================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
----------------
<TABLE>
<S> <C>
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 02194-9127 Needham Heights, Massachusetts 02194-9127
(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)
</TABLE>
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the issuers' classes of common
stock, as of the close of business on October 31, 1998 were:
Meditrust Corporation 150,713,428
Meditrust Operating Company 149,408,051
================================================================================
<PAGE>
THE MEDITRUST COMPANIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page(s)
--------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Information 1
The Meditrust Companies
Combined Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997 1
Combined Consolidated Statements of Operations for the three months
ended September 30, 1998 (unaudited) and 1997 (unaudited) 2
Combined Consolidated Statements of Operations for the nine months
ended September 30, 1998 (unaudited) and 1997 (unaudited) 3
Combined Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 (unaudited) and 1997 (unaudited) 4
Meditrust Corporation
Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 6
Consolidated Statements of Operations for the three months ended
September 30, 1998 (unaudited) and 1997 (unaudited) 7
Consolidated Statements of Operations for the nine months ended
September 30, 1998 (unaudited) and 1997 (unaudited) 8
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 (unaudited) and 1997 (unaudited) 9
Meditrust Operating Company
Consolidated Balance Sheets as of September 30, 1998 (unaudited)
and December 31, 1997 11
Consolidated Statement of Operations for the three months ended
September 30, 1998 (unaudited) 12
Consolidated Statement of Operations for the nine months ended
September 30, 1998 (unaudited) 13
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1998 (unaudited) 14
Notes to Combined Consolidated Financial Statements (unaudited) 15
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 35
Part II. Other Information
Item 1. Legal Proceedings 53
Item 2. Changes in Securities 53
Item 4. Submission of Matters to a Vote of Security Holders 53
Item 5. Other Information 53
Item 6. Exhibits and Reports on Form 8-K 55
Signatures 57
</TABLE>
<PAGE>
ITEM I. FINANCIAL INFORMATION
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- -------------
(In thousands) (Unaudited)
<S> <C> <C>
Assets
Real estate investments, net (Note 3) ............................ $5,412,569 $2,935,772
Cash and cash equivalents ........................................ 57,255 43,732
Fees, interest and other receivables ............................. 75,757 23,650
Goodwill, net .................................................... 472,983 194,893
Net assets of discontinued operations (Note 9) ................... 550,249 --
Other assets, net (Note 5) ....................................... 234,795 82,236
---------- ----------
Total assets .................................................. $6,803,608 $3,280,283
========== ==========
Liabilities and Shareholders' Equity
Indebtedness (Note 4):
Notes payable, net .............................................. $1,156,034 $ 900,594
Convertible debentures, net ..................................... 227,626 234,000
Bank notes payable, net ......................................... 1,839,006 179,527
Bonds and mortgages payable, net ................................ 162,889 63,317
---------- ----------
Total indebtedness ............................................. 3,385,555 1,377,438
Accounts payable, accrued expenses and other liabilities ......... 150,824 77,106
---------- ----------
Total liabilities ............................................. 3,536,379 1,454,544
---------- ----------
Commitments and contingencies (Notes 3, 10, and 13) .............. -- --
Shareholders' equity (Notes 4, 5, 6 and 11):
Meditrust Corporation Preferred Stock, $.10 par value;
6,000 shares authorized; 700 and no shares issued and
outstanding at September 30, 1998 and December 31,
1997, respectively ............................................ 70 --
Paired Common Stock, $.20 combined par value; 270,000 shares
authorized; 149,357 and 88,128 paired shares issued and
outstanding at September 30, 1998 and December 31, 1997,
respectively .................................................. 29,871 17,626
Additional paid-in-capital ...................................... 3,880,894 2,001,086
Unearned compensation ........................................... (8,592) --
Distributions in excess of net income ........................... (635,014) (192,973)
---------- ----------
Total shareholders' equity ..................................... 3,267,229 1,825,739
---------- ----------
Total liabilities and shareholders' equity .................... $6,803,608 $3,280,283
========== ==========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
1
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenue:
Rental .................................................................. $ 50,659 $ 34,826
Interest ................................................................ 41,033 39,918
Hotel ................................................................... 124,510 --
---------- --------
216,202 74,744
---------- --------
Expenses:
Interest ................................................................ 57,723 23,453
Depreciation and amortization ........................................... 30,669 6,889
Amortization of goodwill ................................................ 4,516 389
General and administrative .............................................. 6,859 1,961
Hotel operations ........................................................ 58,298 --
Rental property operations .............................................. 7,119 --
Loss on securities held for sale ........................................ 3,620 --
Income from unconsolidated joint venture and minority interests ......... (26) --
Other (Note 7) .......................................................... 66,941 --
---------- --------
235,719 32,692
---------- --------
Income (loss) from continuing operations before benefit for income
taxes ................................................................... (19,517) 42,052
Income tax benefit ....................................................... (1,064) --
---------- --------
Income (loss) from continuing operations ................................. (18,453) 42,052
Discontinued operations (Note 9):
Income from discontinued operations ..................................... 856 --
Provision for loss on disposition of discontinued operations ............ (177,194) --
---------- --------
Net income (loss) ........................................................ (194,791) 42,052
Preferred stock dividends ................................................ (3,893) --
---------- --------
Net income (loss) available to Paired
Common shareholders .................................................... $ (198,684) $ 42,052
========== ========
Basic earnings per Paired Common Share (Note 11):
Income (loss) from continuing operations ................................ $ (0.16) $ 0.57
Discontinued operations ................................................. (1.26) --
---------- --------
Net income (loss) ....................................................... $ (1.42) $ 0.57
========== ========
Diluted earnings per Paired Common Share (Note 11):
Income (loss) from continuing operations ................................ $ (0.16) $ 0.56
Discontinued operations ................................................. (1.26) --
---------- --------
Net income (loss) ....................................................... $ (1.42) $ 0.56
========== ========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
2
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
for the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenue:
Rental .................................................................. $ 143,718 $ 100,917
Interest ................................................................ 118,179 112,806
Hotel ................................................................... 124,510 --
Other (Note 3) .......................................................... 26,000 --
---------- ---------
412,407 213,723
---------- ---------
Expenses:
Interest ................................................................ 107,835 61,831
Depreciation and amortization ........................................... 51,327 19,465
Amortization of goodwill ................................................ 7,670 1,168
General and administrative .............................................. 15,166 6,207
Hotel operations ........................................................ 58,298 --
Rental property operations .............................................. 9,841 --
Income from unconsolidated joint venture ................................ (474) --
Loss on securities held for sale ........................................ 3,620 --
Other (Note 7) .......................................................... 88,482 --
---------- ---------
341,765 88,671
---------- ---------
Income from continuing operations before benefit for income taxes ........ 70,642 125,052
Income tax benefit ....................................................... (1,064) --
---------- ---------
Income from continuing operations ........................................ 71,706 125,052
Discontinued operations (Note 9):
Income from discontinued operations ..................................... 10,721 --
Provision for loss on disposition of discontinued operations ............ (177,194) --
---------- ---------
Net income (loss) ........................................................ (94,767) 125,052
Preferred stock dividends ................................................ (4,506) --
---------- ---------
Net income (loss) available to Paired
Common shareholders .................................................... $ (99,273) $ 125,052
========== =========
Basic earnings per Paired Common Share (Note 11):
Income from continuing operations ....................................... $ 0.61 $ 1.69
Discontinued operations ................................................. (1.51) --
---------- ---------
Net income (loss) ....................................................... $ (0.90) $ 1.69
========== =========
Diluted earnings per Paired Common Share (Note 11):
Income from continuing operations ....................................... $ 0.58 $ 1.68
Discontinued operations ................................................. (1.44) --
---------- ---------
Net income (loss) ....................................................... $ (0.86) $ 1.68
========== =========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
3
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ..................................................... $ (94,767) $ 125,052
Adjustments to reconcile net income (loss) to net cash provided by
continuing operations ................................................
Depreciation of real estate ........................................... 55,593 19,124
Goodwill amortization ................................................. 10,231 1,168
Shares issued for compensation ........................................ 398 1,375
Equity in income of joint venture, net of dividends received .......... 976 --
Other depreciation, amortization and other items, net ................. 15,318 721
Other non cash expenses ............................................... 256,203 --
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
AVAILABLE FOR DISTRIBUTION ............................................ 243,952 147,440
Net change in other assets and liabilities of discontinued operations.. (4,314) --
Net change in other assets and liabilities ............................ (180,723) (19,350)
---------- ----------
Net cash provided by operating activities ............................ 58,915 128,090
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of paired common and Realty
preferred stock ...................................................... 456,713 --
Proceeds from borrowings on bank notes payable ........................ 2,420,000 858,000
Repayment of bank notes payable ....................................... (730,000) (447,000)
Repayment of notes payable ............................................ (220,000) --
Equity offering and debt issuance costs ............................... (47,337) (5,073)
Principal payments on bonds and mortgages payable ..................... (10,016) (774)
Distributions to shareholders ......................................... (347,278) (131,586)
Capital distribution to partners ...................................... (121) --
Proceeds from exercise of stock options ............................... 4,874 5,355
---------- ----------
Net cash provided by financing activities ............................ 1,526,835 278,922
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate and development funding .................... (538,597) (182,808)
Investment in real estate mortgages and development funding ........... (176,699) (211,272)
Prepayment proceeds and principal payments received on real
estate mortgages ..................................................... 280,199 9,013
Proceeds from sale of real estate ..................................... 7,671 --
Acquisition of Cobblestone ............................................ (178,523) --
Acquisition of La Quinta .............................................. (956,054) --
Cash acquired in Cobblestone merger ................................... 723 --
Cash acquired in La Quinta merger ..................................... 18,004 --
Working capital and note receivable advances, net of repayments
and collections ...................................................... 1,271 (227)
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
4
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES, Continued
Investment in equity securities ............................... $ (30,222) $ (39,459)
------------ ----------
Net cash used in investing activities ........................ (1,572,227) (424,753)
------------ ----------
Net increase (decrease) in cash and cash equivalents ......... 13,523 (17,741)
CASH AND CASH EQUIVALENTS AT:
Beginning of period ........................................... 43,732 42,726
------------ ----------
End of period ................................................. $ 57,255 $ 24,985
============ ==========
Supplemental disclosure of cash flow information (Note 2)
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
5
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- -------------
(In thousands) (Unaudited)
<S> <C> <C>
Assets
Real estate investments, net (Note 3) ............................. $5,412,569 $2,935,772
Cash and cash equivalents ......................................... 38,974 24,059
Fees, interest and other receivables .............................. 59,248 21,070
Goodwill, net ..................................................... 441,162 162,408
Due from Meditrust Operating Company .............................. 13,657 18,490
Net assets of discontinued operations (Note 9) .................... 528,375 --
Other assets, net (Note 5) ........................................ 201,549 54,129
---------- ----------
Total assets ................................................... $6,695,534 $3,215,928
========== ==========
Liabilities and Shareholders' Equity
Indebtedness (Note 4):
Notes payable, net ............................................... $1,156,034 $ 900,594
Convertible debentures, net ...................................... 227,626 234,000
Bank notes payable, net .......................................... 1,839,006 179,527
Bonds and mortgages payable, net ................................. 162,889 63,317
---------- ----------
Total indebtedness .............................................. 3,385,555 1,377,438
Accounts payable, accrued expenses and other liabilities .......... 93,588 46,250
---------- ----------
Total liabilities .............................................. 3,479,143 1,423,688
---------- ----------
Commitments and contingencies (Notes 3, 10, and 13) ............... -- --
Shareholders' equity (Notes 4, 5, 6 and 11):
Preferred Stock, $.10 par value; 6,000 shares authorized; 700 and
no shares issued and outstanding at September 30, 1998 and
December 31, 1997, respectively ................................ 70 --
Common Stock, $.10 par value; 270,000 shares authorized;
150,663 and 89,433 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively ......... 15,066 8,943
Additional paid-in-capital ........................................ 3,842,480 1,988,798
Unearned compensation ............................................. (6,940) --
Distributions in excess of net income ............................. (619,502) (192,373)
---------- ----------
3,231,174 1,805,368
Due from Meditrust Operating Company .............................. (1,655) --
Note receivable--Meditrust Operating Company ...................... (13,128) (13,128)
---------- ----------
Total shareholders' equity ..................................... 3,216,391 1,792,240
---------- ----------
Total liabilities and shareholders' equity .................... $6,695,534 $3,215,928
========== ==========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
6
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenue:
Rental ................................................................ $ 50,659 $ 34,826
Interest .............................................................. 40,842 39,918
Rent from Meditrust Operating Company ................................. 63,497 --
Interest from Meditrust Operating Company ............................. 215 --
Royalty from Meditrust Operating Company .............................. 3,111 --
Hotel operating revenue ............................................... 1,080 --
---------- --------
159,404 74,744
---------- --------
Expenses:
Interest .............................................................. 57,692 23,453
Depreciation and amortization ......................................... 28,815 6,889
Amortization of goodwill .............................................. 4,315 389
General and administrative ............................................ 6,142 1,961
Hotel operations ...................................................... 560 --
Rental property operations ............................................ 7,119 --
Loss on securities held for sale ...................................... 3,620 --
Income from unconsolidated joint venture and minority interests, net .. (26) --
Other (Note 7) ........................................................ 65,000 --
---------- --------
173,237 32,692
---------- --------
Income (loss) from continuing operations ............................... (13,833) 42,052
Discontinued operations (Note 9):
Income from discontinued operations ................................... 3,422
Provision for loss on disposition of discontinued operations .......... (172,694) --
---------- --------
Net income (loss) ...................................................... (183,105) 42,052
Preferred stock dividends .............................................. (3,893) --
---------- --------
Net income (loss) available to Common shareholders ..................... $ (186,998) $ 42,052
========== ========
Basic earnings per Paired Common Share (Note 11):
Income (loss) from continuing operations .............................. $ (0.13) $ 0.57
Discontinued operations ............................................... (1.19) --
---------- --------
Net income (loss) ..................................................... $ (1.32) $ 0.57
========== ========
Diluted earnings per Paired Common Share (Note 11):
Income (loss) from continuing operations .............................. $ (0.13) $ 0.56
Discontinued operations ............................................... (1.19) --
---------- --------
Net income (loss) ..................................................... $ (1.32) $ 0.56
========== ========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
7
<PAGE>
THE MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
for the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(In thousands, except per share amounts)
<S> <C> <C>
Revenue:
Rental .................................................................. $ 143,653 $ 100,917
Interest ................................................................ 117,800 112,806
Rent from Meditrust Operating Company ................................... 63,562 --
Interest from Meditrust Operating Company ............................... 639 --
Royalty from Meditrust Operating Company ................................ 3,111 --
Hotel operating revenue ................................................. 1,080 --
Other (Note 3) .......................................................... 26,000 --
---------- ---------
355,845 213,723
---------- ---------
Expenses:
Interest ................................................................ 107,804 61,831
Depreciation and amortization ........................................... 49,473 19,465
Amortization of goodwill ................................................ 7,066 1,168
General and administrative .............................................. 13,210 6,207
Hotel operations ........................................................ 560 --
Rental property operations .............................................. 9,841 --
Income from unconsolidated joint venture and minority interests ......... (474) --
Loss on securities held for sale ........................................ 3,620 --
Other (Note 7) .......................................................... 86,541 --
---------- ---------
277,641 88,671
---------- ---------
Income from continuing operations ........................................ 78,204 125,052
Discontinued operations (Note 9):
Income from discontinued operations ..................................... 14,635 --
Provision for loss on disposition of discontinued operations ............ (172,694) --
---------- ---------
Net income (loss) ........................................................ (79,855) 125,052
Preferred stock dividends ................................................ (4,506) --
---------- ---------
Net income (loss) available to Common shareholders ....................... $ (84,361) $ 125,052
========== =========
Basic earnings per Paired Common Share (Note 11):
Income from continuing operations ....................................... $ 0.66 $ 1.69
Discontinued operations ................................................. (1.41) --
---------- ---------
Net income (loss) ....................................................... $ (0.75) $ 1.69
========== =========
Diluted earnings per Paired Common Share (Note 11):
Income from continuing operations ....................................... $ 0.63 $ 1.68
Discontinued operations ................................................. (1.35) --
---------- ---------
Net income (loss) ....................................................... $ (0.72) $ 1.68
========== =========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
8
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ (79,855) $ 125,052
Adjustments to reconcile net income (loss) to net cash provided by
continuing operations ............................................... -- --
Depreciation of real estate .......................................... 53,111 19,124
Goodwill amortization ................................................ 9,627 1,168
Shares issued for compensation ....................................... 356 1,375
Equity in income of joint venture, net of dividends received ......... 976 --
Other depreciation, amortization and other items, net ................ 12,389 721
Other non cash expenses .............................................. 246,467 --
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
AVAILABLE FOR DISTRIBUTION ........................................... 243,071 147,440
Net change in other assets and liabilities ........................... (178,607) (19,350)
---------- ----------
Net cash provided by operating activities ........................... 64,464 128,090
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred stock ................. 447,044 --
Proceeds from borrowings on bank notes payable ....................... 2,420,000 858,000
Repayment of bank notes payable ...................................... (730,000) (447,000)
Repayment of notes payable ........................................... (220,000) --
Equity offering and debt issuance costs .............................. (47,232) (5,073)
Principal payments on bonds and mortgages payable .................... (10,016) (774)
Proceeds from intercompany borrowings, net of repayments ............. 5,500 --
Distributions to shareholders ........................................ (347,278) (131,586)
Capital distributions to partners .................................... (121) --
Proceeds from exercise of stock options .............................. 4,781 5,355
---------- ----------
Net cash provided by financing activities ........................... 1,522,678 278,922
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate and development funding ................... (538,597) (182,808)
Investment in real estate mortgages and development funding .......... (176,699) (211,272)
Prepayment proceeds and principal payments received on real
estate mortgages .................................................... 280,199 9,013
Proceeds from sale of real estate .................................... 7,671 --
Acquisition of Cobblestone ........................................... (178,523) --
Acquisition of La Quinta ............................................. (956,054) --
Cash acquired from Cobblestone merger ................................ 723 --
Cash acquired from La Quinta merger .................................. 18,004 --
Working capital and notes receivable advances, net of repayments
and collections ..................................................... 1,271 (227)
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
9
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1998 and 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
--------------- ------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES, Continued
Investment in equity securities ............................... (30,222) (39,459)
------- -------
Net cash used in investing activities ........................ (1,572,227) (424,753)
---------- --------
Net increase (decrease) in cash and cash equivalents ......... 14,915 (17,741)
CASH AND CASH EQUIVALENTS AT:
Beginning of period ........................................... 24,059 42,726
---------- --------
End of period ................................................. $ 38,974 $ 24,985
============ ========
Supplemental disclosure of cash flow information (Note 2)
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
10
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------- -------------
(In thousands) (Unaudited)
<S> <C> <C>
Assets
Cash and cash equivalents ......................................... $ 18,281 $ 19,673
Fees, interest and other receivables .............................. 16,509 2,580
Due from Meditrust Corporation .................................... 7,214 --
Other current assets, net ......................................... 9,064 3,078
--------- --------
Total current assets ............................................ 51,068 25,331
--------- --------
Investment in common stock of Meditrust Corporation ............... 37,581 37,581
Goodwill, net ..................................................... 31,821 32,485
Property, plant and equipment, less accumulated depreciation of
$625 and $171, respectively....................................... 9,582 10,529
Artwork ........................................................... -- 14,500
Other non-current assets .......................................... 14,855 --
--------- --------
Total assets .................................................... $ 144,907 $120,426
========= ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable ................................................. $ 23,654 $ 9,981
Accrued payroll and employee benefits ............................ 30,624 9,312
Accrued expenses and other current liabilities ................... 2,954 9,713
Due to Meditrust Corporation ..................................... -- 18,490
--------- --------
Total current liabilities ....................................... 57,232 47,496
--------- --------
Note payable to Meditrust Corporation ............................. 13,128 13,128
Deferred revenue .................................................. -- 1,349
Other non-current liabilities ..................................... 259 --
Net liabilities of discontinued operations (Note 9) ............... 23,335 --
Deferred income taxes ............................................. -- 501
--------- --------
Total liabilities ............................................... 93,954 62,474
--------- --------
Commitments and contingencies (Notes 3, 10, and 13)
Shareholders' equity (Notes 4, 5, 6 and 11):
Common Stock, $.10 par value; 270,000 shares authorized;
149,357 and 88,128 shares issued and outstanding at
September 30, 1998 and December 31, 1997, respectively ......... 14,936 8,813
Additional paid-in-capital ....................................... 75,864 49,739
Unearned compensation ............................................ (1,652) --
Retained earnings (deficit) ...................................... (15,512) (600)
--------- --------
73,636 57,952
Due from Meditrust Corporation .................................. (22,683) --
--------- --------
Total shareholders' equity ...................................... 50,953 57,952
--------- --------
Total liabilities and shareholders' equity ..................... $ 144,907 $120,426
========= ========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
11
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
for the three months ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
1998
-------------
(In thousands, except per share amounts)
<S> <C>
Revenue:
Hotel .................................................................. $ 123,430
Interest ............................................................... 191
---------
123,621
---------
Expenses:
Hotel operations ....................................................... 57,738
Depreciation and amortization .......................................... 1,854
Amortization of goodwill ............................................... 201
Interest and other ..................................................... 31
Interest to Meditrust Corporation ...................................... 215
General and administrative ............................................. 717
Royalty to Meditrust Corporation ....................................... 3,111
Rent to Meditrust Corporation .......................................... 63,497
Other (Note 7) ......................................................... 1,941
---------
129,305
---------
Loss from continuing operations before benefit for income taxes ......... (5,684)
Income tax benefit ...................................................... (1,064)
---------
Loss from continuing operations ......................................... (4,620)
Discontinued operations (Note 9):
Loss from discontinued operations ...................................... (2,566)
Provision for loss on disposition of discontinued operations ........... (4,500)
---------
Net loss ................................................................ $ (11,686)
=========
Basic earnings per Paired Common Share (Note 11):
Loss from continuing operations ........................................ $ (0.03)
---------
Discontinued operations ................................................ (0.05)
---------
Net loss ............................................................... $ (0.08)
=========
Diluted earnings per Paired Common Share (Note 11):
Loss from continuing operations ........................................ $ (0.03)
---------
Discontinued operations ................................................ (0.05)
---------
Net loss ............................................................... $ (0.08)
=========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
12
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
1998
-------------
(In thousands, except per share amounts)
<S> <C>
Revenue:
Hotel:
Hotel .................................................................. $ 123,430
Interest ............................................................... 444
---------
123,874
---------
Expenses:
Hotel operations ....................................................... 57,738
Depreciation and amortization .......................................... 1,854
Amortization of goodwill ............................................... 604
Interest and other ..................................................... 31
Interest to Meditrust Corporation ...................................... 639
General and administrative ............................................. 1,956
Royalty to Meditrust Corporation ....................................... 3,111
Rent to Meditrust Corporation .......................................... 63,562
Other (Note 7) ......................................................... 1,941
---------
131,436
---------
Loss from continuing operations before benefit for income taxes ......... (7,562)
Income tax benefit ...................................................... (1,064)
---------
Loss from continuing operations ......................................... (6,498)
Discontinued operations (Note 9):
Loss from discontinued operations ...................................... (3,914)
Provision for loss on disposition of discontinued operations ........... (4,500)
---------
Net loss ................................................................ $ (14,912)
=========
Basic earnings per Paired Common Share (Note 11):
Loss from continuing operations ........................................ $ (0.06)
Discontinued operations ................................................ (0.07)
---------
Net loss ............................................................... $ (0.13)
=========
Diluted earnings per Paired Common Share (Note 11):
Loss from continuing operations ........................................ $ (0.06)
Discontinued operations ................................................ (0.07)
---------
Net loss ............................................................... $ (0.13)
=========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
13
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
for the nine months ended September 30, 1998
(Unaudited)
<TABLE>
<CAPTION>
1998
-------------
(In thousands)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................. $ (14,912)
Goodwill amortization ................................................ 604
Shares issued for compensation ....................................... 42
Other depreciation and amortization .................................. 5,411
Other items .......................................................... 9,736
Net change in other assets and liabilities of discontinued operations (4,314)
Net change in other assets and liabilities ........................... (2,116)
---------
Net cash used in operating activities ............................... (5,549)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock ...................................... 9,669
Equity offering costs ................................................ (105)
Net repayment of intercompany borrowings ............................. (5,500)
Proceeds from stock option exercises ................................. 93
---------
Net cash provided by financing activities ........................... 4,157
---------
Net decrease in cash and cash equivalents ........................... (1,392)
CASH AND CASH EQUIVALENTS AT:
Beginning of period .................................................. 19,673
---------
End of period ........................................................ $ 18,281
=========
Supplemental disclosure of cash flow information (Note 2)
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements incorporated by reference in the Companies' Form 10-K and
10-K/A for the year ended December 31, 1997, are an integral part of these
financial statements.
