<PAGE>
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 March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission file number 0-9109 Commission file number 0-9110
MEDITRUST CORPORATION MEDITRUST OPERATING COMPANY
(Exact name of registrant as specified (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 NEEDHAM HEIGHTS, MASSACHUSETTS
02494-9127 02494-9127
(Address of principal executive (Address of principal executive
offices including zip code) offices including zip code)
(781) 433-6000 (781) 453-8062
(Registrant's telephone number, (Registrant's telephone number,
including area code) including area code)
Indicate by check mark whether the registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of each of the issuers' classes of common
stock, as of the close of business on April 30, 2000 were:
Meditrust Corporation 142,567,920
Meditrust Operating Company 141,262,543
<PAGE>
THE MEDITRUST COMPANIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE(S)
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
The Meditrust Companies
Combined Consolidated Balance Sheets as of March 31, 2000
(unaudited) and December 31, 1999 1
Combined Consolidated Statements of Operations for the three
months ended March 31, 2000 (unaudited) and 1999 (unaudited) 2
Combined Consolidated Statements of Cash Flows for the three
months ended March 31, 2000 (unaudited) and 1999 (unaudited) 3
Meditrust Corporation
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999 4
Consolidated Statements of Operations for the three months
ended March 31, 2000 (unaudited) and 1999 (unaudited) 5
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 (unaudited) and 1999 (unaudited) 6
Meditrust Operating Company
Consolidated Balance Sheets as of March 31, 2000 (unaudited)
and December 31, 1999 7
Consolidated Statements of Operations for the three months
ended March 31, 2000 (unaudited) and 1999 (unaudited) 8
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 (unaudited) and 1999 (unaudited) 9
Notes to Combined Consolidated Financial Statements (unaudited) 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Part II. Other Information
Item 5. Other Information 39
Item 6. Exhibits and Reports on Form 8-K 39
Signatures 40
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
-------------------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate investments, net .................................... $ 4,389,771 $ 4,672,659
Cash and cash equivalents ....................................... 11,557 7,220
Fees, interest and other receivables ............................ 136,156 79,042
Goodwill, net ................................................... 474,973 480,673
Other assets, net ............................................... 190,441 228,163
----------- -----------
Total assets ............................................... $ 5,202,898 $ 5,467,757
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Notes payable, net ........................................... $ 1,110,363 $ 1,144,406
Convertible debentures, net .................................. 175,066 185,468
Bank notes payable, net ...................................... 1,039,124 1,154,182
Bonds and mortgages payable, net ............................. 89,395 113,382
----------- -----------
Total indebtedness ......................................... 2,413,948 2,597,438
Accounts payable, accrued expenses and other liabilities ..... 140,118 197,106
----------- -----------
Total liabilities .......................................... 2,554,066 2,794,544
----------- -----------
Commitments and contingencies ................................... -- --
Shareholders' equity:
Meditrust Corporation Preferred Stock, $.10 par value;
6,000 shares authorized; 701 shares issued and outstanding at
March 31, 2000 and December 31, 1999 ........................ 70 70
Paired Common Stock, $.20 combined par value; 500,000 shares
authorized; 141,249 and 141,015 paired shares issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively ................................................ 28,249 28,203
Additional paid-in-capital ................................... 3,655,612 3,654,358
Unearned compensation ........................................ (5,258) (6,760)
Accumulated other comprehensive income (loss) ................ (29,891) 4,468
Distributions in excess of net income ........................ (999,950) (1,007,126)
----------- -----------
Total shareholders' equity ................................. 2,648,832 2,673,213
----------- -----------
Total liabilities and shareholders' equity ............... $ 5,202,898 $ 5,467,757
=========== ===========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
1
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
---------------------
<S> <C> <C>
Revenue:
Rental .......................................................... $ 31,995 $ 43,712
Interest ........................................................ 31,890 34,202
Hotel ........................................................... 150,863 148,534
Other ........................................................... -- 856
--------- ---------
214,748 227,304
--------- ---------
Expenses:
Interest ........................................................ 55,236 66,657
Depreciation and amortization ................................... 36,739 33,859
Amortization of goodwill ........................................ 5,699 5,308
General and administrative ...................................... 10,181 9,306
Hotel operations ................................................ 72,792 66,602
Rental property operations ...................................... 7,643 8,907
Loss (gain) on sale of assets ................................... 3,812 (12,271)
Other ........................................................... 12,364 34,887
--------- ---------
204,466 213,255
--------- ---------
Income from continuing operations before benefit for income taxes
and extraordinary item ............................................ 10,282 14,049
Income tax benefit .................................................. -- 826
--------- ---------
Income from continuing operations before extraordinary item ......... 10,282 14,875
Discontinued operations: ............................................ --
Gain (loss adjustment) on disposal of Santa Anita, net ........... -- 1,875
Gain (loss adjustment) on disposal of Cobblestone Golf Group, net -- 2,994
--------- ---------
Income before extraordinary item .................................... 10,282 19,744
Extraordinary gain on early extinguishment of debt .................. 1,394 --
--------- ---------
Net income .......................................................... 11,676 19,744
--------- ---------
Preferred stock dividends ........................................... (4,500) (3,938)
--------- ---------
Net income available to Paired
Common shareholders ............................................... $ 7,176 $ 15,806
========= ==========
Basic earnings per Paired Common Share:
Income from continuing operations ................................. $ .04 $ .07
Discontinued operations ........................................... -- .04
Extraordinary gain ................................................ .01 --
--------- ---------
Net income ........................................................ $ .05 $ .11
