specific business functions that will suffer material disruption as a result
of Year 2000 related events. It is possible, however, that the Companies may
identify business functions in the future that are specifically at risk of Year
2000 disruption. The absence of any such determination at this point represents
only the Companies' current status of evaluating potential Year 2000 related
problems and facts presently known to the Companies, and should not be construed
to mean that there is no risk of Year 2000 related disruption.
Moreover, due to the unique and pervasive nature of the Year 2000 issue, it is
impracticable to anticipate each of the wide variety of Year 2000 events,
particularly outside of the Companies, that might arise in a worst case scenario
which might have a material adverse impact on the Companies' business, financial
condition and results of operations.
THE COMPANIES' CONTINGENCY PLANS. The Companies have not identified any specific
business function that will be materially at risk of significant Year 2000
related disruptions. However, the Companies are in the process of developing
detailed contingency plans specific to Year 2000 problems. Development of these
contingency plans is currently scheduled to occur as appropriate. As a part of
their contingency planning, the Companies are analyzing the most reasonably
likely worst-case scenario that could result from Year 2000-related failures.
Failures by third parties to achieve Year 2000 compliance might result in
short-term disruptions in travel patterns, and potential temporary disruptions
in the supply of utility, telecommunications and financial services, most likely
regional or local in scope. These events could cause temporary disruptions in
the operations of hotel properties, and/or lead travelers to postpone travel, or
to cancel travel plans, thereby affecting lodging patterns and occupancy.
The preceding "Year 2000 readiness disclosure" contains various forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These forward-looking statements represent the Companies' beliefs or
expectations regarding future events. All forward-looking statements involve a
number of risks and uncertainties that could cause the actual results to differ
materially from the projected results. Factors that may cause these differences
include, but are not limited to, the availability of qualified personnel and
other information technology resources; the ability to identify and remediate
all date sensitive lines of computer code or to replace embedded computer chips
in affected systems or equipment; and the actions of governmental agencies or
other third parties with respect to Year 2000 problems.
SEASONALITY
The lodging industry is seasonal in nature. Generally, hotel revenues are
greater in the second and third quarters than in the first and fourth quarters.
This seasonality can be expected to cause quarterly fluctuations in revenue,
profit margins and net earnings. In addition, opening of new construction hotels
and/or timing of hotel acquisitions may cause variation of revenue from quarter
to quarter.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS
At a Special Meeting of Shareholders of Meditrust Corporation and Meditrust
Operating Company held on May 21, 1999, the recorded vote for each of the
following matters submitted to the shareholders of the Companies was as
follows:
1. To approve and adopt the Amended and Restated Certificate of
Incorporation of Meditrust (the "Amended Meditrust Certificate"), which
includes (i) an increase in the amount of authorized common stock,
(ii) requirements, which are waivable or terminable by Meditrust's Board of
Directors, to "pair" shares of common stock of Meditrust with shares of
common stock of Operating Company, and (iii) terms and provisions which are
presently in Meditrust's Restated Certificate of Incorporation.
For Against Abstain
100,908,352 2,210,763 744,786
2. To approve and adopt the Amended and Restated Certificate of
Incorporation of Operating Company (the "Amended Operating Company
Certificate"), which includes (i) an increase in the amount of authorized
common stock, (ii) requirements, which are waivable or terminable by
Operating Company's Board of Directors, to "pair" shares of common stock of
Operating Company with shares of common stock of Meditrust, and (iii) terms
and provisions which are presently in Operating Company's Restated
Certificate of Incorporation.
For Against Abstain
99,645,770 1,829,082 689,317
3. To terminate the Pairing Agreement, dated as of December 20, 1979, as
amended, by and between Meditrust and Operating Company, upon the filing of
each of the Amended Meditrust Certificate and the Amended Operating Company
Certificate.