14
<PAGE>
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 their financial position as of September 30, 1998 and their
results of operations for each of the three and nine-month periods ended
September 30, 1998 and 1997 and cash flows for each of the nine-month periods
ended September 30, 1998 and 1997. The results of operations for the three and
nine-month period ended September 30, 1998 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" 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 and 10-K/A for the year ended
December 31, 1997 (and the Reports on Form 8-K and 8-K/A dated February 26,
1998 and incorporated by reference therein) and the Reports on Form 10-Q for
the quarters ended March 31, 1998 and June 30, 1998 for additional information
relevant to significant accounting policies followed by the Companies.
On November 11, 1998, the boards of directors of Realty and Operating
Company approved a comprehensive restructuring plan designed to strengthen the
Companies' financial position and clarify their investment and operating
strategy by focusing on the healthcare and lodging business. Significant
components of the restructuring plan include selling more than $1 billion of
non-strategic assets, including their portfolio of golf-related real estate and
operating properties ("Cobblestone Golf Group" or "Cobblestone"), the Santa
Anita Racetrack, and approximately $550 million of non-strategic healthcare
properties.
As a result of the restructuring 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.
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 September 30, 1998, La Quinta owned and operated 283 hotels, with
over 36,000 rooms located in the western and southern regions of the United
States. This transaction was accounted for under the purchase method of
accounting. Accordingly, the financial statements include, among other things,
the results of operations and cash flows of La Quinta from July 17, 1998
through the date of the financial statements.
With the acquisition of La Quinta, Operating Company is currently engaged
in hotel operations. The hotel operations are conducted by several subsidiaries
of Operating Company which lease the respective facilities and license the La
Quinta trade name from Realty and its subsidiaries.
15
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies (Continued)
Significant accounting policies related to hotel operations follow:
Hotel Property, Equipment and Leasehold Interests
Hotel property and equipment are recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
related assets as follows:
<TABLE>
<S> <C>
Buildings and improvements ................ 40 years
Equipment, furniture and fixtures ......... 3 to 10 years
</TABLE>
Hotel construction in progress is carried at cost. All costs associated
with, or allocable to, hotel construction are capitalized. All preopening and
start-up costs are expensed as incurred.
Revenue and Deferred Revenue
Hotel revenues are derived from room rentals and other sources such as
charges to guests for long-distance telephone service, fax machine use, movie
and vending commissions, meeting and banquet room revenue and laundry services.
Hotel revenues are recognized as earned.
The hotel 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.
Self-Insurance Programs
The hotel operation uses a paid loss retrospective insurance plan for
general and auto liability and workers' compensation whereby the operation is
effectively self-insured. Predetermined loss limits have been arranged with
insurance companies to limit the per occurrence cash outlay.
Hotel operation employees and their dependents are covered by a
self-insurance program for major medical and hospitalization coverage which is
partially funded by payroll deductions. Payments for major medical and
hospitalization to individual participants less than specified amounts are
self-insured by the company.
Newly Issued Accounting Standards
Financial Accounting Standards Board Statement No. 133 ("SFAS 133"):
"Accounting for Derivative Instruments and Hedging Activities" is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999, although
early application is encouraged. SFAS 133 established standards related to the
Companies' financial risks associated with their activity as it relates to
financial activities with respect to derivative instruments and hedging. The
Companies are evaluating the impact of this pronouncement and intend to adopt
the requirements of SFAS 133 in the financial statements for the year ending
December 31, 1998 and do not believe implementation will have a material effect
on the financial statements (see Note 4).
Reclassification
Certain reclassifications have been made to the 1997 presentation to
conform to the 1998 presentation.
16
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
Nine Months Ended
September 30
The Meditrust Companies: --------------------------
1998 1997
------------- ----------
<S> <C> <C>
(In thousands)
Interest paid during the period ........................................ $ 122,628 $68,175
Interest capitalized during the period ................................. 8,434 3,450
Non-cash investing and financing transactions:
Value of real estate acquired:
Land, land improvements and buildings ................................. 4,059
Accumulated depreciation of buildings sold ............................ 6,256
Increase (reduction) in real estate mortgages net
of participation reduction ........................................... (31,540) 192
Change in market value of equity securities in excess of cost ......... 17,097 (330)
Value of shares issued for conversion of debentures ................... 7,167 4,348
In connection with the Cobblestone merger:
Fair value of assets acquired ......................................... 302,713
Excess purchase consideration over estimated fair market value of
assets acquired ...................................................... 153,750
Liabilities assumed ................................................... (37,488)
Cash, net ............................................................. (177,800)
Value of the issuance of common shares ................................ 241,175
In connection with the La Quinta merger:
Fair value of assets acquired ......................................... 2,660,780
Excess purchase consideration over estimated fair market value of
assets acquired ...................................................... 285,821
Liabilities assumed ................................................... (835,915)
Cash, net ............................................................. (938,050)
Value of the issuance of common shares ................................ 1,172,636
</TABLE>
17
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Supplemental Cash Flow Information (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
Meditrust Corporation: --------------------------
1998 1997
------------- ----------
<S> <C> <C>
(In thousands)
Interest paid during the period ........................................ $ 122,410 $68,175
Interest capitalized during the period ................................. 8,434 3,450
Non-cash investing and financing transactions:
Value of real estate acquired:
Land, land improvements and buildings ................................. 4,059
Accumulated depreciation of buildings sold ............................ 6,256
Increase (reduction) in real estate mortgages net
of participation reduction ........................................... (31,540) 192
Change in market value of equity securities in excess of cost ......... 17,097 (330)
Value of shares issued for conversion of debentures ................... 7,031 4,348
In connection with the Cobblestone merger:
Fair value of assets acquired ......................................... 272,463
Excess purchase consideration over estimated fair market value of
assets acquired ...................................................... 153,750
Liabilities assumed ................................................... (11,638)
Cash, net ............................................................. (177,800)
Value of the issuance of common shares ................................ 236,775
In connection with the La Quinta merger:
Fair value of assets acquired ......................................... 2,437,051
Excess purchase consideration over estimated fair market value of
assets acquired ...................................................... 285,821
Liabilities assumed ................................................... (634,466)
Cash, net ............................................................. (938,050)
Value of the issuance of common shares ................................ 1,150,356
</TABLE>
18
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. Supplemental Cash Flow Information (Continued)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
Meditrust Operating Company: --------------------
1998 1997
------------ -----
<S> <C> <C>
(In thousands)
Interest paid during the period .................................. $ 271
Non-cash investing and financing transactions:
Value of shares issued for conversion of debentures ............. 136
In connection with the Cobblestone merger:
Fair value of assets acquired ................................... 30,250
Excess purchase consideration over estimated fair market value of
assets acquired ................................................ --
Liabilities assumed ............................................. (25,850)
Value of the issuance of common shares .......................... 4,400
In connection with the La Quinta merger:
Fair value of assets acquired ................................... 223,729
Excess purchase consideration over estimated fair market value of
assets acquired ................................................ --
Liabilities assumed ............................................. (201,449)
Value of the issuance of common shares .......................... 22,280
</TABLE>
3. Real Estate Investments
The following is a summary of Realty's real estate investments:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
(In thousands) --------------- -------------
(Unaudited)
<S> <C> <C>
Land .................................................... $ 529,516 $ 249,852
Buildings and improvements, net ......................... 3,563,214 1,223,255
Real estate mortgages and loans receivable, net ......... 1,284,785 1,432,825
Investment in unconsolidated joint venture, net ......... 27,957 29,840
Assets held for sale, net ............................... 7,097 --
---------- ----------
$5,412,569 $2,935,772
========== ==========
</TABLE>
During the nine months ended September 30, 1998, Realty acquired 15
assisted living facilities and 22 medical office buildings for $265,608,000.
Realty also acquired 16 golf facilities for $121,976,000. In addition, during
the nine month period ended September 30, 1998, Realty provided net funding of
$36,177,000 for the construction of 17 assisted living facilities, two golf
facilities, and also provided $1,820,000 for an addition to a long-term care
facility already in the portfolio. Realty also provided net funding of
$113,016,000 for ongoing construction of facilities it currently owns which
were in the portfolio prior to 1998 or for construction and capital
improvements to hotels and golf courses acquired in the mergers with
Cobblestone and La Quinta.
19
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Real Estate Investments (Continued)
Also during the nine months ended September 30, 1998, Realty provided
permanent mortgage financing of $51,260,000 for two long-term care facilities
and for a 135 acre development stage property. Realty also provided $2,122,000
in additions to permanent mortgages already in the portfolio.
Realty commenced new development funding of $24,449,000 relating to two
long-term care facilities and one medical office building. Realty also provided
$98,868,000 for ongoing construction of mortgaged facilities already in the
portfolio.
During the nine months ended September 30, 1998, Realty received
$4,709,000 from the sale of a long-term care facility. There was no gain or
loss realized on the sale. Realty also received $2,962,000 from the sale of a
rehabilitation facility. There was a loss on the sale of $3,710,000 which was
fully provided for in the first quarter of 1998.
As a result of the merger with Cobblestone, Realty acquired 21 golf
facilities and leasehold interests in four golf facilities and recorded them at
appraised values of $224,434,000 and $23,641,000, respectively.
Realty also acquired 280 operating hotels, 23 hotels under construction
and land held for development and recorded them at appraised values of
$2,503,264,000 as a result of the La Quinta merger.
During the nine months ended September 30, 1998, Realty received principal
payments of $280,199,000 on real estate mortgages. Included in this amount was
a $122,000,000 prepayment of mortgage investments for which a prepayment and
make-whole gain of $26,000,000 was received and has been classified as other
income in the consolidated statements of income.
At September 30, 1998, Realty was committed to provide additional
financing of approximately $261,000,000 relating to five medical office
buildings, five long-term care facilities, 38 assisted living facilities and 20
hotel facilities currently under construction as well as additions to existing
facilities in the portfolio.
During 1996 and 1997, Realty provided mortgage financing in the aggregate
amount of $82,270,000 (of which $74,313,000 had been funded through January
1998) to certain limited partnerships in which the Companies' then Chairman
holds a minority equity interest, for the construction and/or permanent
financing of 11 medical office buildings. During January 1998, Realty acquired
all of the assets of, or all of the partnership interests in such limited
partnerships for an aggregate purchase price of $110,528,000, and currently
leases the medical office buildings directly to the occupants thereof.
On August 3, 1998, the Companies' Chairman resigned as Chairman and as a
Director, and as Chief Executive Officer and Treasurer of Operating Company
(see Note 10).
4. Indebtedness and Shareholders' Equity
On July 17, 1998, Realty entered into a new credit agreement (the "New
Credit Agreement") which provides Realty with up to $2,250,000,000 in credit
facilities, replacing Realty's existing $365,000,000 revolving credit
facilities. The New Credit Agreement provides 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
matures July 17, 1999 with a six month extension option, and Tranche D, a term
loan in the amount of $500,000,000, amounts of which if repaid may not be
20
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Indebtedness and Shareholders' Equity (Continued)
reborrowed, which matures July 17, 2001. A total of $310,000,000 was available
at November 3, 1998. Borrowings under the New Credit Agreement include LIBOR,
Base Rate and Money Market Borrowings. Pricing on the loan commitments, loans
and letters of credit under the New Credit Agreement varies according to the
pricing level commensurate with the credit quality of Realty. Events of default
under the New Credit Agreement include, among other things, failure to pay any
principal or reimbursement obligation when due, failure to meet any of the
covenants of the New Credit Agreement, failure of the representations and
warranties to be true in any material respect, and default under other debt
instruments of the Companies or their subsidiaries. The New Credit Agreement
includes covenants with respect to maintaining certain financial benchmarks,
limitations on the types and percentage of investments in certain business
lines, limitations on dividends of Realty and Operating Company, and other
restrictions. In addition, Operating Company is a guarantor of all of the
obligations of Realty under the New Credit Agreement.
During July 1998, Realty entered into an interest rate SWAP Agreement to
reduce the impact on interest expense of fluctuating interest rates on
$1,250,000,000 of its New 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. At September 30,
1998, Realty was a fixed rate payor of approximately 5.7% and received a
variable rate of approximately 5.6%. Differentials in the swapped amounts are
recorded as adjustments to interest expense of Realty.
On August 17, 1998 Realty redeemed its $100,000,000 Remarketed Reset Notes
due August 15, 2002 at par value.
On February 26, 1998, the Companies entered into transactions with Merrill
Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch &
Co., Inc. ("MLI"). Pursuant to the terms of a Stock Purchase Agreement, MLI
purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock par
value $.10 per share from each of the Companies at a purchase price of $32.625
per share. The Series A Non-Voting Convertible Common Stock converted to paired
common stock of the Companies on June 18, 1998, the business day following the
date on which the stockholders of the Companies approved the merger of Realty
with La Quinta. Net proceeds from the issuance of securities were approximately
$272,000,000 and were used by the Companies to repay existing indebtedness. The
Companies and MLI entered into a Purchase Price Adjustment Agreement under
which the Companies will, within one year from the date of MLI's purchase, on a
periodic basis, adjust the original $32.625 purchase price per share based on
the market price of the paired common stock at the time of any interim or final
adjustments, by receiving additional paired common stock from MLI or by issuing
additional paired common stock to MLI. In the event that the market price for
the paired shares is lower than the original purchase price, the Companies will
have to deliver additional paired shares to MLI which would have dilutive
effects on the capital stock of the Companies. This dilutive effect increases
significantly as the market price of the paired shares declines further below
the original purchase price. Moreover, settlement, whether at maturity or at an
earlier date, may force the Companies to issue paired shares at a depressed
price, which may heighten this dilutive effect on the capital stock of the
Companies.
The paired common shares issued under the above listed agreements receive
the same dividend as the Companies' paired common stock, however, the
guaranteed minimum return is LIBOR plus 75 basis points. Any difference between
LIBOR plus 75 basis points and the dividend payments received by MLI will be
included in an adjustment amount under the Purchase Price Adjustment Agreement.
The Companies expect the annual dividend to exceed LIBOR plus 75 basis points.
This Forward Equity Issuance Transaction ("FEIT") has been accounted for
as an equity transaction with the original 8,500,000 paired common shares
treated as outstanding from their date of issuance for
21
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Indebtedness and Shareholders' Equity (Continued)
both basic and diluted earnings per share purposes. Contingent shares,
calculated based upon the Companies' September 30, 1998 stock price, are
included in the calculation of diluted earnings per share. The accounting
treatment for this type of transaction is being reviewed by the Emerging Issues
Task Force ("EITF"). The Securities and Exchange Commission has concluded that
until the EITF has an opportunity to perform a full review of this type of
transaction, future transactions of this type will be accounted for as debt.
For previously completed transactions such as the Companies', the Securities
and Exchange Commission will not object to the accounting treatment reflected
in this Quarterly Report on Form 10-Q.
Pursuant to the FEIT agreement, the Companies placed in a collateral
account approximately 8,714,000 paired common shares, based on various
measurement dates prior to September 30, 1998. According to the terms of the
FEIT, had the closing stock price of $17.06 on September 30, 1998 been used,
approximately 2,417,000 paired common shares would have been required to be
returned to the Companies.
During the nine months ended September 30, 1998, $1,410,000 of principal
amount of 9% convertible debentures were converted into 62,746 paired common
shares; $5,027,000 of principal amount of 7% convertible debentures were
converted into 197,231 paired common shares; $65,000 of principal amount of
7.5% convertible debentures were converted into 2,158 paired common shares and
$665,000 of principal amount of 6-7/8% convertible debentures were converted
into 21,521 paired common shares.
On June 10, 1998, Realty issued 7,000,000 depository shares of Meditrust
Corporation. Each depository share represents one-tenth of a share of 9% Series
A Cumulative Redeemable Preferred Stock with a par value of $.10 per share.
Total proceeds from this issuance were approximately $169,488,000, which were
primarily used to repay existing indebtedness.
As of September 30, 1998, the following classes of Preferred Stock, Excess
Stock and Series Common Stock were authorized; no shares were issued or
outstanding at either September 30, 1998 or December 31, 1997:
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 July 1998, 390,000 restricted shares of the Companies' stock were
issued to key employees under The Meditrust 1995 Share Award Plan and The
Operating Company 1995 Share Award Plan (collectively known as the "Plan").