========= =========
Diluted earnings per Paired Common Share:
Income from continuing operations ................................. $ .04 $ .07
Discontinued operations ........................................... -- .04
Extraordinary gain ................................................ .01 --
--------- ---------
Net income ........................................................ $ .05 $ .11
========= =========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
2
<PAGE>
THE MEDITRUST COMPANIES
COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS) 2000 1999
---------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ...................................................................... $ 11,676 $ 19,744
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of real estate ..................................................... 32,409 32,965
Goodwill amortization ........................................................... 5,699 5,308
Loss (gain) on sale of assets ................................................... 3,812 (17,140)
Gain on early extinguishment of debt ............................................ (2,174) --
Other depreciation, amortization and other items, net ........................... 6,453 11,452
Other non cash items ............................................................ 2,303 30,788
--------- ---------
Cash Flows from Operating Activities Available for Distribution ................. 60,178 83,117
Net change in other assets and liabilities of discontinued operations ........... -- (148)
Net change in other assets and liabilities ...................................... (31,918) (53,829)
--------- ---------
Net cash provided by operating activities ............................... 28,260 29,140
--------- ---------
Cash Flows from Financing Activities:
Purchase of treasury stock ...................................................... -- (13,433)
Proceeds from borrowings on bank notes payable .................................. 112,000 355,000
Repayment of bank notes payable ................................................. (228,464) (963,000)
Repayment of notes payable ...................................................... (32,845) --
Repayment of convertible debentures ............................................. (9,781) --
Equity offering and debt issuance costs ......................................... (500) (577)
Principal payments on bonds and mortgages payable ............................... (16,327) (6,762)
Dividends to shareholders ....................................................... (4,500) (71,956)
Proceeds from exercise of stock options ......................................... -- 307
--------- ---------
Net cash used in financing activities ................................... (180,417) (700,421)
--------- ---------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding .............................. (7,534) (59,337)
Investment in real estate mortgages and development funding ..................... (161) (11,956)
Prepayment proceeds and principal payments received on real estate mortgages .... 18,461 8,182
Net proceeds from sale of assets ................................................ 180,994 476,950
Payment of costs related to prior year asset sales .............................. (25,879) --
Working capital and notes receivable advances, net of repayments and
collections, and other items .................................................. (9,387) (8,745)
--------- ---------
Net cash provided by investing activities ............................... 156,494 405,094
--------- ---------
Net increase (decrease) in cash and cash equivalents .................... 4,337 (266,187)
Cash and cash equivalents at:
Beginning of period ..................................................... 7,220 305,456
--------- ---------
End of period ........................................................... $ 11,557 $ 39,269
========= =========
</TABLE>
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K and for the year
ended December 31, 1999, are an integral part of these financial statements.
3
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
---------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Real estate investments, net .................................................. $ 4,369,854 $ 4,652,631
Cash and cash equivalents ..................................................... 10,316 5,779
Fees, interest and other receivables .......................................... 114,139 59,004
Goodwill, net ................................................................. 445,734 451,240
Due from Meditrust Operating Company .......................................... 34,431 30,525
Other assets, net ............................................................. 138,578 175,870
----------- -----------
Total assets .......................................................... $ 5,113,052 $ 5,375,049
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness:
Notes payable, net ........................................................ $ 1,110,363 $ 1,144,406
Convertible debentures, net ............................................... 175,066 185,468
Bank notes payable, net ................................................... 1,039,124 1,154,182
Bonds and mortgages payable, net .......................................... 89,395 113,382
----------- -----------
Total indebtedness ...................................................... 2,413,948 2,597,438
Accounts payable, accrued expenses and other liabilities ...................... 78,940 139,833
----------- -----------
Total liabilities ....................................................... 2,492,888 2,737,271
----------- -----------
Commitments and contingencies ................................................. -- --
Shareholders' equity:
Preferred Stock, $.10 par value; 6,000 shares authorized; 701 shares
issued and outstanding at March 31, 2000 and December 31, 1999 .......... 70 70
Common Stock, $.10 par value; 500,000 shares authorized; 142,554
and 142,320 shares issued and outstanding at March 31, 2000 and
December 31, 1999, respectively ......................................... 14,255 14,232
Additional paid-in-capital ................................................ 3,588,246 3,586,994
Unearned compensation ..................................................... (4,625) (6,104)
Accumulated other comprehensive income (loss) ............................. (29,891) 4,468
Distributions in excess of net income ..................................... (934,027) (948,018)
----------- -----------
2,634,028 2,651,642
Due from Meditrust Operating Company ...................................... (736) (736)
Note receivable - Meditrust Operating Company ............................. (13,128) (13,128)
----------- -----------
Total shareholders' equity .............................................. 2,620,164 2,637,778
----------- -----------
Total liabilities and shareholders' equity ............................ $ 5,113,052 $ 5,375,049
=========== ===========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
4
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
----------------------
<S> <C> <C>
Revenue:
Rental ............................................................ $ 31,995 $ 43,712
Interest .......................................................... 31,853 34,030