For Against Abstain
Meditrust Corporation 101,560,284 1,547,648 755,969
Meditrust Operating Company 99,892,274 1,553,130 718,765
ITEM 5. OTHER INFORMATION
On May 10, 1999, The Meditrust Companies entered into a separation agreement
with Abraham D. Gosman, former Director and Chairman of the Companies and Chief
Executive Officer and Treasurer of Operating Company. Under the terms of the
agreement, Mr. Gosman will receive a payment of $25 million in cash and the
continuation of certain life insurance benefits. The full text of the separation
agreement can be found in the Joint Current Report on Form 8-K of the Companies,
event date May 10, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
NO. DESCRIPTION
- --- -----------
3.1 Restated Certificate of Incorporation of Meditrust Corporation
(incorporated by reference to Exhibit 3.2 to Joint Registration
Statement on Form S-4 of Meditrust Corporation and Meditrust
Operating Company (File Nos. 333-47737 and 333-47737-01));
3.2 Amended and Restated By-laws of Meditrust Corporation (incorporated
by reference to Exhibit 3.5 to Joint Registration Statement on Form
S-4 of Meditrust Corporation and Meditrust Operating Company (File
Nos. 333-47737 and 333-47737-01));
3.3 Restated Certificate of Incorporation of Meditrust Operating Company
filed with the Secretary of State of Delaware on March 2, 1998
(incorporated by reference to Exhibit 3.4 to Joint Registration
Statement on Form S-4 of Meditrust Corporation and Meditrust
Operating Company (File Nos. 33-47737 and 333-47737-01));
3.4 Amended and Restated By-laws of Meditrust Operating Company
(incorporated by reference to Exhibit 3.6 to Joint Registration
Statement on Form S-4 of Meditrust Corporation and Meditrust
Operating company (File Nos. 333-47737 and 333-47737-01));
3.5 Certificate of Designation for the 9% Series A Cumulative Redeemable
Preferred Stock of Meditrust Corporation filed with the Secretary of
State of Delaware on June 12, 1998 (incorporated by reference to
Joint Current Report on Form 8-K of the Companies, event date June
10, 1998);
3.6 Certificate of Amendment of Restated Certificate of Incorporation of
Meditrust Corporation filed with the Secretary of State of Delaware
on July 17, 1998 (incorporated by reference to exhibit 3.8 to the
Joint Quarterly Report on Form 10-Q for the quarter ended June 30,
1998);
3.7 Certificate of Amendment of Restated Certificate of Incorporation of
Meditrust Operating Company filed with the Secretary of State of
Delaware on July 17, 1998 (incorporated by reference to exhibit 3.9
to the Joint Quarterly Report on Form 10-Q for the quarter ended June
30, 1998);
4.1 Certificate of Designation for the 9% Series A Cumulative Redeemable
Preferred Stock of Meditrust Corporation filed with the Secretary of
State of Delaware on June 12, 1998 (incorporated by reference to
Joint Current Report on Form 8-K of the Companies, event date June
10,1998);
10.1 Employment Agreement dated as of January 1, 1999 by and between
Meditrust Corporation and David F. Benson (incorporated by
reference to exhibit 10.1 to the Joint Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999);
10.2 Employment Agreement dated as of January 1, 1999 by and between
Meditrust Corporation and Michael S. Benjamin (incorporated by
reference to exhibit 10.2 to the Joint Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999);
10.3 Employment Agreement dated as of January 1, 1999 by and between
Meditrust Corporation and Michael F. Bushee (incorporated by
reference to exhibit 10.3 to the Joint Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999);
10.4 Employment Agreement dated as of January 1, 1999 by and between
Meditrust Corporation and Laurie T. Gerber (incorporated by
reference to exhibit 10.4 to the Joint Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999);
10.5 Amendment Agreement to Purchase Agreement dated as of February 26,
1999 among Meditrust Corporation, Meditrust Operating Company,
Merrill Lynch International and Merrill Lynch, Pierce, Fenner & Smith
(incorporated by reference to exhibit 10.5 to the Joint Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999);
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED)
Exhibit
NO. DESCRIPTION
- --- -----------
10.6 Stock Purchase Agreement dated as of February 10, 1999 between The
Meditrust Companies and Golf Acquisitions L.L.C (incorporated by
reference to Exhibit 10.1 to the Joint Current Report on Form 8-K of
the Companies, event date March 31, 1999);
10.7 Separation Agreement dated as of May 10, 1999 by and among Meditrust
Corporation, Meditrust Operating Company, Abraham D. Gosman and other
parties thereto (incorporated by reference to the Joint Current
Report on Form 8-K of The Companies, event date May 10, 1999);
27 Financial Data Schedule;
99.1 Second Amendment to Credit Agreement dated as of March 10, 1999 by
and among Meditrust Corporation, Morgan Guaranty Trust Company of New
York, Bankers Trust Company and the other Banks set forth therein
(incorporated by reference to exhibit 99.1 to the Joint Quarterly
Report on Form 10-Q for the quarter ended March 31, 1999).
(b) Reports on Form 8-K. During the quarter ended June 30, 1999, the
Companies filed the following Current Reports on Form 8-K:
1. Joint Current Report on Form 8-K, event date March 31, 1999, which
contains a Stock Purchase Agreement dated as of February 10, 1999,
between the Meditrust Companies and Golf Acquisitions L.L.C and a press
release announcing the completion of the sale of Cobblestone to Golf
Acquisitions L.L.C.
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
MEDITRUST CORPORATION
July 29, 1999 /s/ Laurie T. Gerber
--------------------
Laurie T. Gerber
Chief Financial Officer
MEDITRUST OPERATING COMPANY
July 29, 1999 /s/ William C. Baker
--------------------
William C. Baker
Interim President and
Interim Treasurer