Under the Plan participants are entitled to cash dividends and voting
rights on their respective shares. Restrictions generally limit the sale or
transfer of shares during a restricted period, not exceeding eight years.
Participants vest in the amounts 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.
22
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Indebtedness and Shareholders' Equity (Continued)
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 balance
sheets.
5. Comprehensive Income (Loss) and Other Assets
As of January 1, 1998, the Companies adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130") "Reporting Comprehensive Income".
SFAS 130 establishes standards for the reporting and display of comprehensive
income and its components; however, the adoption of this statement has no
impact on the Companies' net income or shareholders' equity. SFAS 130 requires,
among other things, unrealized gains or losses on the Companies'
available-for-sale investments to be included in other comprehensive income.
On August 18, 1998, Realty invested approximately an additional
$30,222,000 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, through an agreement to
purchase previously issued warrants to purchase common shares of NHP Plc, and
an agreement to purchase newly issued common shares of NHP Plc. The investment
increased Realty's total equity investment to approximately $57,204,000, at
cost. The investment added approximately 12,322,000 shares to Realty's previous
investment of 14,285,000 shares of NHP Plc, and maintained Realty's ownership
interest in NHP Plc at 19.99% of which Realty has voting rights with respect to
9.99%. The resulting difference between the current market value and cost,
$15,118,000 is included in shareholders' equity in the accompanying balance
sheet.
As of September 30, 1998, Realty owns 331,000 shares of stock and warrants
to purchase 1,006,000 shares of stock in Balanced Care Corporation ("BCC"), a
healthcare operator, which completed an initial public offering of its stock in
1998. The stock and warrants have a current market value of $6,652,000. The
difference between current market value and cost of the BCC investment,
$5,547,000 is included in shareholders' equity in the accompanying balance
sheet.
As a result of the La Quinta Merger, Realty owns approximately 324,000
shares of a company which specializes in reservation systems. On September 23,
1998 the Board of Directors of Realty approved the sale of Realty's investment
in this stock. Consequently, a loss of $3,620,000, has been provided for in the
accompanying statement of operations.
The following is a summary of the Companies' comprehensive income:
<TABLE>
<CAPTION>
Nine months ended
September 30
---------------------------
1998 1997
------------- -----------
<S> <C> <C>
Net income (loss) ..................................................... $ (94,767) $125,052
Other comprehensive income:
Change in market value of equity securities in excess of cost ......... 17,097 (330)
--------- --------
Comprehensive income (loss) ........................................... $ (77,670) $124,722
========= ========
</TABLE>
In addition, Realty acquired the La Quinta tradename, reservation system
and assembled workforce with values of $98,108,000, $5,065,000 and $9,370,000,
respectively, as a result of the La Quinta Merger.
23
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
6. Distributions Paid to Shareholders
On August 14, 1998, Realty paid a dividend of $0.61625 per share of common
stock to shareholders of record on July 31, 1998. On September 11, 1998
pursuant to its merger agreement with La Quinta, Realty paid a special dividend
distribution of $0.88361 per share to holders of record on August 28, 1998. On
September 30, 1998 Realty paid a dividend of $0.64375 per depository share of
preferred stock to holders of record on September 15, 1998 of its 9.00% Series
A cumulative redeemable preferred stock.
7. Other Expenses
As a result of continued deteriorating performance at four healthcare
facilities and two owned psychiatric facilities and the corresponding impact on
Realty's resources, management committed to a plan to sell these facilities as
soon as practicable. Accordingly, Realty recorded a provision of $48,500,000
($38,000,000 during the third quarter) to adjust the carrying value of these
facilities and related receivables to estimated fair value less costs to sell
during the nine months ended September 30, 1998. In addition, as part of the
continuing evaluation of its existing healthcare real estate portfolio, Realty
also provided a $14,000,000 reserve to adjust the carrying value of real estate
to estimated fair value during the three months ended September 30, 1998.
Realty also recorded a valuation reserve of $16,000,000 ($13,000,000
during the third quarter) related to the Companies mortgage loan portfolio
during the nine months ended September 30, 1998. Realty holds other assets and
receivables that are unrelated to its historical primary business of healthcare
financing. Management has determined that protracted collection efforts for
these assets is currently an inefficient use of its resources and therefore
recorded a provision of approximately $5,100,000 to reduce the carrying value
of these assets to net realizable value during the nine months ended September
30, 1998.
Additionally, during the nine months ended September 30, 1998, the
Companies incurred approximately $5,000,000 of non-recurring costs related to
the comprehensive restructuring plan, halting the evaluation of certain
acquisition targets and severance of certain employees of Operating Company.
8. La Quinta Merger
On July 17, 1998, Realty completed its merger with La Quinta pursuant to a
merger agreement dated January 3, 1998, and as amended thereto (as amended, the
"La Quinta Merger Agreement"). Under the terms of the La Quinta Merger
Agreement, La Quinta merged with and into Realty, with Realty as the surviving
corporation.
Upon the closing of the La Quinta Merger, each share of common stock of La
Quinta was converted into the right to receive 0.736 paired common shares,
reduced by the amount to be received in an earnings and profits distribution.
Approximately 43,280,000 paired common shares, with an aggregate market value
of approximately $1,172,636,000, and approximately $956,054,000 were exchanged
in order to consummate the La Quinta Merger. In addition, Realty assumed
approximately $835,915,000 of La Quinta's debt and associated costs.
Accordingly, the operations of La Quinta are included in the combined and
consolidated financial statements since consummation of the La Quinta Merger.
The total consideration paid in connection with the La Quinta Merger was
approximately $2,946,601,000. The excess of the purchase price, including costs
of the La Quinta Merger, over the fair value of the net assets acquired
approximated $285,821,000, and is being amortized over 20 years.
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, 1997:
24
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. La Quinta Merger (Continued)
<TABLE>
<CAPTION>
For the nine months ended
September 30
(In thousands, except per share amounts) -----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Revenues .................................................. $ 696,843 $ 600,640
Net income from continuing operations ..................... 82,866 143,611
Basic earnings per paired common share .................... $ 0.55 $ 1.22
Weighted average paired common shares outstanding ......... 150,472 117,667
</TABLE>
The pro forma condensed combined consolidated results for the nine month
period ended September 30, 1998 include approximately $88,482,000 of other
expenses related to nonrecurring non-cash provisions further described in Note
7 and a $3,620,000 unrealized loss on securities held for sale.
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.
9. Discontinued Operations and Corporate Restructuring
On November 11, 1998, the boards of directors of Realty and Operating
Company approved a comprehensive restructuring plan. Significant components of
the restructuring plan include the sale of Cobblestone Golf Group, the Santa
Anita Racetrack and adjacent property and artwork contained therein and certain
healthcare properties.
Accordingly, operating results for Cobblestone Golf Group and the Santa
Anita Racetrack and adjacent property have been reclassified and reported in
discontinued operations. The Companies are in the process of engaging brokers
and obtaining bids for these operations and assets and expect that the sales
will be completed over the next six months. Accordingly, the Companies recorded
a provision of approximately $177,000,000 as of September 30, 1998 based upon
the estimated proceeds to be realized by sale of the golf and racetrack related
assets and operations. At September 30, 1998, the net assets subject to sale
totaled $550,249,000 and have been classified as net assets from discontinued
operations on the consolidated balance sheet.
Operating results (exclusive of any corporate charges or interest expense)
of discontinued golf and racetrack operations for the nine months ended
September 30, 1998 are as follows:
<TABLE>
<CAPTION>
(in 000's)
Cobblestone Santa Anita
Golf Group Racetrack Total
------------- ------------- ----------
<S> <C> <C> <C>
Revenues ........................... $43,278 $55,421 $98,699
======= ======= =======
Income before income taxes ......... $ 510 $ 8,221 $ 8,731
======= ======= =======
Income tax benefit ................. $ 1,453 $ 537 $ 1,990
======= ======= =======
Net income ......................... $ 1,963 $ 8,758 $10,721
======= ======= =======
</TABLE>
25
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Discontinued Operations and Corporate Restructuring (Continued)
The components of net assets of discontinued operations included in the
consolidated balance sheet at September 30, 1998, are as follows:
<TABLE>
<CAPTION>
(in 000's)
Cobblestone Santa Anita
Golf Group Racetrack Total
------------- ------------- -------------
<S> <C> <C> <C>
Assets ........................................ $ 444,704 $ 148,984 $ 593,688
Liabilities ................................... $ (25,186) $ (18,253) $ (43,439)
--------- --------- ---------
Net assets of discontinued operations ......... $ 419,518 $ 130,731 $ 550,249
========= ========= =========
</TABLE>
10. Contingencies
Litigation
On January 8, 1998 the Companies received notice that they were named as
defendants in an action entitled Lynn Robbins v. William J. Razzouk, et al.,
Civil Action No. 98CI-00192 filed January 7, 1998 in the District Court of
Bexar County, Texas (the "Texas Court"), and on January 20, 1998 the Companies
received notice that they were named as defendants in an action entitled Adele
Brody v. William J. Razzouk, et al., Civil Action No. 98CI-00456 filed January
12, 1998 in the Texas Court. The complaints, which were consolidated into one
action (the "Action"), (i) alleged, in part, that La Quinta and its directors
violated their fiduciary duties of care and loyalty to La Quinta shareholders
by entering into a merger agreement with the Companies without having first
invited other bidders, and that the Companies aided and abetted La Quinta and
its directors in the alleged breaches, and (ii) sought injunctive relief
enjoining the merger with La Quinta and compensatory damages. The parties
negotiated and entered into an agreement in principle to settle the Action,
dated on or about May 8, 1998 (the "Memorandum of Understanding"). The
Memorandum of Understanding set forth the principal bases for the settlement,
which included the issuance of a series of press releases prior to the meetings
of the shareholders of the Companies and La Quinta to consider the La Quinta
Merger Agreement, and the inclusion of a section in the joint proxy
statement/prospectus prepared for the shareholder meetings which described the
FEIT with MLI.
The parties have negotiated and entered into a Stipulation and Agreement
of Compromise, Settlement and Release (the "Stipulation" or "Settlement"),
dated on or about October 8, 1998, which contains the terms of settlement of
the Action. On October 8, 1998, the Texas Court entered an Order Re:
Preliminary Approval ("Order") which, among other things, (i) preliminarily
approved the Settlement; (ii) conditionally approved the Settlement Class;
(iii) approved the Notice of Pendency and Settlement of Class Action for
mailing to the Settlement Class; and (iv) scheduled a Settlement Hearing. On
November 9, 1998, the Texas Court entered an amended Order which set the date
for the Settlement Hearing to January 19, 1999. The Texas Court has the right
to change the date of the Settlement Hearing without further notice to the
Settlement Class. The Settlement is contingent upon Final Court Approval of the
Settlement (as defined in the Stipulation). At the Settlement Hearing, the
parties will ask the Texas Court to enter a Final Judgment which will, among
other things, (i) finally approve the Settlement; (ii) declare that the Action
and the Settled Claims (as defined in the Stipulation) are finally and fully
compromised and settled; (iii) deem that the Representative Plaintiffs, the
Settlement Class and the Settlement Class Members have fully, finally and
forever settled and released any and all Settled Claims against the Released
Parties (as defined in the Stipulation); and (iv) dismiss the Action on the
merits and with prejudice. La Quinta has agreed to pay counsel for the class
plaintiffs attorney's fees in an amount awarded by the Texas Court not to
exceed $700,000 in the event such settlement is consummated.
The Companies are a party to a number of other claims and lawsuits arising
out of the normal course of business; the Companies believe that none of these
claims or pending lawsuits, either individually or
26
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. Contingencies (Continued)
in the aggregate, will have a material adverse affect on the Companies'
business or on their consolidated financial position or results of operations.
Paired Share REIT Legislation
On July 22, 1998, the President of the United States of America signed
into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the
"Reform Act"). Included in the Reform Act is a freeze on the grandfathered
status of paired share REITs such as the Companies. Under this legislation, the
anti-pairing rules provided in the Internal Revenue Code of 1986, as amended
(the "Code"), apply to real property interests acquired after March 26, 1998 by
the Companies, or by a subsidiary or partnership in which a ten percent or
greater interest is owned by the Companies, unless (1) the real property
interests are acquired pursuant to a written agreement that was binding on
March 26, 1998 and at all times thereafter or (2) the acquisition of such real
property interests was described in a public announcement or in a filing with
the SEC on or before March 26, 1998.
Under the Reform Act, the properties acquired in connection with the July
17, 1998 La Quinta Merger and in connection with the merger on May 29, 1998
with Cobblestone generally are not subject to these anti-pairing rules.
However, any property acquired by the Companies, La Quinta, or Cobblestone
after March 26, 1998, other than property acquired pursuant to a written
agreement that was binding on March 26, 1998 or described in a public
announcement or in a filing with the SEC on or before March 26, 1998, is
subject to the anti-pairing rules. Moreover, under the Reform Act any otherwise
grandfathered property will become subject to the anti-pairing rules if the
rent on a lease or renewal with respect to such property is determined to
exceed an arm's length rate. In addition, the Reform Act also provides that a
property held by the Companies that is not subject to the anti-pairing rules
will become subject to such rules in the event of an improvement placed in
service after December 31, 1999 that changes the use of the property and the
cost of which is greater than 200 percent of (A) the undepreciated cost of the
property (prior to the improvement) or (B) in the case of property acquired
where there is a substituted basis (e.g., the properties acquired from La
Quinta and Cobblestone), the fair market value of the property on the date it
was acquired by the Companies.
There is an exception for improvements placed in service before January 1,
2004 pursuant to a binding contract in effect on December 31, 1999 and at all
times thereafter. This restriction on property improvements applies to the
properties acquired from La Quinta and Cobblestone, as well as all other
properties owned by the Companies, and limits the ability of the Companies to
improve or change the use of those properties after December 31, 1999. The
Companies are considering various steps which they might take in order to
minimize the effect of the Reform Act. Restructuring the operations of Realty
and Operating Company, however, to comply with the legislation may cause the
Companies to incur substantial tax liabilities, to recognize an impairment loss
on their goodwill asset or otherwise adversely affect the Companies.
Other Events
On August 3, 1998, Abraham D. Gosman resigned his position as Director and
Chairman of the Boards of the Companies and Chief Executive Officer and
Treasurer of Operating Company. Thomas M. Taylor was appointed Interim Chairman
of the Companies. David F. Benson will serve as Interim Chief Executive Officer
of Realty, and William C. Baker will serve as Interim President and Interim
Treasurer of Operating Company. In connection with discussions relating to his
resignation, the Companies are considering making severance payments to Mr.
Gosman, the amounts of which may be significant. These discussions are ongoing.
27
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Earnings Per Share
Combined consolidated earnings per share is computed as follows:
<TABLE>
<CAPTION>
For the three months ended September 30,
1998
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
(In thousands, except per share amounts) ------------- --------------- ----------
<S> <C> <C> <C>
Loss from continuing operations ....................... $ (18,453)
Less: Preferred stock dividends ....................... (3,893)
---------
Basic EPS:
Loss available to common shareholders from
continuing operations ............................... (22,346) 140,314 $ (0.16)
=======
Effect of Dilutive Securities:
Stock options ........................................ -- --
Contingently issuable shares to MLI (Note 4) ......... -- --
--------- -------
Diluted EPS:
Loss available to common shareholders from
continuing operations ............................... $ (22,346) 140,314 $ (0.16)
========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the three months ended September 30,
1997
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
(In thousands, except per share amounts) ------------- --------------- ----------
<S> <C> <C> <C>
Income from continuing operations ..................... $42,052
Less: Preferred stock dividends ....................... --
-------
42,052
Basic EPS:
Income available to common shareholders from
continuing operations ............................... 42,052 74,081 $ 0.57
======
Effect of Dilutive Securities:
Stock options ........................................ -- 420
Contingently issuable shares to MLI (Note 4) ......... -- --
------- ------
Diluted EPS:
Income available to common shareholders from
continuing operations ............................... $42,052 74,501 $ 0.56
======= ====== ======
</TABLE>
28
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Earnings Per Share (Continued)
<TABLE>
<CAPTION>
For the nine months ended September 30,
1998
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
(In thousands, except per share amounts) ------------- --------------- ----------
<S> <C> <C> <C>
Income from continuing operations ..................... $ 71,706
Less: Preferred stock dividends ....................... (4,506)
--------
Basic EPS:
Income available to common shareholders from
continuing operations ............................... 67,200 110,799 $ 0.61
======
Effect of Dilutive Securities:
Stock options ........................................ -- 186
Contingently issuable shares to MLI (Note 4) ......... -- 4,982
-------- -------
Diluted EPS:
Income available to common shareholders from
continuing operations ............................... $ 67,200 115,967 $ 0.58
======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30,
1997
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
(In thousands, except per share amounts) ------------- --------------- ----------
<S> <C> <C> <C>
Income from continuing operations ..................... $125,052
Less: Preferred stock dividends ....................... --
--------
Basic EPS:
Net income available to common shareholders from
continuing operations ............................... 125,052 73,967 $ 1.69
======
Effect of Dilutive Securities:
Stock options ........................................ -- 420
-------- ------
Contingently issuable shares to MLI (Note 4) ......... -- --
-------- ------
Diluted EPS:
Income available to common shareholders from
continuing operations ............................... $125,052 74,387 $ 1.68
======== ====== ======
</TABLE>
Options to purchase 3,851,000 and 3,738,000 paired common shares at prices
ranging from $21.85 to $36.46 were outstanding during the three and nine month
periods ended September 30, 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 April 2008, were still outstanding at
September 30, 1998.
Contingently issuable shares totaling 6,297,000 related to the FEIT are
not included in the calculation of diluted earnings per share for the three
months ended September 30, 1998 as their inclusion would be antidilutive.
Convertible debentures outstanding for the three and nine month periods
ended September 30, 1998 and 1997 of 7,936,000 and 8,028,000, respectively, are
not included in the computation of diluted EPS because the inclusion would
result in an antidilutive effect.
29
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Earnings Per Share (Continued)
Meditrust Corporation earnings per share is computed as follows:
<TABLE>
<CAPTION>
For the three months ended September 30,
1998
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
(In thousands, except per share amounts) ------------- --------------- ----------
<S> <C> <C> <C>
Loss from continuing operations ....................... $ (13,833)
Less: Preferred stock dividends ....................... (3,893)
---------
Basic EPS:
Loss available to common shareholders from
continuing operations ............................... (17,726) 141,619 $ (0.13)
=======
Effect of Dilutive Securities:
Stock options ........................................ -- --
Contingently issuable shares to MLI (Note 4) ......... -- --
--------- -------
Diluted EPS:
Loss available to common shareholders from
continuing operations ............................... $ (17,726) 141,619 $ (0.13)
========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the three months ended September 30,
1997
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
(In thousands, except per share amounts) ------------- --------------- ----------
<S> <C> <C> <C>
Income from continuing operations ..................... $42,052
Less: Preferred stock dividends ....................... --
-------
42,052
Basic EPS:
Income available to common shareholders from
continuing operations ............................... 42,052 74,081 $ 0.57
======
Effect of Dilutive Securities:
Stock options ........................................ -- 420
Contingently issuable shares to MLI (Note 4) ......... -- --
------- ------
Diluted EPS:
Income available to common shareholders from
continuing operations ............................... $42,052 74,501 $ 0.56
======= ====== ======
</TABLE>
30
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Earnings Per Share (Continued)
<TABLE>
<CAPTION>
For the nine months ended September 30,
1998
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
(In thousands, except per share amounts) ------------- --------------- ----------
<S> <C> <C> <C>
Income from continuing operations ..................... $ 78,204
Less: Preferred stock dividends ....................... (4,506)
--------
Basic EPS:
Income available to common shareholders from
continuing operations ............................... 73,698 112,104 $ 0.66
======
Effect of Dilutive Securities:
Stock options ........................................ -- 186
Contingently issuable shares to MLI (Note 4) ......... -- 4,982
-------- -------
Diluted EPS:
Income available to common shareholders from
continuing operations ............................... $ 73,698 117,272 $ 0.63
======== ======= ======
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30,
1997
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
(In thousands, except per share amounts) ------------- --------------- ----------
<S> <C> <C> <C>
Income from continuing operations ..................... $125,052
Less: Preferred stock dividends ....................... --
--------
Basic EPS:
Income available to common shareholders from
continuing operations ............................... 125,052 73,967 $ 1.69
======
Effect of Dilutive Securities:
Stock options ........................................ -- 420
-------- ------
Contingently issuable shares to MLI (Note 4) ......... -- --
-------- ------
Diluted EPS:
Income available to common shareholders from
continuing operations ............................... $125,052 74,387 $ 1.68
======== ====== ======
</TABLE>
Options to purchase 3,472,000 and 3,385,000 paired common shares at prices
ranging from $21.85 to $36.46 were outstanding during the three and nine month
periods ended September 30, 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
September 30, 1998.