Rent from Meditrust Operating Company ............................. 68,880 68,248
Interest from Meditrust Operating Company ......................... 141 --
Royalty from Meditrust Operating Company .......................... 4,873 3,620
Hotel operating revenue ........................................... 2,793 3,210
Other ............................................................. -- 856
--------- ---------
140,535 153,676
--------- ---------
Expenses:
Interest .......................................................... 55,125 66,547
Depreciation and amortization ..................................... 33,663 32,058
Amortization of goodwill .......................................... 5,505 5,087
General and administrative ........................................ 3,999 4,925
Hotel operations .................................................. 1,327 943
Rental property operations ........................................ 7,643 8,907
Loss (gain) on sale of assets ..................................... 3,812 (12,271)
Other ............................................................. 12,364 4,389
--------- ---------
123,438 110,585
--------- ---------
Income from continuing operations before extraordinary item ........... 17,097 43,091
Discontinued operations:
Gain (loss adjustment) on disposal of Santa Anita, net ............ -- 6,655
Gain (loss adjustment) on disposal of Cobblestone Golf Group, net -- 9,439
--------- ---------
Income before extraordinary item ...................................... 17,097 59,185
Extraordinary gain on early extinguishment of debt .................... 1,394 --
--------- ---------
Net income ............................................................ 18,491 59,185
Preferred stock dividends ............................................. (4,500) (3,938)
--------- ---------
Net income available to Common shareholders ........................... $ 13,991 $ 55,247
========= =========
Basic earnings per Common Share:
Income from continuing operations ............................... $ .09 $ .26
Discontinued operations ......................................... -- .11
Extraordinary gain .............................................. .01 --
--------- ---------
Net income ...................................................... $ .10 $ .37
========= =========
Diluted earnings per Common Share:
Income from continuing operations ............................... $ .09 $ .26
Discontinued operations ......................................... -- .11
Extraordinary gain .............................................. .01 --
--------- ---------
Net income ...................................................... $ .10 $ .37
========= =========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
5
<PAGE>
MEDITRUST CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS) 2000 1999
----------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income ....................................................... $ 18,491 $ 59,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of real estate ...................................... 32,239 30,737
Goodwill amortization ............................................ 5,505 5,087
Loss (gain) on sale of assets .................................... 3,812 (28,365)
Gain on early extinguishment of debt ............................. (2,174) --
Other depreciation, amortization and other items, net ............ 3,524 9,711
Other non cash items ............................................. 2,303 (2,123)
--------- ---------
Cash Flows from Operating Activities Available for Distribution .. 63,700 74,232
Net change in other assets and liabilities ....................... (35,240) (49,603)
--------- ---------
Net cash provided by operating activities .................... 28,460 24,629
--------- ---------
Cash Flows from Financing Activities:
Purchase of treasury stock ....................................... -- (13,178)
Proceeds from borrowings on bank notes payable ................... 112,000 355,000
Repayment of bank notes payable .................................. (228,464) (963,000)
Repayment of notes payable ....................................... (32,845) --
Repayment of convertible debentures .............................. (9,781) --
Equity offering and debt issuance costs .......................... (500) (577)
Intercompany lending, net ........................................ (59) 38,619
Principal payments on bonds and mortgages payable ................ (16,327) (6,762)
Dividends to shareholders ........................................ (4,500) (71,956)
Proceeds from exercise of stock options .......................... -- 302
--------- ---------
Net cash used in financing activities ........................ (180,476) (661,552)
--------- ---------
Cash Flows from Investing Activities:
Acquisition of real estate and development funding ............... (7,475) (59,029)
Investment in real estate mortgages and development funding ...... (161) (11,956)
Prepayment proceeds and principal payments received on real estate
mortgages ...................................................... 18,461 8,182
Payment of costs related to prior year asset sales ............... (25,879) --
Net proceeds from sale of real estate ............................ 180,994 453,077
Working capital and notes receivable advances, net of
repayments and collections, and other items .................... (9,387) (8,745)
--------- ---------
Net cash provided by investing activities .................... 156,553 381,529
--------- ---------
Net increase (decrease) in cash and cash equivalents ......... 4,537 (255,394)
Cash and cash equivalents at:
Beginning of period ........................................ 5,779 292,694
--------- ---------
End of period .............................................. $ 10,316 $ 37,300
========= =========
</TABLE>
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
6
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
-------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents .............................................. $ 1,241 $ 1,441
Fees, interest and other receivables ................................... 22,017 20,038
Other current assets, net .............................................. 12,872 12,643
--------- ---------
Total current assets ............................................. 36,130 34,122
Investment in common stock of Meditrust Corporation .................... 37,581 37,581
Goodwill, net .......................................................... 29,239 29,433
Property, plant and equipment, less accumulated depreciation
of $4,071 and $2,572, respectively ................................. 52,330 51,669
Other non-current assets ............................................... 6,578 8,009
--------- ---------
Total assets ................................................... $ 161,858 $ 160,814
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable ....................................................... $ 22,816 $ 20,803
Accrued payroll and employee benefits .................................. 24,116 21,452
Accrued expenses and other current liabilities ......................... 9,340 10,030
Due to Meditrust Corporation ........................................... 58,751 54,820
--------- ---------