Contingently issuable shares totaling 6,297,000 related to the FEIT are
not included in the calculation of diluted earnings per share for the three
months ended September 30, 1998 as their inclusion would be antidilutive.
Convertible debentures outstanding for the three and nine month periods
ended September 30, 1998 and 1997 of 7,936,000 and 8,028,000, respectively, are
not included in the computation of diluted EPS because the inclusion would
result in an antidilutive effect.
31
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Earnings Per Share (Continued)
Meditrust Operating Company earnings per share is computed as follows:
<TABLE>
<CAPTION>
For the three months ended September 30,
1998
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
(In thousands, except per share amounts) ------------- --------------- ----------
<S> <C> <C> <C>
Loss from continuing operations ....................... $ (4,620)
Less: Preferred stock dividends ....................... --
--------
Basic EPS:
Loss available to common shareholders from
continuing operations ............................... (4,620) 140,314 $ (0.03)
=======
Effect of Dilutive Securities:
Stock options ........................................ -- --
Contingently issuable shares to MLI (Note 4) ......... -- --
-------- -------
Diluted EPS:
Loss available to common shareholders from
continuing operations ............................... $ (4,620) 140,314 $ (0.03)
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended September 30,
1998
----------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
(In thousands, except per share amounts) ------------- --------------- ----------
<S> <C> <C> <C>
Loss from continuing operations ....................... $ (6,498)
Less: Preferred stock dividends ....................... --
--------
Basic EPS:
Loss available to common shareholders from
continuing operations ............................... (6,498) 110,799 $ (0.06)
=======
Effect of Dilutive Securities:
Stock options ........................................ -- 186
Contingently issuable shares to MLI (Note 4) ......... -- 4,982
-------- -------
Diluted EPS:
Loss available to common shareholders from
continuing operations ............................... $ (6,498) 115,967 $ (0.06)
======== ======= =======
</TABLE>
Options to purchase 379,000 and 353,000 paired common shares at prices
ranging from $29.00 to $31.49 were outstanding during the three and nine month
periods ended September 30, 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 April 2008, were still outstanding at
September 30, 1998.
Contingently issuable shares totaling 6,296,000 related to the FEIT are
not included in the calculation of diluted earnings per share for the three
months ended September 30, 1998 as their inclusion would be antidilutive.
Convertible debentures outstanding for the three and nine month periods
ended September 30, 1998 and 1997 of 7,936,000 and 8,028,000, respectively, are
not included in the computation of diluted EPS because the inclusion would
result in an antidilutive effect.
32
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
11. Earnings Per Share (Continued)
Operating Company holds common shares of Realty which are unpaired
pursuant to a stock option plan approved by the shareholders. The common shares
held totaled 1,305,000 as of September 30, 1998. These shares affect the
calculation 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.
Operating Company has entered into a royalty arrangement with Realty for
the use of the La Quinta tradename at a rate of approximately 2.5% of gross
revenues, as defined in the facility lease agreement.
During the year, Realty and Operating issued shares under The Meditrust
1995 Share Award Plan and The Operating Company 1995 Share Award Plan
(collectively the "Plan"). Under the Plan, a like number of Shares of Realty or
Operating, as the case may be, shall be purchased from the other corporation or
arrangements shall be made with such other corporation for the simultaneous
issuance by the other corporation of the same number of Paired Common Shares as
the number of Common Shares issued in connection with an award.
Amounts due from Realty and Operating in connection with awards of shares
under the Plan are shown as a reduction of shareholders' equity in the
accompanying consolidated balance sheets of Realty and Operating, respectively.
In connection with certain acquisitions, Operating 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,
shareholders' equity.
13. Subsequent Events
On October 15, 1998 Realty declared a dividend of $0.62125 per share
payable on November 13, 1998 to shareholders of record on October 30, 1998.
On November 11, 1998, the boards of Directors of Realty and Operating
Company unanimously approved a comprehensive restructuring plan designed to
strengthen the Companies' financial position and clarify their investment and
operating strategy by focusing on the healthcare and lodging business segments.
The comprehensive plan includes pursuing the separation of its primary
businesses, healthcare and lodging, by creating two separately-listed,
publicly-traded real estate investment trusts ("REITs") to be accomplished by a
spin off of healthcare financing business into a stand-alone REIT during the
latter part of 1999. The plan contemplates continuation of operation of the
healthcare and lodging businesses using the existing paired-share structure
until the healthcare spin off takes place.
The plan contemplates that the Companies will sell over $1 billion of
non-strategic assets, including the Cobblestone Golf Group, the Santa Anita
Racetrack and approximately $550 million of non-strategic healthcare
properties. Proceeds from the sales of these assets will be used to achieve
significant near-term debt reduction.
The comprehensive restructuring plan also includes goals related to
reduction of capital investments to reflect current industry operating
conditions and of resetting its annual dividend amount to $1.84 per paired
common share, an amount that is considered sustainable and a comparable payout
ratio to that of its peer groups.
33
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. Subsequent Events (Continued)
On November 11, 1998, the Companies entered into an agreement with Merrill
Lynch International and certain of its affiliates to settle the FEIT. Under the
agreement, Realty has agreed to grant a mortgage of the Santa Anita Racetrack
to Merrill Lynch and anticipates repaying Merrill Lynch approximately 50% of
the FEIT in cash generated in part from the sale of certain assets. It is
anticipated that the remaining FEIT will be discharged from the proceeds of the
sale of equity securities of The Meditrust Companies with terms to be finalized
shortly, which, if offered publicly will be offered pursuant to a prospectus.
Merrill Lynch has agreed, subject to the terms of the settlement agreement, not
to sell any shares of the existing FEIT until February 28, 1999 while the
Companies complete the sale of equity securites and certain assets.
Realty has reached an agreement with its bank group and is in the process
of amending its New Credit Agreement. The amendment provides 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 and to provide for future operating flexibility; and the pledge of
stock of the Companies' subsidiaries. This pledge of subsidiary stock will also
extend on a pro rata basis to entitled bondholders. Realty has also agreed to
increase the pricing of the credit facility by approximately 125 basis points.
34
<PAGE>
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
health-care 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 and golf
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, 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.
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. However, it should be noted that combined
results of operations for the three and nine months ended September 30, 1998
and 1997 are principally related to the activity of Realty.
On November 5, 1997, Meditrust 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 and
Meditrust Acquisition Company were treated as the acquirers for accounting
purposes. Accordingly, the financial history is that of Meditrust and Meditrust
Acquisition Company prior to the Santa Anita Mergers. For the three and nine
month periods ended September 30, 1997, all share and per share amounts have
been retroactively adjusted to reflect the 1.2016 exchange of shares of
beneficial interest for paired common shares of the Companies.
The Meditrust Companies--Combined Results of Operations
Three months ended September 30, 1998 vs. Three months ended September 30, 1997
Revenue for the three months ended September 30, 1998 was $216,202,000
compared to $74,744,000 for the three months ended September 30, 1997, an
increase of $141,458,000. Revenue growth was primarily attributable to the
addition of hotel operating revenue of $124,510,000 and increased rental and
interest income of $16,948,000 as a result of additional real estate
investments made over the last year.
For the three months ended September 30, 1998, total expenses, excluding a
provision for impairment discussed below, increased by $138,027,000. Expense
growth was primarily attributable to the addition of operating expenses from
the hotel segment of $58,298,000, which were incurred during the
post-acquisition period from July 17, 1998 through September 30, 1998. Interest
expense increased by $34,270,000 due to increases in debt outstanding resulting
from additional real estate investments
35
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
The Meditrust Companies--Combined Results of Operations (Continued)
made over the past year and the acquisitions of La Quinta Inns, Inc. ("La
Quinta") and Cobblestone Holdings, Inc. ("Cobblestone"). Depreciation and
amortization increased by $27,907,000 which was a result of increased real
estate investments and amortization of goodwill from the La Quinta acquisition
completed on July 17, 1998. General and administrative expenses increased by
$4,898,000 primarily due to a higher level of operating costs associated with
portfolio growth and as a result of the mergers. Rental property operating
expenses of $7,119,000 were incurred during the three months ended September
30, 1998 and related to property taxes incurred at hotel facilities and the
management of medical office buildings. Other expenses during the quarter ended
September 30, 1998 include a provision for loss on securities held for sale of
$3,620,000 and non-recurring charges, primarily related to a restructuring plan
discussed below, of $1,941,000.
Provision for impairment
During the quarter ended September 30, 1998 Realty recorded a provision
for impairment of $65,000,000, which includes healthcare assets to be sold,
adjustments to the carrying value of owned properties, and mortgages. Realty
commenced a reevaluation, during the quarter ended March 31, 1998, of its
intentions with respect to certain existing healthcare assets. As a result of
continued deteriorating performance at four healthcare facilities, management
committed to a plan to sell these facilities as soon as practicable.
Accordingly, Realty recorded a provision of $38,000,000 to adjust the carrying
value of these facilities and related receivables to estimated fair value less
costs to sell as of September 30, 1998. Realty also recorded a provision of
$14,000,000 related to three owned facilities and a valuation reserve of
$13,000,000 that related to Realty's mortgage loan portfolio, to adjust the
carrying value to estimated fair value. These provisions were recorded based
upon recent developments identified as part of a continuing evaluation of the
existing health care portfolio.
Discontinued operations
During the latter part of 1997 and 1998 the Companies pursued a strategy
of diversifying into new businesses including horse racing, golf and lodging.
During the third quarter of 1998, the Companies reassessed these business
segments. In addition, a review of investment and operating strategies for the
Companies was initiated. As a result, on November 11, 1998, the Companies
approved a comprehensive restructuring plan including the disposal of the horse
racing and golf segments as well as the sale of certain healthcare and other
non-strategic assets.
Accordingly, the Companies have classified approximately $856,000 of
operating income from the horse racing and golf segments as discontinued during
the quarter ended September 30, 1998. The Companies have recorded a provision
of approximately $177,000,000 based upon the estimated proceeds to be realized
on disposal of the horse racing and golf-related assets and operations.
The resulting net loss available for common shareholders, after deducting
preferred share dividends, for the three months ended September 30, 1998, was
$198,684,000 compared to net income of $42,052,000 for the three months ended
September 30, 1997. The net loss available to common shareholders per paired
common share for the three months ended September 30, 1998 was $1.42 compared
to net income per paired common share of $.57 for the three months ended
September 30, 1997. The per paired common share amount decreased primarily due
to the provisions for impairment and discontinued operations, and dilution
resulting from mergers completed since September 30, 1997. Per paired common
share amounts for 1997 have been restated to reflect the exchange of Meditrust
Shares of Beneficial Interest for paired common shares of the Companies
pursuant to the Santa Anita Merger. In connection with the Santa Anita,
Cobblestone and La Quinta mergers, 24,822,000, 8,177,000 and 43,280,000
additional paired common shares are now outstanding.
Nine months ended September 30, 1998 vs. Nine months ended September 30, 1997
Revenue for the nine months ended September 30, 1998 was $412,407,000
compared to $213,723,000 for the nine months ended September 30, 1997, an
increase of $198,684,000. Revenue
36
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Nine months ended September 30, 1998 vs. Nine months ended September 30, 1997
(Continued)
growth was primarily attributable to the addition of hotel operating revenue of
$124,510,000 and increased rental and interest income of $48,174,000 as a
result of additional real estate investments made over the last year net of
mortgage prepayments. Other income for the nine months ended September 30, 1998
included a nonrecurring $26,000,000 prepayment and make-whole gain as a result
of approximately $122,000,000 in mortgage investments that were repaid prior to
their maturity.
For the nine months ended September 30, 1998, total expenses, excluding a
provision for impairment discussed below, increased by $180,094,000. Expense
growth was primarily attributable to the addition of operating expenses from
the hotel segment of $58,298,000, which were incurred during the
post-acquisition period from July 17, 1998 to September 30, 1998. Interest
expense increased by $46,004,000 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 $38,364,000 which was a result of increased real estate
investments and amortization of goodwill from the La Quinta acquisition
completed on July 17, 1998. General and administrative expenses increased by
$8,959,000 primarily due to a higher level of operating costs associated with
portfolio growth and as a result of the acquisition. Rental property operating
expenses of $9,841,000 were incurred during the nine months ended September 30,
1998 and related to property taxes incurred at hotel facilities and the
management of medical office buildings. During the nine months ended September
30, 1998 Realty recorded an unrealized loss on securities held for sale of
$3,620,000 that were sold in the fourth quarter.
Provision for impairment
During the nine months ended September 30, 1998 Realty recorded a
provision for impairment of $73,000,000, which includes healthcare assets to be
sold, adjustments to the carrying value of owned properties, and mortgages.
Realty commenced a reevaluation, during the quarter ended March 31, 1998, of
its intentions with respect to existing healthcare assets. As a result of
continued deteriorating performance at six healthcare facilities, management
committed to a plan to sell these facilities as soon as practicable.
Accordingly, Realty recorded a provision of $46,000,000 to adjust the carrying
value of these facilities and related receivables to estimated fair value less
costs to sell as of September 30, 1998. Realty also recorded a provision of
$14,000,000 of three owned facilities and a valuation reserve of $13,000,000
that related to Realty's mortgage loan portfolio to adjust the carrying value
to estimated fair value. These provisions were recorded based upon recent
developments identified as part of a continuing evaluation of the existing
health care portfolio.
Other expenses
During the nine months ended September 30, 1998 Realty also recorded a
provision of $2,500,000 to adjust the carrying value of receivables related to
certain existing healthcare facilities and established a $3,000,000 valuation
reserve against other assets. Realty also has held other assets and receivables
that are unrelated to its historical primary business of health care financing.
Management has determined that further collection efforts for these assets is
currently an inefficient use of its resources and therefore recorded a
provision of approximately $5,100,000 to reduce the carrying value of these
assets to net realizable value during the nine months ended September 30, 1998.
In addition, during the nine months ended September 30, 1998 Realty recorded
approximately $5,000,000 of non-recurring costs related to the evaluation of
certain acquisition targets for which it is no longer pursuing and charges
related to a restructuring plan.
Discontinued operations
During the latter part of 1997 and 1998 the Companies pursued a strategy
of diversifying into new businesses including horse racing, golf and lodging.
During the third quarter of 1998, the Companies reassessed these business
segments. In addition, a review of investment and operating strategies for the
Companies was initiated. As a result, on November 11, 1998, the Companies
approved a
37
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Nine months ended September 30, 1998 vs. Nine months ended September 30, 1997
(Continued)
comprehensive restructuring plan including the disposal of the horse racing and
golf segments as well as the sale of certain healthcare and other non-strategic
assets.
Accordingly, the Companies have classified approximately $10,721,000 of
operating income from the horse racing and golf segments as discontinued during
the nine months ended September 30, 1998. The Companies have recorded a
provision of approximately $177,000,000 based upon the estimated proceeds to be
realized on disposal of the horse racing and golf-related assets and
operations.
The resulting net loss available for common shareholders, after deducting
preferred share dividends, for the nine months ended September 30, 1998, was
$99,273,000 compared to net income of $125,052,000 for the nine months ended
September 30, 1997. The net loss available to common shareholders per paired
common share for the nine months ended September 30, 1998 was $.90 compared to
net income per paired common share of $1.69 for the nine months ended September
30, 1997. The per paired common share amount decreased primarily due to the
provisions for impairment and discontinued operations, and dilution resulting
from mergers completed since September 30, 1997. Per paired common share
amounts for 1997 have been restated to reflect the exchange of Meditrust Shares
of Beneficial Interest for paired common shares of the Companies pursuant to
the Santa Anita Merger. In connection with the Santa Anita, Cobblestone and La
Quinta mergers, 24,822,000, 8,177,000 and 43,280,000 additional paired common
shares are now outstanding.
The Meditrust Companies--Combined Financial Condition
As of September 30, 1998, the Companies' gross real estate investments
totaled approximately $5,654,866,000, consisting of 216 long-term care
facilities, 198 retirement and assisted living facilities, 34 medical office
buildings, 25 rehabilitation hospitals, six alcohol and substance abuse
treatment facilities and psychiatric hospitals, one acute care hospital campus,
283 hotel facilities in service with 20 more under construction, and a 50%
interest in a fashion mall. As of September 30, 1998, the Companies'
outstanding commitments for additional financing totaled approximately
$261,000,000 for the completion of 38 assisted living facilities, five
long-term care facilities, five medical office buildings and 20 hotel
facilities currently under construction and additions to existing facilities in
the portfolio.
On November 11, 1998 the boards of directors of Realty and Operating
approved a comprehensive restructuring plan. Significant components of the
restructuring plan include the sale of the Cobblestone Golf Group, the Santa
Anita Racetrack and certain pieces of artwork contained therein, and certain
healthcare properties. The Companies have letters of intent to sell
approximately $400,000,000 of healthcare properties at approximately their
original investment value and is close to signing a definitive agreement to
sell the Santa Anita Racetrack. The sale of Santa Anita Racetrack is expected
to close at the end of 1998.
The Companies provide funding for new investments through a combination of
long-term and short-term financing including both debt and equity as well as
the sale of assets. 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 February 26, 1998, the Companies entered into transactions with Merrill
Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch &
Co., Inc. ("MLI"). Pursuant to the terms of a Stock
38
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
The Meditrust Companies--Combined Financial Condition (Continued)
Purchase Agreement, MLI purchased 8,500,000 shares of Series A Non-Voting
Convertible Common Stock par value $.10 per share from each of the Companies at
a purchase price of $32.625 per share. The Series A Non-Voting Convertible
Common Stock converted to paired common stock of the Companies on June 18,
1998, the business day following the date on which the stockholders of the
Companies approved the merger of Realty with La Quinta. Net proceeds from the
issuance of securities were approximately $272,000,000 and were used by the
Companies to repay existing indebtedness. The Companies and MLI entered into a
Purchase Price Adjustment Agreement under which the Companies will, within one
year from the date of MLI's purchase, on a periodic basis, adjust the original
$32.625 purchase price per share based on the market price of the paired common
stock at the time of any interim or final adjustments, by receiving additional
paired common stock from MLI or by issuing additional paired common stock to
MLI. In the event that the market price for the paired shares is lower than the
original purchase price, the Companies will have to deliver additional paired
shares to MLI which would have dilutive effects on the capital stock of the
Companies. This dilutive effect increases significantly as the market price of
the paired shares declines further below the original purchase price. Moreover,
settlement, whether at maturity or at an earlier date, may force the Companies
to issue paired shares at a depressed price, which may heighten this dilutive
effect on the capital stock of the Companies.
The paired common shares issued under the above listed agreements receive
the same dividend as the Companies' paired common stock, however, the
guaranteed minimum return is LIBOR plus 75 basis points. Any difference between
LIBOR plus 75 basis points and the dividend payments received by MLI will be
included in an adjustment amount under the Purchase Price Adjustment Agreement.
The Companies expect the annual dividend to exceed LIBOR plus 75 basis points.
This Forward Equity Issuance Transaction ("FEIT") has been accounted for
as an equity transaction with the original 8,500,000 paired common shares
treated as outstanding from their date of issuance for both basic and diluted
earnings per share purposes. Contingent shares, calculated based upon the
Companies' September 30, 1998 stock price, are included in the calculation of
diluted earnings per share. The accounting treatment for this type of
transaction is being reviewed by the Emerging Issues Task Force ("EITF"). The
Securities and Exchange Commission has concluded that until the EITF has an
opportunity to perform a full review of this type of transaction, future
transactions of this type will be accounted for as debt. For previously
completed transactions such as the Companies', the Securities and Exchange
Commission will not object to the accounting treatment reflected in this
Quarterly Report on Form 10-Q.
Pursuant to the FEIT agreement, the Companies placed in a collateral
account approximately 8,714,000 paired common shares, based on various
measurement dates prior to September 30, 1998. According to the terms of the
FEIT, had the closing stock price of $17.06 on September 30, 1998 been used,
approximately 2,417,000 paired common shares would have been required to be
returned to the Companies.
On November 11, 1998, the Companies entered into an agreement with Merrill
Lynch International and certain of its affiliates to settle the FEIT. Under the
agreement, Realty has agreed to grant a mortgage of the Santa Anita Racetrack
to Merrill Lynch and anticipates repaying Merrill Lynch approximately 50% of
the FEIT in cash generated in part from the sale of certain assets. It is
anticipated that the remaining FEIT will be discharged from the proceeds of the
sale of equity securities of The Meditrust Companies with terms to be finalized
shortly, which, if offered publicly will be offered pursuant to a prospectus.