Total current liabilities ........................................ 115,023 107,105
Note payable to Meditrust Corporation .................................. 13,128 13,128
Other non-current liabilities .......................................... 4,906 4,988
--------- ---------
Total liabilities .............................................. 133,057 125,221
--------- ---------
Commitments and contingencies .......................................... -- --
Shareholders' equity:
Common Stock, $.10 par value; 500,000 shares authorized; 141,249
and 141,015 shares issued and outstanding at March 31, 2000 and
December 31, 1999, respectively .................................. 14,125 14,102
Additional paid-in-capital ......................................... 104,816 104,814
Unearned compensation .............................................. (633) (656)
Retained earnings (deficit) ........................................ (65,923) (59,108)
--------- ---------
52,385 59,152
Due from Meditrust Corporation ..................................... (23,584) (23,559)
--------- ---------
Total shareholders' equity ....................................... 28,801 35,593
--------- ---------
Total liabilities and shareholders' equity ..................... $ 161,858 $ 160,814
========= =========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
7
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
<S> <C> <C>
----------------------
Revenue:
Hotel ..................................................... $ 148,070 $ 145,324
Interest .................................................. 37 172
--------- ---------
148,107 145,496
--------- ---------
Expenses:
Hotel operations .......................................... 71,465 65,659
Depreciation and amortization ............................. 3,076 1,801
Amortization of goodwill .................................. 194 221
Interest and other ........................................ 111 110
Interest to Meditrust Corporation ......................... 141 --
General and administrative ................................ 6,182 4,381
Royalty to Meditrust Corporation .......................... 4,873 3,620
Rent to Meditrust Corporation ............................. 68,880 68,248
Other ..................................................... -- 30,498
--------- ---------
154,922 174,538
--------- ---------
Loss from continuing operations before benefit for income taxes (6,815) (29,042)
Income tax benefit ............................................ -- 826
--------- ---------
Loss from continuing operations ............................... (6,815) (28,216)
Discontinued operations:
Loss adjustment on disposal of Santa Anita, net ........... -- (4,780)
Loss adjustment on disposal of Cobblestone Golf Group, net -- (6,445)
--------- ---------
Net loss ...................................................... $ (6,815) $ (39,441)
========= =========
Basic earnings per Common Share:
Loss from continuing operations ........................... $ (.05) $ (.19)
Discontinued operations ................................... -- (.08)
--------- ---------
Net loss .................................................. $ (.05) $ (.27)
========= =========
Diluted earnings per Common Share:
Loss from continuing operations ........................... $ (.05) $ (.19)
Discontinued operations ................................... -- (.08)
--------- ---------
Net loss .................................................. $ (.05) $ (.27)
========= =========
</TABLE>
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
8
<PAGE>
MEDITRUST OPERATING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
-------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss ....................................................................... $(6,815) $(39,441)
Adjustments to reconcile net loss to cash provided by (used in) operating
activities:
Goodwill amortization .......................................................... 194 221
Loss on sale of assets ......................................................... -- 11,225
Other depreciation and amortization ............................................ 3,099 3,968
Other items .................................................................... -- 32,912
Net change in other assets and liabilities of discontinued operations .......... -- (148)
Net change in other assets and liabilities ..................................... 3,322 (4,226)
------- --------
Net cash provided by (used in) operating activities .................... (200) 4,511
------- --------
Cash Flows from Financing Activities:
Purchase of treasury stock ..................................................... -- (255)
Intercompany borrowing (lending), net .......................................... 59 (38,619)
Proceeds from stock option exercises ........................................... -- 5
------- --------
Net cash provided by (used in) financing activities .................... 59 (38,869)
------- --------
Cash Flows from Investing Activities:
Capital improvements to real estate ............................................ (59) (308)
Net proceeds from sale of assets ............................................... -- 23,873
------- --------
Net cash provided by (used in) investing activities .................... (59) 23,565
------- --------
Net decrease in cash and cash equivalents .............................. (200) (10,793)
Cash and cash equivalents at:
Beginning of period .................................................... 1,441 12,762
------- --------
End of period .......................................................... $ 1,241 $ 1,969
======= ========
</TABLE>
Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated
Financial Statements contained within the Companies' Form 10-K for the year
ended December 31, 1999, are an integral part of these financial statements.
9
<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 "SEC").
The accompanying unaudited combined consolidated financial statements reflect
all adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position as of March 31, 2000 and the results of operations
for the three months ended March 31, 2000 and 1999 and cash flows for each of
the three month periods ended March 31, 2000 and 1999. The results of operations
for the three month period ended March 31, 2000 are not necessarily indicative
of the results which may be expected for any other interim period or for the
entire year.
In the opinion of Meditrust Corporation ("Realty") and Meditrust Operating
Company and subsidiaries ("Operating Company" or "Operating" and collectively
with Realty the "Companies" or "The Meditrust Companies"), the disclosures
contained in this Form 10-Q are adequate to make the information presented not
misleading. See the Companies' Joint Annual Report on Form 10-K for the year
ended December 31, 1999 for additional information relevant to significant
accounting policies followed by the Companies.
BASIS OF PRESENTATION AND CONSOLIDATION
Separate financial statements have been presented for Realty and for Operating
Company. Combined Realty and Operating Company financial statements have been
presented as The Meditrust Companies. All significant intercompany and
inter-entity balances and transactions have been eliminated in combination. The
Meditrust Companies and Realty use an unclassified balance sheet presentation.