Merrill Lynch has agreed, subject to the terms of the settlement agreement, not
to sell any shares of the existing FEIT until February 28, 1999 while the
Companies completes the sale of equity securities and certain assets.
On May 29, 1998, Realty completed its merger with Cobblestone pursuant to
an Agreement and Plan of Merger dated as of January 11, 1998, as amended by a
First Amendment thereto dated as of March 16, 1998 (as amended, the "Merger
Agreement"). Under the terms of the Merger Agreement, Cobblestone, the parent
of Cobblestone Golf Group, Inc., merged with and into Realty, with Realty as
39
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
The Meditrust Companies--Combined Financial Condition (Continued)
the surviving corporation (the "Cobblestone Merger"). Upon the closing of the
Cobblestone Merger, each share of common stock of Cobblestone was converted
into the right to receive 3.867 paired common shares and each share of
preferred stock of Cobblestone was converted into the right to receive .2953
paired common shares. The total number of paired common shares issued in
connection with the Cobblestone Merger was approximately 8,177,000, with an
aggregate market value of approximately $230,000,000 plus the issuance of
approximately 452,000 options valued at $10,863,000. In addition, Realty
advanced monies in order for Cobblestone to satisfy approximately $170,000,000
of Cobblestone's debt and associated costs. The total consideration paid in
connection with the Cobblestone Merger was approximately $420,000,000. The
excess of the purchase price, including costs of the Cobblestone Merger, over
the fair value of the net assets acquired approximated $153,750,000 and is
being amortized over 20 years.
On June 10, 1998, Realty issued 7,000,000 depositary shares. Each
depositary share represents one-tenth of a share of 9% Series A Cumulative
Redeemable Preferred Stock with a par value of $.10 per share. Total proceeds
from this issuance of approximately $169,488,000 were used by Realty primarily
to repay existing indebtedness.
On July 17, 1998, Realty completed its merger with La Quinta pursuant to a
merger agreement dated January 3, 1998, and amendments thereto (as amended, the
"La Quinta Merger Agreement"). Under the terms of the La Quinta Merger
Agreement, La Quinta merged with and into Realty, with Realty as the surviving
corporation (the "La Quinta Merger").
Upon the closing of the La Quinta Merger, each share of common stock of La
Quinta was converted into the right to receive 0.736 paired common shares,
reduced by the amount to be received in an earnings and profits distribution.
Approximately 43,280,000 paired common shares, with an aggregate market value
of approximately $1,172,636,000, and approximately $956,054,000 were exchanged
in order to consummate the La Quinta Merger. In addition, Realty assumed
approximately $835,915,000 of La Quinta's debt and associated costs.
Accordingly, the operations of La Quinta are included in the combined and
consolidated financial statements since consummation of the La Quinta Merger.
The total consideration paid in connection with the La Quinta Merger was
approximately $2,946,601,000. The excess of the purchase price, including costs
of the La Quinta Merger, over the fair value of the net assets acquired
approximated $285,821,000, and is being amortized over 20 years.
On July 17, 1998 Realty executed an agreement for an unsecured bank
facility for a total of $2,250,000,000 bearing interest at the lenders' prime
rate plus .50% or LIBOR plus 1.375% (7.06% at November 3, 1998). The facility
is comprised of three tranches with term loans at various maturity dates
between July 17, 1999 and July 17, 2001 and a revolving tranche with
availability of $1,000,000,000 maturing July 17, 2001. A total of $310,000,000
was available at November 3, 1998.
Realty has reached an agreement with its bank group and is in the process
of amending its New Credit Agreement. The amendment provides 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 and to provide for future operating flexibility; and the pledge of
stock of the Companies' subsidiaries. This pledge of subsidiary stock will also
extend on a pro rata basis to entitled bondholders. Realty has also agreed to
increase the pricing of the credit facility by approximately 125 basis points.
On August 17, 1998, Realty redeemed $100,000,000 Remarketed Reset Notes
due August 15, 2002 at par value. On September 11, 1998, Realty redeemed
$120,000,000 of 9-1/4% Senior Subordinated Notes due 2003 at 103.46% of par.
Realty's credit facility was used to finance both redemptions.
The Companies had shareholders' equity of $3,267,229,000 and debt
constituted 51% of the Companies' total capitalization as of September 30,
1998.
On October 15, 1998 Realty declared a dividend of $0.62125 per share
payable on November 13, 1998 to shareholders of record on October 30, 1998.
40
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
The Meditrust Companies--Combined Financial Condition (Continued)
In addition, the Companies have an effective shelf registration statement
on file with the Securities and Exchange Commission under which the Companies
may issue $1,875,000,000 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 pending acquisitions, mortgage
financings and future dividends. Over the next twelve months, as the Companies
identify appropriate investment opportunities, the Companies may raise
additional capital through the sale of assets, shares, series common stock or
preferred stock, the issuance of additional long-term debt, through a
securitization transaction.
Realty--Results of Operations
Three months ended September 30, 1998 vs. Three months ended September 30, 1997
Revenue for the three months ended September 30, 1998 was $159,404,000
compared to $74,744,000 for the three months ended September 30, 1997, an
increase of $84,660,000. Revenue growth was primarily attributable to an
increase in healthcare rental and interest income of $16,757,000 due to
additional real estate investments made over the last year net of mortgage
prepayments. The increase also arose from other income of $1,080,000 and rent,
interest and royalty income of $66,823,000 collected from Operating,
principally related to the addition of hotel rental activities.
For the three months ended September 30, 1998, total expenses, excluding a
provision for impairment discussed below, increased by $75,545,000. Interest
expense increased $34,239,000 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 $25,852,000 which was a result of increased real estate
investments and amortization of goodwill from the La Quinta acquisition
completed on July 17, 1998. General and administrative expenses increased by
$4,181,000 primarily due to a higher level of operating costs associated with
portfolio growth and as a result of the merger. Rental and hotel property
operating expenses of $7,679,000 were incurred during the three months ended
September 30, 1998 and principally related to property taxes incurred at hotel
facilities and the management of medical office buildings. During the three
months ended September 30, 1998 Realty also recorded an unrealized loss on
securities held for sale of $3,620,000 that were sold in the fourth quarter.
Provision for impairment
During the quarter ended September 30, 1998 Realty recorded a provision
for impairment of $65,000,000, which includes healthcare assets to be sold,
adjustments to the carrying value of owned properties, and mortgages. Realty
commenced a reevaluation, during the quarter ended March 31, 1998, of its
intentions with respect to certain existing healthcare assets. As a result of
continued deteriorating performance at four healthcare facilities, management
committed to a plan to sell these facilities as soon as practicable.
Accordingly, Realty recorded a provision of $38,000,000 to adjust the carrying
value of these facilities and related receivables to estimated fair value less
costs to sell as of September 30, 1998. Realty also recorded a provision of
$14,000,000 of three owned facilities and a valuation reserve of $13,000,000
that related to Realty's mortgage loan portfolio to adjust the carrying value
to estimated fair value. These provisions were recorded based upon recent
developments identified as part of a continuing evaluation of the existing
health care portfolio.
Discontinued operations
During the latter part of 1997 and 1998 the Companies pursued a strategy
of diversifying into new businesses including horse racing, golf and lodging.
During the third quarter of 1998, the Companies reassessed these business
segments. In addition, a review of investment and operating strategies for the
Companies was initiated. As a result, on November 11, 1998, the Companies
approved a
41
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Three months ended September 30, 1998 vs. Three months ended September 30, 1997
(Continued)
comprehensive restructuring plan including the disposal of the horse racing and
golf segments as well as the sale of certain healthcare and other non-strategic
assets.
Accordingly, Realty has classified approximately $3,422,000 of net income
from the horse racing and golf segments as discontinued during the quarter
ended September 30, 1998. Realty has also recorded a provision of approximately
$173,000,000 based upon the estimated proceeds to be realized on disposal of
the horse racing and golf-related assets and operations.
The resulting net loss available for common shareholders, after deducting
preferred share dividends, for the three months ended September 30, 1998, was
$186,998,000 compared to net income of $42,052,000 for the three months ended
September 30, 1997. The net loss available to common shareholders per share for
the three months ended September 30, 1998 was $1.32 compared to net income per
share of $.57 for the three months ended September 30, 1997. The per share
amount decreased primarily due to the provisions for impairment and
discontinued operations, and dilution resulting from mergers completed since
September 30, 1997.
Nine months ended September 30, 1998 vs. Nine months ended September 30, 1997
Revenue for the nine months ended September 30, 1998 was $355,845,000
compared to $213,723,000 for the nine months ended September 30, 1997, an
increase of $142,122,000. Revenue growth was primarily attributable to
increased rental and interest income of $47,730,000 as a result of additional
real estate investments made over the last year, net of mortgage prepayments.
The increase also arose from other income of $1,080,000 and rent, interest and
royalty income of $67,312,000 collected from Operating, principally related to
the addition of hotel rental activities. Other income for the nine months ended
September 30, 1998 included a nonrecurring $26,000,000 prepayment and
make-whole gain as a result of approximately $122,000,000 in mortgage
investments that were repaid prior to their maturity.
For the nine months ended September 30, 1998, total expenses, excluding a
provision for impairment discussed below, increased by $115,970,000. Interest
expense increased $45,973,000 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 $35,906,000 which was a result of increased real estate
investments and amortization of goodwill from the La Quinta acquisition
completed on July 17, 1998. General and administrative expenses increased by
$7,003,000 primarily due to a higher level of operating costs associated with
portfolio growth and as a result of the acquisition. Rental and hotel property
operating expenses of $10,401,000 were incurred during the nine months ended
September 30, 1998 and principally related to property taxes incurred at hotel
facilities and the management of medical office buildings. During the nine
months ended September 30, 1998 Realty recorded an unrealized loss on
securities held for sale of $3,620,000 that were sold in the fourth quarter.
Provision for impairment
During the nine months ended September 30, 1998 Realty recorded a
provision for impairment of $73,000,000, which includes healthcare assets to be
sold, adjustments to the carrying value of owned properties, and mortgages.
Realty commenced a reevaluation, during the quarter ended March 31, 1998, of
its intentions with respect to existing healthcare assets. As a result of
continued deteriorating performance at six healthcare facilities, management
committed to a plan to sell these facilities as soon as practicable.
Accordingly, Realty recorded a provision of $46,000,000 to adjust the carrying
value of these facilities and related receivables to estimated fair value less
costs to sell as of September 30, 1998. Realty also recorded a provision of
$14,000,000 to three owned facilities and a valuation reserve of $13,000,000
that related to Realty's mortgage loan portfolio to adjust the carrying value
to estimated fair value. These provisions were recorded based upon recent
developments identified as part of a continuing evaluation of the existing
health care portfolio.
42
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Nine months ended September 30, 1998 vs. Nine months ended September 30, 1997
(Continued)
Other expenses
During the nine months ended September 30, 1998 Realty also recorded a
provision of $2,500,000 to adjust the carrying value of working capital
receivables related to certain existing healthcare facilities and established a
$3,000,000 valuation reserve against other assets. Realty also has held other
assets and receivables that are unrelated to its historical primary business of
health care financing. Management has determined that further collection
efforts for these assets is currently an inefficient use of its resources and
therefore recorded a provision of approximately $5,000,000 to reduce the
carrying value of these assets to net realizable value during the nine months
ended September 30, 1998. In addition, during the nine months ended September
30, 1998 Realty recorded approximately $3,041,000 of non-recurring costs
related to the evaluation of certain acquisition targets for which it is no
longer pursuing and charges related to a restructuring plan.
Discontinued operations
During the latter part of 1997 and 1998 the Companies pursued a strategy
of diversifying into new businesses including horse racing, golf and lodging.
During the first quarter of 1998 Realty commenced a reevaluation of its
existing health care real estate portfolio and other assets. As a result during
the third quarter of 1998, the Companies reassessed these business segments. In
addition, a review of investment and operating strategies for the Companies was
initiated. As a result, on November 11, 1998, the Companies approved a
comprehensive restructuring plan including the disposal of the horse racing and
golf segments as well as the sale of certain healthcare and other non-strategic
assets.
Accordingly, Realty has classified approximately $14,635,000 of net income
from the horse racing and golf segments as discontinued during the nine months
ended September 30, 1998. Realty has also recorded a provision of approximately
$173,000,000 based upon the estimated proceeds to be realized on disposal of
the horse racing and golf-related assets and operations.
The resulting net loss available for common shareholders, after deducting
preferred share dividends, for the nine months ended September 30, 1998, was
$84,361,000 compared to net income of $125,052,000 for the nine months ended
September 30, 1997. The net loss available to common shareholders per share for
the nine months ended September 30, 1998 was $.75 compared to net income per
share of $1.69 for the nine months ended September 30, 1997. The per share
amount decreased primarily due to the provisions for impairment and
discontinued operations, and dilution resulting from mergers completed since
September 30, 1997.
Realty--Financial Condition
As of September 30, 1998, the Realty's gross real estate investments
totaled approximately $5,654,866,000, consisting of 216 long-term care
facilities, 198 retirement and assisted living facilities, 34 medical office
buildings, 25 rehabilitation hospitals, six alcohol and substance abuse
treatment facilities and psychiatric hospitals, one acute care hospital campus,
283 hotel facilities in service with 20 more under construction, and a 50%
interest in a fashion mall. As of September 30, 1998, the Realty's outstanding
commitments for additional financing totaled approximately $261,000,000 for the
completion of 38 assisted living facilities, five long-term care facilities,
five medical office buildings and 20 hotel facilities currently under
construction and additions to existing facilities in the portfolio.
On November 11, 1998 the boards of directors of Realty and Operating
approved a comprehensive restructuring plan. Significant components of the
restructuring plan include the sale of the Cobblestone Golf Group, the Santa
Anita Racetrack and certain pieces of artwork contained therein, and certain
healthcare properties. The Companies have letters of intent to sell
approximately $400,000,000 of healthcare properties at approximately their
original investment value and is close to signing a definitive agreement to
sell the Santa Anita Racetrack. The sale of Santa Anita Racetrack is expected
to close at the end of 1998.
The Companies provide funding for new investments through a combination of
long-term and short-term financing including both debt and equity as well as
the sale of assets. The Companies obtain long-
43
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Realty--Financial Condition (Continued)
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 February 26, 1998, the Companies entered into transactions with Merrill
Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch &
Co., Inc. ("MLI"). Pursuant to the terms of a Stock Purchase Agreement, MLI
purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock par
value $.10 per share from each of the Companies at a purchase price of $32.625
per share. The Series A Non-Voting Convertible Common Stock converted to paired
common stock of the Companies on June 18, 1998, the business day following the
date on which the stockholders of the Companies approved the merger of Realty
with La Quinta. Net proceeds from the issuance of securities were approximately
$272,000,000 and were used by the Companies to repay existing indebtedness.
Separately, the Companies and MLI entered into a Purchase Price Adjustment
Agreement under which the Companies will, within one year from the date of
MLI's purchase, on a periodic basis, adjust the original $32.625 purchase price
per share based on the market price of the paired common stock at the time of
any interim or final adjustments, by receiving additional paired common stock
from MLI or by issuing additional paired common stock to MLI. In the event that
the market price for the paired shares is lower than the original purchase
price, the Companies will have to deliver additional paired shares to MLI which
would have dilutive effects on the capital stock of the Companies. This
dilutive effect increases significantly as the market price of the paired
shares declines further below the original purchase price. Moreover,
settlement, whether at maturity or at an earlier date, may force the Companies
to issue paired shares at a depressed price, which may heighten this dilutive
effect on the capital stock of the Companies.
The paired common shares issued under the above listed agreements receive
the same dividend as the Companies' paired common stock, however, the
guaranteed minimum return is LIBOR plus 75 basis points. Any difference between
LIBOR plus 75 basis points and the dividend payments received by MLI will be
included in an adjustment amount under the Purchase Price Adjustment Agreement.
The Companies expect the annual dividend to exceed LIBOR plus 75 basis points.
This Forward Equity Issuance Transaction ("FEIT") has been accounted for
as an equity transaction with the original 8,500,000 paired common shares
treated as outstanding from their date of issuance for both basic and diluted
earnings per share purposes. Contingent shares, calculated based upon the
Companies' September 30, 1998 stock price, are included in the calculation of
diluted earnings per share. The accounting treatment for this type of
transaction is being reviewed by the Emerging Issues Task Force ("EITF"). The
Securities and Exchange Commission has concluded that until the EITF has an
opportunity to perform a full review of this type of transaction, future
transactions of this type will be accounted for as debt. For previously
completed transactions such as the Companies', the Securities and Exchange
Commission will not object to the accounting treatment reflected in this
Quarterly Report on Form 10-Q.
Pursuant to the FEIT agreement, the Companies placed in a collateral
account approximately 8,714,000 paired common shares, based on various
measurement dates prior to September 30, 1998. According to the terms of the
FEIT, had the closing stock price of $17.06 on September 30, 1998 been used,
approximately 2,417,000 paired common shares would have been required to be
returned to the Companies.
44
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Realty--Financial Condition (Continued)
On November 11, 1998, the Companies entered into an agreement with Merrill
Lynch International and certain of its affiliates to settle the FEIT. Under the
agreement, Realty has agreed to grant a mortgage of the Santa Anita Racetrack
to Merrill Lynch and anticipates repaying Merrill Lynch approximately 50% of
the FEIT in cash generated in part from the sale of certain assets. It is
anticipated that the remaining FEIT will be discharged from the proceeds of the
sale of equity securities of The Meditrust Companies with terms to be finalized
shortly, which, if offered publicly will be offered pursuant to a prospectus.
Merrill Lynch has agreed, subject to the terms of the settlement agreement, not
to sell any shares of the existing FEIT until February 28, 1999 while the
Companies completes the sale of equity securities and certain assets.
On May 29, 1998, Realty completed its merger with Cobblestone Holdings,
Inc. ("Cobblestone") pursuant to an Agreement and Plan of Merger dated as of
January 11, 1998, as amended by a First Amendment thereto dated as of March 16,
1998 (as amended, the "Merger Agreement"). Under the terms of the Merger
Agreement, Cobblestone, the parent of Cobblestone Golf Group, Inc., merged with
and into Realty, with Realty as the surviving corporation (the "Cobblestone
Merger"). Upon the closing of the Cobblestone Merger, each share of common
stock of Cobblestone was converted into the right to receive 3.867 paired
common shares and each share of preferred stock of Cobblestone was converted
into the right to receive .2953 paired common shares. The total number of
paired common shares issued in connection with the Cobblestone Merger was
approximately 8,177,000, with an aggregate market value of approximately
$230,000,000 plus the issuance of approximately 452,000 options valued at
$10,863,000. In addition, Realty advanced monies in order for Cobblestone to
satisfy approximately $170,000,000 of Cobblestone's debt and associated costs.
The total consideration paid in connection with the Cobblestone Merger was
approximately $420,000,000. The excess of the purchase price, including costs
of the Cobblestone Merger, over the fair value of the net assets acquired
approximated $153,750,000 and is being amortized over 20 years.
On June 10, 1998, Realty issued 7,000,000 depositary shares. Each
depositary share represents one-tenth of a share of 9% Series A Cumulative
Redeemable Preferred Stock with a par value of $.10 per share. Total proceeds
from this issuance of approximately $169,488,000 were used by Realty primarily
to repay existing indebtedness.
On July 17, 1998, Realty completed its merger with La Quinta Inns, Inc.
("La Quinta") pursuant to a merger agreement dated January 3, 1998, and as
amended thereto (as amended, the "La Quinta Merger Agreement"). Under the terms
of the La Quinta Merger Agreement, La Quinta merged with and into Realty, with
Realty as the surviving corporation (the "La Quinta Merger").
Upon the closing of the La Quinta Merger, each share of common stock of La
Quinta was converted into the right to receive 0.736 paired common shares,
reduced by the amount to be received in an earnings and profits distribution.
Approximately 43,280,000 paired common shares, with an aggregate market value
of approximately $1,172,636,000, and approximately $956,054,000 were exchanged
in order to consummate the La Quinta Merger. In addition, Realty assumed
approximately $835,915,000 of La Quinta's debt and associated costs.
Accordingly, the operations of La Quinta are included in the combined and
consolidated financial statements since consummation of the La Quinta Merger.
The total consideration paid in connection with the La Quinta Merger was
approximately $2,946,601,000. The excess of the purchase price, including costs
of the La Quinta Merger, over the fair value of the net assets acquired
approximated $285,821,000, and is being amortized over 20 years.
On July 17, 1998 Realty executed an agreement for an unsecured bank
facility for a total of $2,250,000,000 bearing interest at the lenders' prime
rate plus .50% or LIBOR plus 1.375% (7.06% at November 3, 1998). The facility
is comprised of three tranches with term loans at various maturity dates
between July 17, 1999 and July 17, 2001 and a revolving tranche with
availability of $1,000,000,000 maturing July 17, 2001. A total of $310,000,000
was available at November 3, 1998.
Realty has reached an agreement with its bank group and is in the process
of amending its New Credit Agreement. The amendment provides for: Realty's cash
repayment of a portion of its FEIT; the
45
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Realty--Financial Condition (Continued)
amendment of certain financial covenants to accommodate asset sales, to exclude
the impact of non-recurring charges and to provide for future operating
flexibility; and the pledge of stock of the Companies' subsidiaries. This
pledge of subsidiary stock will also extend on a pro rata basis to entitled
bondholders. Realty has also agreed to increase the pricing of the credit
facility by approximately 125 basis points.
On August 17, 1998, Realty redeemed $100,000,000 Remarketed Reset Notes
due August 15, 2002 at par value. On September 11, 1998, Realty redeemed
$120,000,000 of 91/4% Senior Subordinated Notes due 2003 at 103.46% of par.
Realty's credit facility was used to finance both redemptions.
In addition, the Companies have an effective shelf registration statement
on file with the Securities and Exchange Commission under which the Companies
may issue $1,875,000,000 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 had shareholders' equity of $3,216,391,000 and debt constituted 51%
of Realty's total capitalization as of September 30, 1998.
On October 15, 1998 Realty declared a dividend of $0.62125 per share
payable on November 13, 1998 to shareholders of record on October 30, 1998.
Realty believes that various sources of capital are adequate to finance
its operations as well as pending acquisitions, mortgage financings and future
dividends. Over the next twelve months, as realty identifies appropriate
investment opportunities, Realty may raise additional capital through the sale
of assets, shares, series common stock or preferred stock, the issuance of
additional long-term debt, through a securitization transaction.
Operating--Results of Operations
Three months ended September 30, 1998
Operating derives its revenue primarily from hotel facility operations.
Hotel revenues were $123,430,000 during the post-merger period of July 17, 1998
through September 30, 1998. Interest and other income was $191,000 for the
three months ended September 30, 1998.
For the three months ended September 30, 1998, total expenses were
$129,305,000. Expenses were primarily attributable to the addition of operating
expenses from the hotel segment of $57,738,000 and interest, royalty and rent
expenses paid to Realty of $66,823,000 which were incurred during the post-
acquisition period from July 17, 1998 to September 30, 1998. Depreciation and
amortization expense was $2,055,000 primarily for depreciation of furniture and
fixtures as a result of the La Quinta acquisition and amortization of goodwill
as a result of the La Quinta and Santa Anita acquisitions. Other expenses were
$1,941,000 and primarily consisted of non-recurring charges related to a
restructuring plan discussed below. General and administrative expenses were
$717,000.
Discontinued operations
During the latter part of 1997 and 1998 the Companies pursued a strategy
of diversifying into new businesses including horse racing, golf and lodging.
During the third quarter of 1998, the Companies reassessed these business
segments. In addition, a review of investment and operating strategies for the
Companies was initiated. As a result, on November 11, 1998, the Companies
approved a comprehensive restructuring plan including the disposal of the horse
racing and golf segments as well as the sale of certain healthcare and other
non-strategic assets.
Accordingly, Operating has classified approximately $2,566,000 of net
losses from the horse racing and golf segments as discontinued during the three
months ended September 30, 1998. Operating has also recorded a provision of
approximately $4,500,000 based upon the estimated proceeds to be realized on
disposal of certain operating assets.
46
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Three months ended September 30, 1998 (Continued)
As a result, a net loss of $11,686,000 was incurred for the three months
ended September 30, 1998.
Nine months ended September 30, 1998
Operating--Results of Operations
Operating derives its revenue primarily from hotel facility operations.
Hotel revenues were $123,430,000 during the post-merger period of July 17, 1998
through September 30, 1998. Interest and other income was $444,000 for the
three months ended September 30, 1998.
For the nine months ended September 30, 1998, total expenses were
$131,436,000. Expenses were primarily attributable to the addition of operating
expenses from the hotel segment of $57,738,000 and interest, royalty and rent
expenses paid to Realty of $67,312,000. Depreciation and amortization expense
was $2,458,000 primarily for depreciation of furniture and fixtures as a result
of the La Quinta acquisition and amortization of goodwill as a result of the La
Quinta and Santa Anita acquisitions. Other expenses were $1,941,000 and
primarily consisted of non-recurring charges related to a restructuring plan
discussed below. General and administrative expenses were $1,956,000.
Discontinued operations
During the latter part of 1997 and 1998 the Companies pursued a strategy
of diversifying into new businesses including horse racing, golf and lodging.
During the third quarter of 1998, the Companies reassessed these business
segments. In addition, a review of investment and operating strategies for the
Companies was initiated. As a result, on November 11, 1998, the Companies
approved a comprehensive restructuring plan including the disposal of the horse
racing and golf segments as well as the sale of certain healthcare and other
non-strategic assets.
Accordingly, Operating has classified approximately $3,914,000 of net
losses from the horse racing and golf segments as discontinued during the nine
months ended September 30, 1998. Operating has also recorded a provision of
approximately $4,500,000 based upon the estimated proceeds to be realized on
disposal of certain operating assets.
As a result, a net loss of $14,912,000 was incurred for the nine months
ended September 30, 1998.
Operating--Financial Condition
Operating provides funding from hotel operations and through a combination
of long-term and short-term financing including both debt and equity. Operating
obtains long-term financing through the issuance of common shares and unsecured
notes. Operating obtains short-term financing through borrowings from Realty.
On November 11, 1998 the boards of directors of Realty and Operating
approved a comprehensive restructuring plan. Significant components of the
restructuring plan include the sale of the Cobblestone Golf Group, the Santa
Anita Racetrack and certain pieces of artwork contained therein, and certain
healthcare properties. The Companies have letters of intent to sell
approximately $400,000,000 of healthcare properties at approximately their
original investment value and is close to signing a definitive agreement to
sell the Santa Anita Racetrack. The sale of Santa Anita Racetrack is expected
to close at the end of 1998.
On February 26, 1998, the Companies entered into transactions with Merrill
Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch &
Co., Inc. ("MLI"). Pursuant to the terms of a Stock Purchase Agreement, MLI
purchased 8,500,000 shares of Series A Non-Voting Convertible Common Stock par
value $.10 per share from each of the Companies at a purchase price of $32.625
per share. The Series A Non-Voting Convertible Common Stock converted to paired
common stock of the Companies on June 18, 1998, the business day following the
date on which the stockholders of the Companies approved the merger of Realty
with La Quinta. Net proceeds from the issuance of securities were approximately
$272,000,000 and were used by the Companies to repay existing indebtedness.
47
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Operating--Financial Condition (Continued)
The Companies and MLI entered into a Purchase Price Adjustment Agreement under
which the Companies will, within one year from the date of MLI's purchase, on a
periodic basis, adjust the original $32.625 purchase price per share based on
the market price of the paired common stock at the time of any interim or final
adjustments, by receiving additional paired common stock from MLI or by issuing
additional paired common stock to MLI. In the event that the market price for
the paired shares is lower than the original purchase price, the Companies will
have to deliver additional paired shares to MLI which would have dilutive
effects on the capital stock of the Companies. This dilutive effect increases
significantly as the market price of the paired shares declines further below
the original purchase price. Moreover, settlement, whether at maturity or at an
earlier date, may force the Companies to issue paired shares at a depressed
price, which may heighten this dilutive effect on the capital stock of the
Companies.
The paired common shares issued under the above listed agreements receive
the same dividend as the Companies' paired common stock, however, the
guaranteed minimum return is LIBOR plus 75 basis points. Any difference between
LIBOR plus 75 basis points and the dividend payments received by MLI will be
included in an adjustment amount under the Purchase Price Adjustment Agreement.
The Companies expect the annual dividend to exceed LIBOR plus 75 basis points.
This Forward Equity Issuance Transaction ("FEIT") has been accounted for
as an equity transaction with the original 8,500,000 paired common shares
treated as outstanding from their date of issuance for both basic and diluted
earnings per share purposes. Contingent shares, calculated based upon the
Companies' September 30, 1998 stock price, are included in the calculation of
diluted earnings per share. The accounting treatment for this type of
transaction is being reviewed by the Emerging Issues Task Force ("EITF"). The
Securities and Exchange Commission has concluded that until the EITF has an
opportunity to perform a full review of this type of transaction, future
transactions of this type will be accounted for as debt. For previously
completed transactions such as the Companies', the Securities and Exchange
Commission will not object to the accounting treatment reflected in this
Quarterly Report on Form 10-Q.
Pursuant to the FEIT agreement, the Companies placed in a collateral
account approximately 8,714,000 paired common shares, based on various
measurement dates prior to September 30, 1998. According to the terms of the
FEIT, had the closing stock price of $17.06 on September 30, 1998 been used,
approximately 2,417,000 paired common shares would have been required to be
returned to the Companies.
On November 11, 1998, the Companies entered into an agreement with Merrill
Lynch International and certain of its affiliates to settle the FEIT. Under the
agreement, Realty has agreed to grant a mortgage of the Santa Anita Racetrack
to Merrill Lynch and anticipates repaying Merrill Lynch approximately 50% of
the FEIT in cash generated in part from the sale of certain assets. It is
anticipated that the remaining FEIT will be discharged from the proceeds of the
sale of equity securities of The Meditrust Companies with terms to be finalized
shortly, which, if offered publicly will be offered pursuant to a prospectus.
Merrill Lynch has agreed, subject to the terms of the settlement agreement, not
to sell any shares of the existing FEIT until February 28, 1999 while the
Companies completes the sale of equity securities and certain assets.
On May 29, 1998, Realty completed its merger with Cobblestone Holdings,
Inc. ("Cobblestone") pursuant to an Agreement and Plan of Merger dated as of
January 11, 1998, as amended by a First Amendment thereto dated as of March 16,
1998 (as amended, the "Merger Agreement"). Under the terms of the Merger
Agreement, Cobblestone, the parent of Cobblestone Golf Group, Inc., merged with
and into Realty, with Realty as the surviving corporation (the "Cobblestone
Merger"). Upon the closing of the Cobblestone Merger, each share of common
stock of Cobblestone was converted into the right to receive 3.867 paired
common shares and each share of preferred stock of Cobblestone was converted
into the right to receive .2953 paired common shares. The total number of
paired common shares issued in connection with the Cobblestone Merger was
approximately 8,177,000, with an aggregate market value
48
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Operating--Financial Condition (Continued)
of approximately $230,000,000 plus the issuance of approximately 452,000
options valued at $10,863,000. In addition, Realty advanced monies in order for
Cobblestone to satisfy approximately $170,000,000 of Cobblestone's debt and
associated costs. The total consideration paid in connection with the
Cobblestone Merger was approximately $420,000,000. The excess of the purchase
price, including costs of the Cobblestone Merger, over the fair value of the
net assets acquired approximated $153,750,000 and is being amortized over 20
years.
In addition, the Companies have an effective shelf registration statement
on file with the Securities and Exchange Commission under which the Companies
may issue $1,875,000,000 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 had shareholders' equity of $50,953,000 as of September 30,
1998.
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
investment opportunities, Operating may raise additional capital through the
sale of Shares, series common stock or preferred stock, the issuance of
additional long-term debt or through a securitization transaction.
Recent Legislative Developments
On July 22, 1998, the President signed into law the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "Reform Act"). Included in
the Reform Act is a freeze on the grandfathered status of paired share REITs
such as the Companies. Under this legislation, the anti-pairing rules provided
in the Internal Revenue Code of 1986, as amended (the "Code"), apply to real
property interests acquired after March 26, 1998 by the Companies, or by a
subsidiary or partnership in which a ten percent or greater interest is owned
by the Companies, unless (1) the real property interests are acquired pursuant
to a written agreement that was binding on March 26, 1998 and at all times
thereafter or (2) the acquisition of such real property interests was described
in a public announcement or in a filing with the SEC on or before March 26,
1998.
Under the Reform Act, the properties acquired in connection with the July
17, 1998 La Quinta Merger and in connection with the May 29, 1998 Cobblestone
Merger generally are not subject to these anti-pairing rules. However, any
property acquired by the Companies, La Quinta, or Cobblestone after March 26,
1998, other than property acquired pursuant to a written agreement that was
binding on March 26, 1998 or described in a public announcement or in a filing
with the SEC on or before March 26, 1998, is subject to the anti-pairing rules.
Moreover, under the Reform Act any otherwise grandfathered property will become
subject to the anti-pairing rules if a lease or renewal with respect to such
property is determined to exceed an arm's length rate. In addition, the Reform
Act also provides that a property held by the Companies that is not subject to
the anti-pairing rules will become subject to such rules in the event of an
improvement placed in service after December 31, 1999 that changes the use of
the property and the cost of which is greater than 200 percent of (A) the
undepreciated cost of the property (prior to the improvement) or (B) in the
case of property acquired where there is a substituted basis (e.g., the
properties acquired from La Quinta and Cobblestone), the fair market value of
the property on the date it was acquired by the Companies.
There is an exception for improvements placed in service before January 1,
2004 pursuant to a binding contract in effect on December 31, 1999 and at all
times thereafter. This restriction on property improvements applies to the
properties acquired from La Quinta and Cobblestone, as well as all other
properties owned by the Companies, and limits the ability of the Companies to
improve or change the use of those properties after December 31, 1999. The
Companies are considering various steps which they might take in order to
minimize the effect of the Reform Act.
Restructuring the operations of Realty and Operating Company to comply
with the recent legislation may cause the Companies to incur substantial tax
liabilities, to recognize an impairment loss on their goodwill asset or
otherwise adversely affect the Companies.
49
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Other Events
On November 11, 1998, the boards of Directors of Realty and Operating
Company unanimously approved a comprehensive restructuring plan designed to
strengthen the Companies' financial position and clarify their investment and
operating strategy by focusing on the healthcare and lodging business segments.
The comprehensive plan includes pursuing the separation of its primary
businesses, healthcare and lodging, by creating two separately-listed,
publicly-traded real estate investment trusts ("REITs") to be accomplished by a
spin off of healthcare financing business into a stand-alone REIT during the
latter part of 1999. The plan contemplates continuation of operation of the
healthcare and lodging businesses using the existing paired-share structure
until the healthcare spin off takes place.
The plan contemplates that the Companies will sell over $1 billion of
non-strategic assets, including the Cobblestone Golf Group, the Santa Anita
Racetrack and approximately $550 million of non-strategic healthcare
properties. Proceeds from the sales of these assets will be used to achieve
significant near-term debt reduction.
The comprehensive restructuring plan also includes goals related to
reduction of capital investments to reflect current industry operating
conditions and of resetting its annual dividend amount to $1.84 per paired
common share, an amount that is considered sustainable and a comparable payout
ratio to that of its peer groups.
On November 11, 1998, the Companies entered into an agreement with Merrill
Lynch International and certain of its affiliates to settle the FEIT. Under the
agreement, Realty has agreed to grant a mortgage of the Santa Anita Racetrack
to Merrill Lynch and anticipates repaying Merrill Lynch approximately 50% of
the FEIT in cash generated in part from the sale of certain assets. It is
anticipated that the remaining FEIT will be discharged from the proceeds of the
sale of equity securities of The Meditrust Companies with terms to be finalized
shortly, which, if offered publicly will be offered pursuant to a prospectus.
Merrill Lynch has agreed, subject to the terms of the settlement agreement, not
to sell any shares of the existing FEIT until February 28, 1999 while the
Companies complete the sale of equity securites and certain assets.
On August 3, 1998, Abraham D. Gosman resigned his position as Director and
Chairman of the Boards of the Companies and Chief Executive Officer and
Treasurer of Operating Company. Thomas M. Taylor was appointed Interim Chairman
of the Companies. David F. Benson will serve as Interim Chief Executive Officer
of Realty, and William C. Baker will serve as Interim President and Interim
Treasurer of Operating Company. In connection with discussions relating to his
resignation, the Companies are considering making severance payments to Mr.
Gosman, the amounts of which may be significant. These discussions are ongoing.
Newly Issued Accounting Standards
Financial Accounting Standards Board Statement No. 133 ("SFAS 133"):
"Accounting for Derivative Instruments and Hedging Activities" is effective for
all fiscal quarters of all fiscal years beginning after June 15, 1999, although
early application is encouraged. SFAS 133 established standards related to the
Companies financial risks associated with their activity as it relates to
financial activities with respect to derivative instruments and hedging. The
Companies are evaluating the impact of this pronouncement and intend to adopt
the requirements of SFAS 133 in the financial statements for the year ending
December 31, 1998 and do not believe implementation will have a material effect
on the financial statements.
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.
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 made the relevant employees aware of the
Year 2000 issue and collected information from such employees regarding systems
that might be affected. Management has
50
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Year 2000 (Continued)
put together a Year 2000 Steering Committee to 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 is in the process of obtaining written verification from vendors to
the effect that externally developed computer information systems acquired from
such vendors correctly distinguish dates before the year 2000. Operating
expects to obtain such verifications, or a commitment from the relevant vendors
to provide a solution, by no later than the first quarter of 1999. In addition,
the companies are considering engagement of outside consultants to review the
plan and assessment. Realty is in the process of obtaining written verification
from its externally developed general ledger information system and payroll
service provider to insure it correctly distinguishes dates before the year
2000.
The Companies are currently evaluating and assessing their other
electronic systems that include embedded technology, such as
telecommunications, security, HVAC, elevator, fire and safety systems, and
expect that their assessment will be completed by first quarter of 1999. The
Companies are aware that such systems contain embedded chips that are 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.
The Companies' primary financial service providers are its primary bank,
credit card and payroll processors each of which will be required to provide
written verification to the Companies by no later than the first quarter of
1999 that it 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 as such efforts or the potential effects of any failure to
comply.
Remediation. The Companies' primary uses of software systems are their
hotel reservation and front desk system, accounting and payroll and human
resources software. Upgrades to the hotel reservation system to address some
Year 2000 compliance issues were installed and implemented during fourth
quarter of 1997 through the second quarter of 1998. Testing of various airline
interfaces with the hotel reservation system is in process and is expected to
be completed by December 1998. The Companies plan to implement a new hotel
front desk system by the end of 1999, which will be year 2000 compliant.
Operating is in the process of testing Year 2000 compliant releases of existing
accounting, payroll and human resource systems. They plan to implement these
Year 2000 compliant upgrades by the end of the second quarter of 1999. In
addition, Operating has engaged outside consultants to assist in this process
with respect to certain Year 2000 compliance efforts. Operating has received
written verification from the vendors of accounting and payroll and human
resource systems that the general releases currently available are Year 2000
compliant.
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 currently anticipate that testing will commence no later than the
first quarter of 1999 and expects that their testing will be complete by the
end of the third quarter of 1999.
51
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Year 2000 (Continued)
Implementation. The Companies have begun implementation of Year 2000
compliant software and software upgrades and expect to have them completed by
December of 1999.
Costs to Address the Company's Year 2000 Issues. Based on current
information from their review to date, the Companies budgeted $300,000 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 $300,000, and as of September 30, 1998, the companies
have spent approximately $128,000 in connection therewith. 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 exceeds the Companies' estimates, the Year 2000 issue could
have a material adverse effect on the Companies' business, financial condition
and results of operations.
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 Company's Contingency Plans. The Companies intend to develop
contingency plans for significant business risks that might result from Year
2000 related events. Because the Companies have not identified any specific
business function that will be materially at risk of significant Year 2000
related disruptions, and because a full assessment of the Companies' risk from
potential Year 2000 failures is still in process, the Companies have not yet
developed detailed contingency plans specific to Year 2000 problems.
Development of these contingency plans is currently scheduled to occur during
the first quarter of 1999 and as otherwise appropriate.
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
Company's 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.