The consolidated financial statements of Realty and Operating Company include
the accounts of the respective entity and its majority-owned subsidiaries,
including unincorporated partnerships and joint ventures, after the elimination
of all significant intercompany accounts and transactions.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from these estimates.
RECLASSIFICATION
Certain reclassifications have been made to the 1999 presentation to conform to
the 2000 presentation.
10
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. SUPPLEMENTAL CASH FLOW INFORMATION
Details of interest paid and non-cash investing and financing transactions
follow:
THE MEDITRUST COMPANIES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
(IN THOUSANDS) 2000 1999
---------------------------
<S> <C> <C>
Interest paid during the period ................................................... $ 81,360 $92,409
Interest capitalized during the period ............................................ 423 2,743
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3) ................................. 53,900
Retirements and write-offs of project costs .................................. (3,633) (1,518)
Accumulated depreciation and provision for impairment of assets sold ......... 78,387 13,212
Debt assumed by buyer of Cobblestone Golf Group .............................. -- 5,637
Increase in real estate mortgages net of
participation reduction .................................................... 57 259
Allowance for loan losses on prepaid mortgages ............................... 5,027 --
Change in market value of equity securities .................................. (34,359) 3,816
</TABLE>
MEDITRUST CORPORATION:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------
(IN THOUSANDS) 2000 1999
---------------------------
<S> <C> <C>
Interest paid during the period ................................................... $ 81,151 $92,299
Interest capitalized during the period ............................................ 325 2,743
Non-cash investing and financing transactions:
Non-cash proceeds of asset sale (see Note 3) ................................. 53,900
Retirements and write-offs of project costs .................................. (3,633) (1,518)
Accumulated depreciation and provision for impairment of assets sold ......... 78,387 13,212
Debt assumed by buyer of Cobblestone Golf Group .............................. -- 5,637
Increase in real estate mortgages net of
participation reduction .................................................... 57 259
Allowance for loan losses on prepaid mortgages ............................... 5,027 --
Change in market value of equity securities .................................. (34,359) 3,816
</TABLE>
MEDITRUST OPERATING COMPANY:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------------
(IN THOUSANDS) 2000 1999
-------------------------------
<S> <C> <C>
Interest paid during the period ................................................... $ 209 $ 110
Interest capitalized during the period ............................................ 98 --
</TABLE>
11
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. REAL ESTATE INVESTMENTS
The following is a summary of the Companies' real estate investments:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
-------------------------------
(IN THOUSANDS) 2000 1999
-------------------------------
<S> <C> <C>
Land ................................................................ $ 447,826 $ 444,523
Buildings and improvements, net of accumulated depreciation
and other provisions of $301,236 and $272,107 ..................... 2,845,936 2,876,418
Real estate mortgages and loans receivable, net of a valuation
allowance of $27,388 and $32,415 .................................. 1,041,676 1,059,920
Assets held for sale, net of accumulated depreciation and other
provisions of $22,323 and $98,831 ................................. 54,333 291,798
---------- ----------
$4,389,771 $4,672,659
========== ==========
</TABLE>
During the three months ended March 31, 2000, the Companies provided net funding
of $2,238,000 for ongoing construction of healthcare facilities committed to
prior to 2000. The Companies also provided net funding of $5,296,000 for capital
improvements to hotels.
Also during the three months ended March 31, 2000, Realty provided $161,000 for
ongoing construction of mortgaged facilities already in the portfolio.
During the three months ended March 31, 2000, Realty received net proceeds of
$234,894,000, including $7,661,000 of assumed debt and $52,094,000 of
subordinated indebtedness due January 2005 bearing interest at 9.00% (which was
recorded at a discounted value of $46,239,000 due to an imputed interest rate of
12%), from the sale of four long-term care facilities, 12 assisted living
facilities and 23 medical office buildings. Realty realized a net loss on these
sales of $3,812,000.
During the three months ended March 31, 2000, Realty received principal payments
of $18,461,000 on real estate mortgages. Of this amount, $16,539,000 represents
payments in accordance with the Five Point Plan (See Note 8).
At March 31, 2000, Realty was committed to provide additional financing of
approximately $11,000,000 for additions to existing facilities in the portfolio.
As of March 31, 2000, healthcare related facilities (the "Healthcare Portfolio")
comprised approximately 44.1% of Realty's total real estate investments. Life
Care Centers of America ("Lifecare") and Sun Healthcare Group, Inc. ("Sun")
currently operate approximately 20.6% of the total real estate investments, or
47.0% of the Healthcare Portfolio. A schedule of significant healthcare
operators follows:
12
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
<TABLE>
<CAPTION>
% of % of
Invested Entire # of Healthcare
Portfolio by Operator (in thousands) Portfolio Properties Portfolio
-------------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Life Care Centers of America, Inc. ......... $ 566,689 11.9% 93 27.1%
Sun Healthcare Group, Inc. ................. 415,511 8.7% 42 19.9%
Alterra .................................... 161,592 3.4% 57 7.7%
CareMatrix Corporation ..................... 182,624 3.8% 11 8.7%
Harborside ................................. 103,462 2.2% 18 4.9%
Balanced Care Corporation .................. 92,589 2.0% 19 4.4%
Health Asset Realty Trust .................. 69,115 1.5% 11 3.3%
Tenet Healthcare/Iasis ..................... 65,650 1.4% 1 3.1%
Rendina Companies .......................... 55,778 1.2% 2 2.7%
Integrated Health Services, Inc. ........... 50,973 1.1% 10 2.4%
Genesis Health Ventures, Inc. .............. 35,771 0.8% 8 1.7%
Assisted Living Concepts ................... 31,487 0.7% 16 1.5%
ARV Assisted Living, Inc. .................. 28,982 0.6% 4 1.4%
HealthSouth ................................ 25,531 0.5% 2 1.2%
Other Public Operators ..................... 29,711 0.6% 4 1.5%
Other Non-Public Operators ................. 121,334 2.6% 13 5.9%
Paramount Real Estate Services ............. 53,847 1.1% 2 2.6%
-------------------------------------------------------
2,090,646 44.1% 313 100%
=============
LODGING:
La Quinta Companies ........................ 2,650,072 55.9% 302
----------------------------------------
Gross Real Estate Assets ................... $4,740,718 100% 615
========================================
</TABLE>
In addition, companies in the assisted living sector of the healthcare industry
operate approximately 9.2% of Realty's total real estate investments (and
approximately 20.9% of the Healthcare Portfolio).
Realty monitors credit risk for its Healthcare Portfolio by evaluating a
combination of publicly available financial information, information provided
by the operators themselves and information otherwise available to Realty.
The financial condition and ability of these healthcare operators to meet
their rental and other obligations will, among other things, have an impact
on Realty's revenues, net income (loss), funds available from operations and
its ability to make distributions to its shareholders. The operations of the
long-term care (skilled nursing) companies have been negatively impacted by
changes in Medicare reimbursement rates (PPS), increases in labor costs,
increases in their leverage and certain other factors. In addition, any
failure by these operators to effectively conduct their operations could have
a material adverse effect on their business reputation or on their ability to
enlist and maintain patients in their facilities.
Operators of assisted living facilities are experiencing fill-up periods of a
longer duration, and are being impacted by concerns regarding the potential
of over-building, increased regulation and the use of certain accounting
practices. Accordingly, many of these operators have announced decreased
earnings or anticipated earnings shortfalls and have experienced a
significant decline in their stock prices. These factors have had a
detrimental impact on the liquidity of some assisted living operators, which
has caused their growth plans to decelerate and may have a negative effect on
their operating cash flows.
Citing the effects of changes in government regulation relating to Medicare
reimbursement as the precipitating factor, Sun filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on October 14, 1999. As of March 31,
2000, Realty had a portfolio of 42 properties operated by Sun, which consisted
of 38 owned properties with net assets of approximately $305,462,000 and four
mortgages with net assets of approximately $30,470,000. During the three months
ended March 31, 2000, income derived from these properties included rental
income of $11,915,000 from owned properties. No interest income was received on
the four mortgages for the three months ended March 31, 2000.
13
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Sun has not formally indicated whether it will accept or reject any of Realty's
leases. However, Sun has indicated that it will continue to make lease payments
to Realty unless and until such leases are rejected. If necessary, Realty has a
plan in place to transition and to continue operating any of Sun's properties.
Realty has not received interest payments related to the mortgages since
November 1, 1999, and accordingly, such mortgages were put on non-accrual
status.
On January 18, 2000, Mariner Health Group, Inc. ("Mariner") filed for protection
under Chapter 11. As of March 31, 2000, Realty had a portfolio of 2 properties
operated by Mariner, which consisted of one owned property representing net
assets of approximately $7,176,000 and one mortgage representing a net asset
value of approximately $7,036,000. During the three months ended March 31, 2000,
income derived from these properties included rental income of $244,000 from
owned properties. No interest payments related to the Mariner mortgage were
received, and accordingly this mortgage was placed on non-accrual status.
On February 2, 2000, Integrated Health Services, Inc. ("Integrated") filed for
protection under Chapter 11. As of March 31, 2000, Realty had a portfolio of 10
owned properties operated by Integrated, representing net assets of
approximately $38,023,000. During the three months ended March 31, 2000, rental
income derived from these properties was $1,572,000.
Management has proactively initiated various actions to protect its interest
under its leases and mortgages including the drawdown and renegotiations of
certain escrow accounts and agreements. As part of this initiative, asset
impairments and loan valuations of $31,521,000 have been recorded on five
properties. In addition, 13 owned properties have been identified as assets held
for sale for which a provision for loss was recorded of $19,380,000. On April 7,
2000, two mortgages were repaid for which a provision for loss of $8,197,000 had
been provided. Except for these specifically identified items, management does
not believe any of its remaining owned real estate or mortgages are impaired at
March 31, 2000. However, the ultimate outcome of these bankruptcies is not
currently predictable and management is not able to make a meaningful estimate
of the amount or range of loss, if any, that could result from an unfavorable
outcome. It is possible that an unfavorable outcome could have a material
adverse effect on Realty's cash flow, revenues and results of operations in a
particular quarter or annual period. However, Realty believes that even if the
outcome of these bankruptcies is materially adverse to Realty's cash flow,
revenues and results of operations, it should not have a material adverse effect
on Realty's financial position.