52
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
On January 8, 1998 the Companies received notice that they were named as
defendants in an action entitled Lynn Robbins v. William J. Razzouk, et al.,
Civil Action No. 98CI-00192 filed January 7, 1998 in the District Court of
Bexar County, Texas (the "Texas Court"), and on January 20, 1998 the Companies
received notice that they were named as defendants in an action entitled Adele
Brody v. William J. Razzouk, et al., Civil Action No. 98CI-00456 filed January
12, 1998 in the Texas Court. The complaints, which were consolidated into one
action (the "Action"), (i) alleged, in part, that La Quinta and its directors
violated their fiduciary duties of care and loyalty to La Quinta shareholders
by entering into a merger agreement with the Companies without having first
invited other bidders, and that the Companies aided and abetted La Quinta and
its directors in the alleged breaches, and (ii) sought injunctive relief
enjoining the merger with La Quinta and compensatory damages. The parties
negotiated and entered into an agreement in principle to settle the Action,
dated on or about May 8, 1998 (the "Memorandum of Understanding"). The
Memorandum of Understanding set forth the principal bases for the settlement,
which included the issuance of a series of press releases prior to the meetings
of the shareholders of the Companies and La Quinta to consider the La Quinta
merger agreement, and the inclusion of a section in the joint proxy
statement/prospectus prepared for the shareholder meetings which described the
Forward Equity Issuance Transaction with MLI.
The parties have negotiated and entered into a Stipulation and Agreement
of Compromise, Settlement and Release (the "Stipulation" or "Settlement"),
dated on or about October 8, 1998, which contains the terms of settlement of
the Action. On October 8, 1998, the Texas Court entered an Order Re:
Preliminary Approval ("Order") which, among other things, (i) preliminarily
approved the Settlement; (ii) conditionally approved the Settlement Class;
(iii) approved the Notice of Pendency and Settlement of Class Action for
mailing to the Settlement Class; and (iv) scheduled a Settlement Hearing. On
November 9, 1998, the Texas Court entered an amended Order which set the date
for the Settlement Hearing to January 19, 1999. The Texas Court has the right
to change the date of the Settlement Hearing without further notice to the
Settlement Class. The Settlement is contingent upon Final Court Approval of the
Settlement (as defined in the Stipulation). At the Settlement Hearing, the
parties will ask the Texas Court to enter a Final Judgment which will, among
other things, (i) finally approve the Settlement; (ii) declare that the Action
and the Settled Claims (as defined in the Stipulation) are finally and fully
compromised and settled; (iii) deem that the Representative Plaintiffs, the
Settlement Class and the Settlement Class Members have fully, finally and
forever settled and released any and all Settled Claims against the Released
Parties (as defined in the Stipulation); and (iv) dismiss the Action on the
merits and with prejudice. La Quinta has agreed to pay counsel for the class
plaintiffs attorney's fees in an amount awarded by the Texas Court not to
exceed $700,000 in the event such settlement is consummated.
Item 2. Changes in Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
The By-laws of each of the Companies specify when a stockholder must
submit nominations for director or proposals for consideration at a
stockholders' meeting in order for those nominations or proposals to be
considered in the meeting. In order for the nominations or proposals to be
considered at a stockholders' meeting, the stockholder making them must have
given timely notice in writing to the Secretary of such Company. To be timely,
a stockholder's notice must be delivered to or mailed and received at the
principal executive offices of such Company, not less than 60 days nor more
than 90 days prior to the meeting; except that in the event that a meeting is
called for a date other than a date specified in the By-laws, and less than 75
days' prior public disclosure of the date of the meeting is given, notice
53
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Item 5. Other Information (Continued)
by the stockholder to be timely must be received no later than the close of
business on the 15th calendar day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made.
A stockholder's notice to the Secretary concerning nominations for
director shall set forth the name, age, address and principal occupation of
each such nominee and the amount and type of such Company's stock held by each
such nominee, together with any additional information reasonably necessary to
determine the eligibility of each such nominee and any information required to
be disclosed in the solicitation of proxies in respect to each such nominee by
Schedule 14A, as amended from time to time or other applicable rules and
regulations of the Securities and Exchange Commission. The notice to the
Secretary shall also set forth the name, address, and the amount and type of
beneficial ownership of such Company's stock of the stockholder intending to
nominate the candidate or candidates identified in the notice to the Secretary.
Any stockholder desiring to bring any other business before any annual meeting
of stockholders shall set forth in such stockholder's notice to the Secretary
(i) a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the meeting, (ii) the
name and record address of the stockholder proposing such business, (iii) the
class and number of shares of such Company's stock that are beneficially owned
by such stockholder and (iv) any material interest of such stockholder in such
business. In order to be properly brought before any special meeting of
stockholders (other than any special meeting held for the purpose of electing
directors), business must be specified in the notice or meeting (or any
supplement thereto) given by or at the direction of the Board of Directors.
54
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
- - -------- ----------------------------------------------------------------------------------------------
<S> <C>
2.1 Agreement and Plan of Merger, dated as of January 3, 1998, by and among La Quinta Inns,
Inc., Meditrust Corporation and Meditrust Operating Company (incorporated by reference to
Exhibit 10.1 to the Joint Current Report on Form 8-K for Meditrust Corporation and Meditrust
Operating Company filed January 8, 1998);
2.2 Shareholders Agreement, dated as of January 3, 1998, by and among Meditrust
Corporation, Meditrust Operating Company, certain shareholders of La Quinta Inns, Inc.
and, solely for the purposes of Section 3.6 thereof, La Quinta Inns, Inc. (incorporated by
reference to Exhibit 10.2 to the Joint Current Report on Form 8-K for Meditrust Corporation
and Meditrust Operating Company filed January 8, 1998);
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 (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 Merger merging La Quinta Inns, Inc. with and into Meditrust Corporation filed
with the Secretary of State of Delaware on July 17, 1998;
3.7 Certificate of Amendment of Restated Certificate of Incorporation of Meditrust Corporation
filed with the Secretary of State of Delaware on July 17, 1998;
3.8 Certificate of Amendment of Restated Certificate of Incorporation of Meditrust Operating
Company filed with the Secretary of State of Delaware on July 17, 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 of the Companies, event date June 10,
1998);
4.2 Certificate of Amendment of Restated Certificate of Incorporation of Meditrust Operating
Company filed with the Secretary of State of Delaware on July 17, 1998;
10.1 Employment Agreement dated as of July 7, 1998 by and between Meditrust Operating
Company and Abraham D. Gosman;
27 Financial Data Schedule;
</TABLE>
55
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K (Continued)
<TABLE>
<CAPTION>
Exhibit
No. Description
- - ----------- --------------------------------------------------------------------------------------------
<S> <C>
99.5 Credit Agreement dated as of July 17, 1998, among Meditrust Corporation, Morgan
Guaranty Trust Company of New York and the other Banks set forth therein (incorporated by
reference to Joint Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
(b) Reports on Form 8-K. During the quarter ended June 30, 1998, the Companies filed the
following Current Reports on Form 8-K:
1. Joint Current Report on Form 8-K, event date July 17, 1998, which contains a press release
announcing the completion of the merger of La Quinta Inns, Inc. with and into Meditrust
Corporation.
2. Joint Current Report on Form 8-K, event date August 3, 1998, which contains a press
release announcing the resignation of Abraham D. Gosman as Director and Chairman of the
Boards of The Meditrust Companies and Chief Executive Officer and Treasurer of Meditrust
Operating Company.
3. Joint Current Report on Form 8-K/A, event date July 17, 1998, which contains supplemental
information for the period ended June 30, 1998 with respect to the acquisition of La Quinta
Inns, Inc., event date July 17, 1998.
</TABLE>
56
<PAGE>
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.
<TABLE>
<S> <C>
Meditrust Corporation
----------------------------
November 16, 1998 /s/ Laurie T. Gerber
----------------------------
Laurie T. Gerber
Chief Financial Officer
Meditrust Operating Company
----------------------------
November 16, 1998 /s/ William C. Baker
----------------------------
William C. Baker
Interim President and
Interim Treasurer
</TABLE>
57
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT (the "Agreement") made and entered into as of July
7, 1998 by and between Meditrust Operating Company, a Delaware corporation (the
"Employer"), and Abraham D. Gosman (the "Employee").
WHEREAS, the Employee has been employed by the Employer as its Chief
Executive Officer through the date hereof; and
WHEREAS, the Employer and the Employee wish to extend such employment
through December 31, 2002, on the terms and subject to the conditions set forth
in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises hereinafter
contained, the parties hereto hereby agree as follows:
1. Duties. During the term of this Agreement, the Employee agrees to be
employed by and to serve the Employer as its Chief Executive Officer and the
Chairman of its Board of Directors, and the Employer agrees to employ and retain
the Employee in such capacity. The Employee also shall serve the Employer in
such capacity or capacities, and with such other duties, as shall be designated
by the Board of Directors of the Employer from time to time. The Employee shall
devote such of his business time, energy, and skill to the affairs the Employer
as shall be necessary to perform the duties of such position and, in any event,
not less of his business time, energy and skill than he has devoted the Employer
and to Meditrust Corporation ("Meditrust") and its predecessor in the two years
prior to the execution hereof, and he shall not assume an executive or
management position in any other business (except for positions currently held
by him and positions with non-public businesses permitted pursuant to Section
5.1(a) hereof) without the express permission of the Board of Directors. The
Employee shall report only to the Employer's Board of Directors and at all times
during the term of this Agreement shall have powers and duties commensurate with
his position as Chief Executive Officer and Chairman of the Employer and
Chairman of Meditrust. Without the Employee's consent, the Employer may not
materially reduce the Employee's duties or responsibilities hereunder or assign
duties or responsibilities that are inconsistent with the Employee's position as
Chief Executive Officer of the Employer. The parties hereto understand that the
Employee is a resident of Florida and may perform his duties hereunder at a
Florida office to be maintained by the Employer on such terms and conditions as
the Board of Directors of the Employer may approve. Notwithstanding the
foregoing, the Employee shall travel to Needham, Massachusetts and to such other
cities in the United States at such intervals and for such periods as the
Employer shall reasonably request or as may be necessary for the performance of
his duties hereunder.
2. Term of Employment.
2.1 Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
<PAGE>
(a) "Termination For Cause" shall mean termination by
the Employer of the Employee's employment by the Employer by reason of
(i) the Employee's fraud upon, deliberate injury or attempted injury
to, or dishonesty towards the Employer that causes material and
demonstrable injury to the Employer, (ii) the Employee's intentional
and material breach of, or material failure to perform under, this
Agreement or (iii) the conviction of any felony.
(b) [omitted]
(c) Termination Other Than For Cause" shall mean (x)
termination by the Employer of the Employee's employment other than a
Termination For Cause or a Termination Upon Death or Disability or (y)
termination of employment by the Employee after a material breach of
this Agreement by the Employer that is not rectified within 30 days of
notification of the Board of Directors by the Employee of such breach.
(d) "Termination Upon a Change in Control" shall mean
termination by the Employee of the Employee's employment with the
Employer within two years following a Change in Control.
(e) "Termination Upon Death or Disability" shall mean
termination by the Employer by reason of the Employee's death or
disability as described in Section 2.3 hereof.
(f) "Change in Control" shall mean (a) an acquisition
by any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or
more of the combined voting power of the then outstanding voting
securities of the Employer entitled to vote generally in the election
of directors of the Employer (the "Outstanding Voting Securities") or
20% or more of the combined market value of the equity securities of
the Employer (the "Equity Value"); provided, however, that any
acquisition directly from or by the Employer or any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the
Employer or an affiliated company or any acquisition by a company
pursuant to a transaction which complies with clauses (i), (ii) and
(iii) of (c) below shall be excluded from this clause (a); or (b)
individuals who, as of the date hereof, constitute the Board of
Directors (the "Incumbent Board") of the Employer, cease for any reason
to constitute at least 60% of the Board of Directors of the Employer;
provided, however, that any individual becoming a director whose
election, or nomination for election by the Employer's stockholders,
was approved by a vote of at least 60% of the directors then comprising
the Incumbent Board shall be considered as though such individual was a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of an actual or threatened election contest with respect to the
election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other
than the Board of Directors of the Employer; or (c)
<PAGE>
consummation of a reorganization, merger or consolidation of the
Employer or the sale or other disposition of all or a material portion
of the assets of the Employer (a "Business Combination"), unless, in
each case, following such Business Combination, (i) all or
substantially all the individuals and entities who were the beneficial
owners, respectively, of the outstanding Equity Value and Outstanding
Voting Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 60% of the combined
market value of the equity securities and more than 60% of the combined
voting power of the then outstanding voting securities entitled to vote
generally in the election of directors of the corporation resulting
from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Employer or
all or substantially all of the Employer's assets either directly or
through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Business Combination of
the Equity Value and Outstanding Voting Securities, (ii) no Person
(excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Employer or such
corporation resulting from such Business Combination) beneficially
owns, directly or indirectly, 20% or more of the combined voting power
of the then outstanding voting securities or 20% or more of the
combined market value of the equity securities of the corporation
resulting from such business combination except to the extent that such
ownership existed prior to the Business Combination and (iii) at least
60% of the members of the board of directors of the corporation
resulting from such Business Combination were members of the Incumbent
Board at the time of the execution of the initial agreement, or the
action of the Board, providing for such Business Combination; or (d)
approval by the stockholders of the Employer of a complete liquidation
or dissolution of the Employer. For purposes of this definition,
"Employer" shall mean either Meditrust Operating Company or Meditrust
Corporation.
2.2 Term. The term of employment of the Employee by the
Employer shall be from the date hereof through December 31, 2002 unless
terminated earlier pursuant to this Section 2.
2.3 Termination. Notwithstanding any provision of this
Employment Agreement, the employment of the Employee pursuant to this Agreement
may be terminated by the Employer upon (a) at least fifteen (15) days prior
written notification to the Employee in the event of a Termination For Cause,
(b) upon at least sixty (60) days prior written notice to the Employee in the
event of a Termination Other Than For Cause, (c) upon written notification to
the Employee if the Employee, in the reasonable judgment of the Board of
Directors of the Employer, has failed to perform his duties under this Agreement
because of illness or physical or mental incapacity, and such illness or
incapacity continues for a period of more than four (4) months, or (d) in the
event of the Employee's death, in which case the Employee's employment shall be
deemed to have terminated as of the last day of the month during which his death
occurs. The Employee may terminate this Agreement at any time within two years
following a Change in Control by notice to the Employer. A termination Upon a
Change in Control by the Employee shall take effect immediately upon delivery of
a notice of termination to the Employer.
<PAGE>
2.4 Payments Upon Termination. Upon any termination of the
Employee's employment by the Employer hereunder, the Employer shall promptly pay
to the Employee, or in the case of his death, to his estate or such
beneficiaries as the Employee may from time to time designate, all accrued
salary, any benefits under any plans of the Employer in which the Employee is a
participant to the full extent of the Employee's rights under such plans,
accrued vacation pay and any appropriate business expense incurred by the
Employee in connection with his duties hereunder, all to the date of
termination. The Employee, or his estate or beneficiaries in the case of his
death, shall not be entitled to any other Compensation or reimbursement of any
kind, including, without limitation, severance compensation, except as provided
in Section 4 hereof.
3. Salary and Benefits.
3.1 Base Salary. As payment for the services to be rendered by
the Employee as provided in Section 1, and subject to the terms and conditions
of Section 2, the Employer agrees to pay to the Employee at the rate of
$1,000,000 per annum (the "Base Salary"). The Base Salary shall be payable in
equal bi-monthly installments. Unless otherwise determined by the Board of
Directors, the Employee shall not be entitled to any compensation in addition to
that set forth in this Section 3 for serving as an officer of the Employer. All
services which the Employee may render to the Employer in any capacity shall be
deemed to be services required by this Agreement and as consideration for the
compensation herein provided.
3.2 Bonus. Subject to the approval of the Employer's
stockholders of the Annual Bonus Plan, the Employee shall be eligible to receive
within 90 days after the end of each fiscal year hereunder a bonus equal to the
Applicable Percentage of Base Salary paid during the previous fiscal year. The
Applicable Percentage shall be (i) 0% if The Meditrust Companies (as hereinafter
defined) did not meet the funds from operations performance plan which plan
shall have been approved in writing by the non-employee members of the Board of
Directors for such fiscal year before the 91st day of such fiscal year (the
"Plan"), (ii) 75% if the Plan is met and (iii) 100% if the Plan is exceeded by
more than 20%. The Applicable Percentage shall be proportionately increased from
75% to 100% if the Plan is exceeded by between 1% and 20%.
3.3 Employee Benefits. The Employee shall be eligible to
participate in such of the Employer's benefits and deferred compensation plans
as are now generally available or later made generally available to executive
officers of the Employer.
3.4 Reimbursement for Expenses. The Employer shall reimburse
the Employee for reasonable and property documented out-of-pocket expenses
incurred by the Employee in connection with his duties under this Agreement,
including the use of aircraft owned by the Employee at rates and other charges
not in excess of those charged for commercial charter of comparable aircraft.
3.5 Insurance. The Employer shall continue to advance premiums
with respect to the split dollar life insurance policy insuring the Employee
currently in effect.
<PAGE>
3.6 Performance Shares. In connection with the negotiation and
execution hereof, the Employer shall award the Employee 800,000 performance
shares in accordance with the terms described in Exhibit A hereto and the
Employer's 1995 Share Award Plan (the "Performance Shares").
3.7 Stock Options. In connection with the negotiation and
execution hereof, the Employer has issued to the Employee pursuant to the 1995
Share Award Plan options to purchase 1,600,000 paired shares of the Employer and
Meditrust (collectively, "The Meditrust Companies") at $30.75 'per paired share
(the "Option"). The Option shall vest in 25% increments on each of February 27,
1999, February 27, 2000, February 27, 2001 and February 27, 2002, so that the
Option is fully vested on February 27, 2002. The issuance of options to purchase
1,150,000 of such paired shared were subject to approval by the Employer's
stockholders of an amendment to the 1995 Share Award Plan to permit the award of
options to purchase more than 450,000 paired shares to any one individual in any
year, which approval has been obtained.
3.8 Performance Units. The Employer has issued to the Employee
100,000 units in the Long Term Bonus Program in accordance with Exhibit B and
subject to Section 4.1 hereof. In the event of a Termination Upon a Change in
Control or a Termination Other Than For Cause, Employee shall have the right
(exercisable within 30 days of such termination) to exchange up to 800,000
Performance Shares for an equal number of newly issued units in the Long Term
Bonus Program in accordance with Exhibit B and subject to Section 4.1 hereof.
4. Severance Compensation.
4.1 Severance Compensation in the Event of a Termination Upon
a Change in Control or Termination Other Than For Cause. In the event the
Employee's employment is terminated in a Termination Upon a Change in Control or
in a Termination Other Than For Cause, (i) all unvested Performance Shares shall
become immediately vested in full, (ii) all performance units issued pursuant to
Section 3.8 hereof (including any such units issued in exchange for Performance
Shares) shall become immediately vested in full with the value of each unit to
be $50, (iii) any unvested options to purchase shares of the Employer or the
Meditrust Companies held by the Employee shall become immediately vested and
exercisable in full and (iv) the Employee shall be paid a lump sum within 30
days of such termination equal to three times the sum of his Base Salary and
maximum bonus opportunity for the year of termination. The Employee shall
continue to accrue retirement benefits and shall continue to enjoy the benefits
under Section 3.3 and 3.5 hereof for the balance of the original term hereof.
4.2 [omitted]
4.3 Termination Upon Death or Disability. In the event the
Employee's employment is terminated in a Termination Upon Death or Disability,
the Employee or his estate shall be paid his Base Salary and maximum bonus for
the balance of the original term hereof and, except in the event of the
Employee's death, the Employer shall continue to make the payments described in
Section 3.5 for the balance of the original term hereof.
<PAGE>
4.4 Gross Up. The Employee shall be entitled to an additional
payment for taxes imposed under Section 4999 of the Internal Revenue Code in
accordance with the terms of Schedule I attached hereto.
5. Non-Competition and Non-Disclosure.
5.1 Non-Competition.
(a) During the term hereof, the Employee will not,
directly or indirectly, (i) engage or become interested, directly or
indirectly, as owner, employee, director, partner, consultant, through
stock ownership (except ownership of not more than 1% of any class of
securities of a corporation which is publicly traded), investment of
capital, lending of money or property, rendering of services, or
otherwise, either alone or in association with others, in any business
which competes directly with the business of the Employer, (ii) induce
or attempt to induce any customer of the Employer to reduce such
customer's business with the Employer, or (iii) solicit any of the
Company's employees to leave the employ of the Employer or employ any
of such Employees. The Employee recognizes and acknowledges that his
obligations under this Section 5.1(a) shall extend to all geographic
areas in which the Employer is doing business during the term of this
Agreement, either directly or indirectly. Notwithstanding the
foregoing, the restrictions in Section 5.1 (a)(i) above shall not
prohibit the Employee from passively owning, passively investing in, or
lending to, (a) subacute health care facilities that (i) the Employee
has presented to the Employer the opportunity to purchase, invest in,
or lend to, and the Employer has determined not to purchase, invest in,
or lend to, such facilities, or (ii) constitute "turn-key" facilities,
which for purposes hereof shall mean facilities that the Employee
constructs for the purpose of selling, upon completion of construction,
to third parties, (b) any other real estate transaction where no more
than 20% of the transaction is related to a competing business or where
the Employee has presented to the Employer the opportunity to purchase,
invest in, or lend to, and the Employer has determined not to purchase,
invest in, or lend to, such real estate or (c) transactions disclosed
in Schedule 2 to this Agreement.
(b) For a period of three (3) years after termination
or expiration of this Agreement, the Employee will not, directly or
indirectly, (i) engage or become interested, directly or indirectly, as
owner, employee, director, partner, consultant, through stock ownership
(except ownership of not more than 5% of any class of securities of a
corporation which is publicly traded), investment of capital, lending
of money or property, rendering of services, or otherwise, either alone
or in association with others, in any health care business which
competes directly and materially with the business of the Employer or
(ii) solicit any of the Company's employees to leave the employ of the
Employer or employ any of such employees. The Employee recognizes and
acknowledges that his obligations under thus Section 5.l(b) shall
extend to all geographic areas in which the Employer is doing business
at the time of the expiration or termination of this Agreement, either
directly or indirectly. Notwithstanding the foregoing, the restrictions
in Section 5.1(b)(i) above shall not prohibit the Employee from
passively
<PAGE>
owning, passively investing in, or lending to, (a) subacute health care
facilities that (i) the Employee has presented to the Employer the
opportunity to purchase, invest in, or lend to, and the Employer has
determined not to purchase, invest in, or lend to, such facilities, or
(ii) constitute "turn-key" facilities, which for purposes hereof shall
mean facilities that the Employee constructs for the purpose of
selling, upon completion of construction, to third parties, (b) any
real estate transaction where no more than 20% of the transaction is
related to the health care business or (c) transactions disclosed in
Schedule 2 to this Agreement.
(c) As used in this Section 5.1, the term "Employer"
shall mean either Meditrust Operating Company or Meditrust. The
restrictions on the Employee set forth in this Section 5.1 shall not
apply in the case of a Termination Other Than For Cause or a
Termination Upon a Change in Control.
5.2 Non-Disclosure. The Employee agrees that all confidential
and proprietary information relating to the business of the Employer shall be
kept and treated as confidential both during and after the term of this
Agreement, except as may be permitted in writing by the Employer's Board of
Directors or if such information is within the public domain or comes within the
public domain without any breach of this Agreement.
6. Insurance. The Employer may, at its expense, procure and maintain
life insurance on the life of the Employee. The beneficiary of such policy shall
be the Employer. The Employee shall cooperate with the Employer as is necessary
to procure such insurance.
7. Miscellaneous.
7.1 Authority; No Restriction. The Employee represents and
warrants that the Employee has full power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby and this
Agreement is the legal, valid and binding obligation of the Employee,
enforceable against him in accordance with its terms. No consent, approval or
agreement of any person, party, court, government or entity is required to
be obtained by the Employee in connection with the execution and delivery of
this Agreement. The Employee is not subject to any agreement, restriction, lien,
encumbrance or right, title or interest in anyone limiting in any way the scope
of this Agreement or in any way inconsistent herewith, and the Employee will not
hereafter grant anyone the same.
7.2 Effect of Expiration or Termination. Upon the expiration
or other termination of this Agreement, all obligations of the parties shall
forthwith terminate, except for any obligation to pay any fixed sum of money
which may have accrued and be due and payable hereunder at the time of such
expiration or other termination and except that the provisions of Section 5
shall continue in effect in accordance with their terms, such Section containing
independent agreements and obligations.
7.3 Equitable Relief. The obligations of the Employee under
Section 5 hereunder are special, unique and extraordinary, and any breach by the
Employee thereof shall be
<PAGE>
deemed material and to cause Irreparable injury not properly compensated by
damages in an action at law; the Employer's rights and remedies hereunder shall
therefore be enforceable both at law and in equity, by injunction and otherwise;
and the rights and remedies of the Employer hereunder with respect thereto shall
be cumulative and not alternative and shall not be exhausted by any one or more
uses thereof.
7.4 Waiver. The waiver of the breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent breach
of the same or other provision hereof.
7.5 Entire Agreement; Modifications. Except as otherwise
provided herein, this Agreement represents the entire understanding among the
parties with respect to the subject matter hereof, and this Agreement supersedes
any and all prior understandings, agreements, plans and negotiations, whether
written or oral, with respect to the subject matter hereof. All modifications to
the Agreement must be in writing and signed by the party against whom
enforcement of such modification is sought.
7.6 Notices. All notices and other communications under this
Agreement shall be in writing and shall be deemed duly given (a) when delivered,
or (b) two (2) days after being mailed by first class mail, certified or
registered with return receipt requested, or (c) one (1) day after being mailed
through an overnight delivery service, or (d) upon confirmation of transmission
via facsimile, to the following addresses:
If to the Employer: Meditrust Operating Company
197 First Avenue
Needham, MA 02194
Attn: General Counsel
With a copy to: Meditrust Corporation
197 First Avenue
Needham, MA 02194
Attn: General Counsel
And: Nutter, McClennen & Fish, LLP
One International Place
Boston, MA 02110
Attn: Michael J. Bohnen, Esq.
If to the Employee: Abraham D. Gosman
513 North County Road
Palm Beach, FL 33480
With a copy to: Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Attn: Kevin Grehan, Esq.
<PAGE>
Any party may change such party's address for notices by notice duly given
pursuant to this Section 7.6.
7.7 Headings. The Section headings herein are intended for
reference and shall not by themselves determine the construction or
Interpretation of this Agreement.
7.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts.
7.9 Severability. Should a court or other body of competent
jurisdiction determine that any provision of this Agreement is excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, and all other provisions of this Agreement
shall be deemed valid and enforceable to the extent possible.
7.10 Successors and Assigns. This Agreement shall be binding
upon, and inure to the benefit of, the executors, administrators, heirs,
successors and assigns of the parties; provided, however, this Agreement shall
not be assignable by either party.
7.11 Counterparts. This Agreement may be executed in one or
more counterparts, all of which taken together shall constitute one and the same
Agreement.
7.12 Withholdings. All compensation and benefits to the
Employed hereunder shall be reduced by all federal, state, local and other
withholdings and similar taxes and payments required by applicable law. The
Employee agrees to pay all federal, state and local taxes owed by him in
connection with this Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the day and year first above written,
MEDITRUST OPERATING COMPANY
SEAL By: /s/ Michael J. Bohnen
-------------------------------------
Name: Michael J. Bohnen
Title: Secretary
By: /s/ C. Gerald Goldsmith
-------------------------------------
Name: C. Gerald Goldsmith
Title: Chairman, Compensation
Committee
/s/ Abraham D. Gosman
----------------------------------------
Abraham D. Gosman
For value received, the payment obligations of Meditrust Operating
Company under the foregoing Employment Agreement are hereby unconditionally
guaranteed by Meditrust Corporation.
MEDITRUST CORPORATION
SEAL By: Laurie T. Gerber
-------------------------------------
Name: Laurie T. Gerber
Title: Chief Financial Officer
<PAGE>
corrected page
Exhibit A
The Performance Shares.
One hundred percent (100%) of the Performance Shares described in Section 3.6
shall be issued on or before July 28, 1998 upon payment by the Employee of the
par value thereof to The Meditrust Companies, but for dividend purposes only
shall be deemed issued as of February 27, 1998. Subject to the terms of the
Agreement, the Performance Shares shall vest on the earliest of (a) eight years
after the date of issuance, (b) on March 31 of the year following the first
fiscal year after issuance in which the Performance Goal is achieved or (c) as
the Board of Directors may determine. In the event the Agreement expires on
December 31, 2002 and is not extended or renewed and Performance Shares are not
vested, the Employer shall enter into a reasonable and customary consulting
agreement with the Employee until such time as the Performance Shares vest. The
Performance Goal for all outstanding grants of Performance Shares shall be
deemed achieved in any fiscal year commencing with the year 2000 that meets both
criteria specified below:
<TABLE>
<CAPTION>
FFO Cumulative FFO per
Fiscal Year Per Share Share Since January 1, 1998
----------- --------- ---------------------------
<S> <C> <C>
2000 $ 2.92 $ 8.28
2001 3.10 11.38
2002 3.28 14.66
2003 3.48 18.14
2004 3.69 21.83
</TABLE>
For purposes of the foregoing calculation, "FFO" shall mean funds from
operations as reported by The Meditrust Companies. The above Performance Goals
may be adjusted by the Board of Directors of the Employer to reflect changes in
accounting rules.
Subject to the terms of the Agreement, upon termination of the Employee's
employment by The Meditrust Companies for any reason, all right, title and
interest in any unvested Performance Shares shall be transferred to The
Meditrust Companies in exchange for the par value of such Performance Shares,
and the Employee shall not receive any unissued Performance Shares.
The Employee shall receive all voting rights and dividends paid with respect to
unvested Performance Shares from the date of issuance so long as the Employee is
an employee of The Meditrust Companies.
<PAGE>
Exhibit B
The Performance Units
Goals: The unit value of each Performance Unit shall depend upon satisfaction of
the Performance Goals set forth below.
<TABLE>
<CAPTION>
FFO for Year Ended 12/31/2001 Cumulative FFO for 4 Years ended 12/31/2001
- - ----------------------------- -------------------------------------------
<S> <C>
$3.10 $11.38
</TABLE>
For purposes of the foregoing calculation, "FFO" shall mean funds from
operations as reported by The Meditrust Companies. The above Performance Goals
may be adjusted by the Board of Directors of the Employer to reflect changes in
accounting rules.
Unit Value: If The Meditrust Companies meet both the 2001 Performance Goal and
the Cumulative Performance Goal, each unit shall have a value $25 plus $.74 for
each penny above the Cumulative FFO Goal up to a maximum value of $50 per unit.
Time of Payment: Subject to the terms of the Agreement, payment of the value of
each unit shall be made in cash in April, 2002, provided that the awardee was an
employee of one of The Meditrust Companies on December 31, 2001.
<PAGE>
Schedule I
Excise Tax Gross-Up
--------------------
The determination of any additional payment payable pursuant to Section
4.3 of the Agreement shall be made in accordance with the following provisions:
(a) Notwithstanding anything in the Agreement to the contrary, in the
event of the determination (as hereinafter provided) that any required payment
by the Employer to or for benefit of the Employee (whether paid or payable
pursuant to the terms of the Agreement or otherwise pursuant to, or by reason of
any other agreement, policy, plan, program or arrangement, including without
limitation any stock option, stock appreciation right, or similar right, or the
lapse or termination of any restriction on the vesting or exercisability of any
of the foregoing including without limitation the acceleration of the vesting or
lapse of deferral periods under any equity or incentive compensation program
(individually and collectively, "Payment")) would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code") or any successor provision thereto (the "Excise Tax"), the Employee
shall be entitled to receive an additional payment or payments (individually or
collectively, "Tax Assistance Payment"), which shall include an amount such
that, after the Employee pays (1) all taxes upon the Tax Assistance Payment and
(2) any Excise Tax imposed upon the Tax Assistance Payment, the Employee retains
so much of the Tax Assistance Payment as is equal to the Excise Tax imposed on
the Payment.
(b) Subject to the provisions hereinafter concerning the provision of
notice of a claim by the Internal Revenue Service, all determinations required
to be made under these provisions, including whether an Excise Tax is payable by
the Employee, the amount of such Excise Tax and whether the Employer is required
to pay the Employee a Tax Assistance Payment and the amount of such Tax
Assistance Payment, if any, shall be made by [Name of Accountants] or such other
nationally recognized accounting firm retained by the Employer and reasonably
acceptable to the Employee ("Accounting Firm"). The Employer shall direct the
Accounting Firm to submit its determination and detailed supporting calculations
to both the Employee and the Employer within thirty (30) days after the payment
or provision of any benefit that could give rise to an Excise Tax and any such
other time or times as the Employee or the Employer may request. If the
Accounting Firm determines that any Excise Tax is payable by the Employee, the
Employer shall pay the required Tax Assistance Payment to the Employee within
ten (10) business days after the Employer receives such determination and
calculations with respect to any Payment to the Employee.
(c) Any federal tax returns the Employee files shall be prepared and
filed on a basis consistent with the determination of the Accounting Firm with
respect to the Excise Tax payable by the Employee. If the Accounting Firm
determines that the Employed is required to pay no Excise Tax, it shall (at the
same time it makes such determination) furnish the Employee and the Employer an
opinion that the Employee has substantial authority not to report any Excise Tax
on the Employee's federal income tax return. However, in view of the
uncertainty concerning application of Section 4999 of the Code (or any successor
provision thereto) at the time of any
<PAGE>
determination made hereunder by the Accounting Firm, it is possible that a Tax
Assistance Payment that should have been made by the Employer will not have been
made ("Underpayment"), consistent with the calculations required to be made
hereunder. In the event the Employer exhausts or fails to pursue its remedies
pursuant to the provisions concerning notice of a claim by the Internal Revenue
Service, and the Employee thereafter is required to make a payment of any Excise
Tax, the Employee shall direct the Accounting Firm to determine the amount of
the Underpayment and to submit its determination and detailed supporting
calculations as promptly as possible both to the Employee and to the Employer,
which shall pay the amount of such Underpayment to the Employee or for the
Employee's benefit within ten (10) business days following the Employer's
receipt of such determination and calculations.
(d) Each of the Employee and the Employer shall provide the Accounting
Firm access to and copies of any books, records and documents in the Employee's
or its possession, as the case may be, reasonably requested by the Accounting
Firm, and shall otherwise cooperate with the Accounting Firm in connection with
the preparation and issuance of the determination and calculations required or
contemplated hereunder.
(e) The Employer shall bear the fees and expenses of the Accounting
Firm for services hereunder. If, for any reason, the Employee initially pays
such fees and expenses, the Employer shall reimburse the Employee the full
amount of the same within ten (10) business days following receipt from the
Employee of a statement and reasonable evidence of the Employee's payment
thereof.
(f) The Employee shall notify the Employer in writing of any claim by
the Internal Revenue Service that, if successful, would require the Employer to
pay a Tax Assistance Payment. The Employee shall give such notification as
promptly as practicable, but in no event later than the tenth (10th) business
day next following the Employee's receipt of such claim, and the Employee
further shall apprise the Employer of the nature of such claim and the date on
which it is required to be paid (in each case, to the extent known to the
Employee). The Employee shall not pay or otherwise satisfy such claim prior to
the earlier of (a) the expiration of the thirty (30)-calendar-day period next
following the date on which the Employee give notice to the Employer or (b) the
date any payment of the amount with respect to such claim is due. If the
Employer notifies Employee in writing prior to the expiration of such period
that it desires to contest such claim, the Employee shall:
(i) provide the Employer any written records or documents in
the Employee's possession relating to such claim and reasonably requested by the
Employer;
(ii) take such action in connection with contesting such claim
as the Employer, reasonably shall request in writing from time to time,
including without limitation accepting legal representation with respect to such
claim by an attorney competent in respect of the subject matter and reasonably
selected by the Employer;
(iii) cooperate with the Employer in good faith in order
effectively to contest such claim; and
<PAGE>
(iv) permit the Employer to participate in any proceedings
relating to such claim, provided, however, that the Employer directly shall bear
and pay all costs and expenses (including without limitation, interest and
penalties) incurred in connection with such contest and shall indemnify the
Employee and hold the Employee harmless, on an after-tax basis, from and against
any and all Excise Tax or income tax (including without limitation, interest and
penalties with respect thereto), imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing, the Employer
shall control all proceedings taken in connection with the contest of any claim
contemplated by these provisions and, at its sole option, may pursue or forego
any and all administrative appeals, proceedings, hearings and conferences with
the taxing authority in respect of such claim (provided, however, that the
Employee may participate therein at the Employee's own cost and expense) and
may, at its option, either direct the Employee to pay the tax claimed and sue
for a refund or contest the claim in any permissible manner, and the Employee
agrees to prosecute such contest to a determination before any administrative
tribunal, in a court of initial jurisdiction and in one or more appellate
courts, as the Employer shall determine; provided, however, that if the Employer
directs the Employee to pay the tax claimed and to sue for a refund, the
Employer shall advance the amount of such payment to the Employee, and pay on a
current basis all costs of litigation, including without limitation attorneys'
fees, on an interest-free basis and shall agree to and shall indemnify the
Employee and hold the Employee harmless, on an after-tax basis, from any Excise
Tax or income tax, including without limitation, interest and penalties with
respect thereto, imposed with respect to such advance; and provided further,
however, that any extension of the statute of limitations relating to payment of
taxes for the Employee's taxable year with respect to which the contested amount
is claimed to be due is limited solely to such contested amount. Furthermore,
the Employer's control of any such contested claim shall be limited to issues
with respect to which a Tax Assistance Payment would be payable hereunder, and
the Employee shall be entitled to settle or to contest, as the case may be, any
other issue(s) raised by the Internal Revenue Service or any other taxing
authority.
(e) If, after the Employee receives an amount advanced by the Employer
pursuant to provisions of the last full paragraph, the Employee receives any
refund with respect to such claim, the Employee shall (subject to the Employer's
complying with any applicable provisions of the same paragraph) promptly pay to
the Employer the amount of such refund (together with any interest paid or
credited thereon after any taxes applicable thereto). If, after the Employee
receives such an amount advanced by the Employer, a determination is made that
the Employee shall not be entitled to any refund with respect to such claim and
the Employer does not notify the Employee in writing of its intent to contest
such denial or refund prior to expiration of thirty (30) calendar days after
such determination, then such advance shall be forgiven and shall not be
required to be repaid, and the amount of such advance shall offset, to the
extent thereof, the amount of the Tax Assistance Payment the Employer is
required to pay the Employee hereunder.
<PAGE>
Schedule 2
Transactions Exempt from Section 5.1
------------------------------------
1. The following land development projects:
Abacoa (Jupiter, FL)
Lely Lakes (Naples FL)
University Commons (Sarasota, FL)
Grand Dunes (Myrtle Beach, SC)
Miramar (Ft. Myers, FL)
St. James Plantation (Southport, NC)
Taylor Woodrow (Orlando, FL)
2. Investments in of transactions undertaken by or on behalf of,
CareMatrix or PhyMatrix or successors thereto or affiliates thereof
(other than the Employee).
3. Other "turn-key" construction projects for sale to third parties upon
completion and land development projects, provided that, in the case of
any such projects undertaken by the Employee during the term of the
Employment Agreement, the Employee first presents to the Employer the
opportunity to develop or otherwise participate in such projects.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of September 30, 1998 and the Consolidated
Statement of Income for the nine months ended September 30, 1998 of Meditrust
Corporation and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000313749
<NAME> MEDITRUST CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 38,974
<SECURITIES> 0
<RECEIVABLES> 59,248
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,271,459
<DEPRECIATION> 171,632
<TOTAL-ASSETS> 6,695,534
<CURRENT-LIABILITIES> 0
<BONDS> 3,385,555
0
70
<COMMON> 3,857,546
<OTHER-SE> (626,442)
<TOTAL-LIABILITY-AND-EQUITY> 6,695,534
<SALES> 0
<TOTAL-REVENUES> 355,845
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 107,804
<INCOME-PRETAX> 78,204
<INCOME-TAX> 0
<INCOME-CONTINUING> 78,204
<DISCONTINUED> (158,059)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (79,855)
<EPS-PRIMARY> (0.75)
<EPS-DILUTED> (0.72)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of September 30, 1998 and the Consolidated
Statement of Operations for the nine months ended September 30, 1998 of
Meditrust Operating Company and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<CIK> 0000314661
<NAME> MEDITRUST OPERATING COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 18,281
<SECURITIES> 0
<RECEIVABLES> 16,509
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,064
<PP&E> 10,207
<DEPRECIATION> 625
<TOTAL-ASSETS> 144,907
<CURRENT-LIABILITIES> 57,232
<BONDS> 0
0
0
<COMMON> 90,800
<OTHER-SE> (17,164)
<TOTAL-LIABILITY-AND-EQUITY> 144,907
<SALES> 0
<TOTAL-REVENUES> 123,874
<CGS> 0
<TOTAL-COSTS> 57,738
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 670
<INCOME-PRETAX> (7,562)
<INCOME-TAX> (1,064)
<INCOME-CONTINUING> (6,498)
<DISCONTINUED> (8,414)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (14,912)
<EPS-PRIMARY> (.13)
<EPS-DILUTED> (.13)
</TABLE>