4. INDEBTEDNESS
Of the $850,000,000 revolving tranche commitment, approximately $262,000,000 was
available at March 31, 2000, at Realty's option of the base rate (11.0%) or
LIBOR plus 2.875% (9.0% weighted average at March 31, 2000).
At March 31, 2000, Realty was a fixed rate payor under interest rate swap
agreements, with an underlying notional amount of $500,000,000, of 5.7% and
received a variable rate of 6.0%. Differentials in the swapped amounts are
recorded as adjustments to interest expense of Realty.
During the three months ended March 31, 2000, the Companies repurchased
$34,300,000 of notes payable and $10,500,000 of convertible debentures, which
resulted in a gain on early extinguishment of debt of $2,174,000. The Companies
also prepaid mortgages with principal amounts totaling $14,936,000. In
connection with these mortgage prepayments the Companies paid $780,000 in
penalties.
5. SHAREHOLDERS' EQUITY
As of March 31, 2000, the following classes of Preferred Stock, Excess Stock and
Series Common Stock were authorized; no shares were issued or outstanding at
either March 31, 2000 or December 31, 1999:
Meditrust Operating Company Preferred Stock $.10 par value; 6,000,000
shares authorized;
Meditrust Corporation Excess Stock $.10 par value; 25,000,000 shares
authorized;
Meditrust Operating Company Excess Stock $.10 par value; 25,000,000 shares
authorized;
Meditrust Corporation Series Common Stock $.10 par value; 30,000,000 shares
authorized;
Meditrust Operating Company Series Common Stock $.10 par value; 30,000,000
shares authorized.
14
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During January 2000, 200,000 restricted shares of the Companies' stock
were issued to key employees under The Meditrust Corporation 1995 Share
Award Plan and The Meditrust Operating Company 1995 Share Award Plan
(collectively known as the "Share Award Plan").
Under the Share Award Plan participants are entitled to cash dividends
and voting rights on their respective restricted shares. Restrictions
generally limit the sale or transfer of shares during a restricted
period, not to exceed eight years. Participants vest in the restricted
shares granted upon the earliest of eight years after the date of
issuance, upon achieving the performance goals as defined, or as the
Boards of Directors may determine.
Unearned compensation was charged for the market value of the restricted
shares on the date of grant and is being amortized over the restricted
period. The unamortized unearned compensation value is reflected as a
reduction of shareholders' equity in the accompanying consolidated and
combined consolidated balance sheets.
6. COMPREHENSIVE INCOME (LOSS) AND OTHER ASSETS
As of March 31, 2000, Realty had invested approximately $57,204,000 in Nursing
Home Properties Plc ("NHP Plc"), a property investment group which specializes
in the financing, through sale leaseback transactions, of nursing homes located
in the United Kingdom. The investment includes approximately 26,606,000 shares
of NHP Plc, representing an ownership interest in NHP Plc of 19.99% of which
Realty has voting rights with respect to 9.99%. The difference between the
current market value and the cost, an unrealized loss of $30,958,000, is
included in shareholders' equity in the accompanying balance sheet.
As of March 31, 2000, Realty owns 1,081,000 shares of stock and warrants to
purchase 5,000 shares of stock in Balanced Care Corporation ("BCC"), a
healthcare operator. The stock and warrants have a current market value of
$2,172,000. The difference between current market value and the cost of the BCC
investment, an unrealized gain of $1,067,000, is included in shareholders'
equity in the accompanying balance sheet.
The following is a summary of the Companies' comprehensive income (loss):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
(IN THOUSANDS) 2000 1999
------------------------
<S> <C> <C>
Net income .......................................................... $ 11,676 $19,744
Other comprehensive income (loss):
Changes in market value of equity securities ........................ (34,359) 3,816
------------------------
Comprehensive income (loss) ......................................... $(22,683) $23,560
========================
</TABLE>
Other assets includes investments in NHP Plc and BCC, as well as La Quinta
intangible assets, the Telematrix non-compete agreement, furniture, fixtures and
equipment, and other receivables.
7. DISTRIBUTIONS PAID TO SHAREHOLDERS
On March 31, 2000, Realty paid a dividend of $0.5625 per depository share of
preferred stock to holders of record on March 15, 2000 of its 9.00% Series A
Cumulative Redeemable Preferred Stock. On March 31, 2000, Realty also paid a
quarterly dividend at a rate of 9.00% per annum on the liquidation preference of
$25,000 per share to the holder of the 9.00% Series B Cumulative Redeemable
Convertible Preferred Stock.
15
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. OTHER EXPENSES
During the first quarter of 2000, the Companies recorded approximately
$12,364,000 in other expenses.
On January 28, 2000, the Companies announced that the Boards of Directors had
approved a five point plan of reorganization (the "Five Point Plan"), which
provided for:
- An orderly disposition of a significant portion of its healthcare
assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
The Companies also announced that consistent with the adoption of the Five Point
Plan to reduce its emphasis on the healthcare division, David F. Benson would be
leaving as Chief Executive Officer, President, and Treasurer of Realty. Mr.
Benson is continuing to assist the Companies on a consulting basis as the
Companies move forward to implement the Five Point Plan. Realty also entered
into a separation and consulting agreement with Mr. Benson, pursuant to which
Realty made a cash payment of approximately $9,500,000 (including consulting
fees), converted 155,000 restricted paired common shares into unrestricted
paired common shares which resulted in approximately $2,500,000 of accelerated
amortization of unearned compensation and continued certain medical, dental and
other benefits.
The Companies also incurred approximately $80,000 of professional fees related
to implementation of the Five Point Plan. During the quarter ended March 31,
2000, the Companies also recorded provisions of approximately $284,000 for other
receivables that management considers to be uncollectible.
During the first quarter of 1999, the Companies recorded approximately
$34,887,000 in other expenses.
On May 10, 1999, the Companies entered into a separation agreement with Abraham
D. Gosman, former Director and Chairman of the Companies and Chief Executive
Officer and Treasurer of Meditrust Operating Company. Under the terms of this
separation agreement, Mr. Gosman received severance payments totaling
$25,000,000 in cash and the continuation of certain life insurance benefits. The
Companies established a Special Committee of the Boards of Directors of Realty
and Operating (the "Special Committee") to evaluate Mr. Gosman's employment
contract and whether such severance or other payments were appropriate. Based on
the results of the evaluation and recommendation of the Special Committee, the
Boards of Directors concluded that the separation agreement was in the long-term
best interest of the shareholders of the Companies and approved the separation
agreement.
The Companies incurred approximately $5,889,000 of non-recurring costs
associated with the development and implementation of the comprehensive
restructuring plan adopted in November 1998 (the "1998 Plan"). These costs
primarily relate to the early repayment and modification of certain debt and
other advisory fees related to the 1998 Plan and the separation agreement with
Mr. Gosman.
Also, in conjunction with the implementation of the 1998 Plan, which included a
change in the focus of the lodging division to internal growth, La Quinta
management performed a review of the front desk system under development for its
lodging facilities, and made a decision to abandon the project. The decision was
based primarily on management's intent to integrate the front desk system with
new revenue management software, the availability of more suitable and flexible
externally developed software and a shift in information systems philosophy
toward implementation of externally developed software and outsourcing of
related support services. A charge of approximately $3,998,000 to write-off
certain internal and external software development costs related to the project
was recorded in the first quarter of 1999.
16
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE
COMBINED CONSOLIDATED EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
2000 1999
---------------------------
<S> <C> <C>
Income from continuing operations before extraordinary item ............ $ 10,282 $ 14,875
Preferred stock dividends .............................................. (4,500) (3,938)
-------- --------
Income from continuing operations before extraordinary item
available to common shareholders ..................................... $ 5,782 $ 10,937
======== ========
Weighted average outstanding shares of paired common stock ............. 141,230 147,983
Dilutive effect of:
Contingently issuable shares ......................................... -- 363
Stock options ........................................................ -- 126
-------- --------
Dilutive potential paired common stock ................................. 141,230 148,472
======== ========
Earnings per share:
Basic ................................................................ $ .04 $ 0.07
======== ========
Diluted .............................................................. $ .04 $ 0.07
======== ========
</TABLE>
Options to purchase 3,358,000 and 1,919,000 paired common shares at prices
ranging from $8.13 to $36.46 were outstanding during the three months ended
March 31, 2000 and 1999, respectively, but were not included in the computation
of diluted EPS because the options' exercise prices were greater than the
average market price of the paired common shares. The options, which expire on
dates ranging from October 2001 to October 2009, were still outstanding at March
31, 2000.
Convertible debentures outstanding for the three months ended March 31, 2000 and
1999 of 6,177,000 and 6,540,000 paired common shares, respectively, and
convertible preferred stock for the three months ended March 31, 2000 of 563,000
paired common shares are not included in the computation of diluted EPS because
the inclusion would result in an antidilutive effect.
MEDITRUST CORPORATION EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS
ENDED MARCH 31,
---------------------------
2000 1999
---------------------------
<S> <C> <C>
Income from continuing operations before extraordinary item ................ $ 17,097 $ 43,091
Preferred stock dividends .................................................. (4,500) (3,938)
-------- --------
Income from continuing operations before extraordinary item
available to common shareholders ......................................... $ 12,597 $ 39,153
======== ========
Weighted average outstanding shares of common stock ........................ 142,535 149,288
Dilutive effect of:
Contingently issuable shares ............................................. -- 363
Stock options ............................................................ -- 126
-------- --------
Dilutive potential common stock ............................................ 142,535 149,777
======== ========
Earnings per share:
Basic .................................................................... $ 0.09 $ 0.26
======== ========
Diluted .................................................................. $ 0.09 $ 0.26
======== ========
</TABLE>
17
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. EARNINGS PER SHARE (CONT.)
Options to purchase 2,093,000 and 1,919,000 paired common shares at prices
ranging from $12.63 to $36.46 were outstanding during the three months ended
March 31, 2000 and 1999, respectively, but were not included in the computation
of diluted EPS because the options' exercise prices were greater than the
average market price of the common shares. The options, which expire on dates
ranging from October 2001 to January 2009, were still outstanding at March 31,
2000.
Convertible debentures outstanding for the three months ended March 31, 2000 and
1999 of 6,177,000 and 6,540,000 paired common shares, respectively, and
convertible preferred stock for the three months ended March 31, 2000 of 563,000
paired common shares are not included in the computation of diluted EPS because
the inclusion would result in an antidilutive effect.
MEDITRUST OPERATING COMPANY EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS
ENDED MARCH 31,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Loss from continuing operations ............................... $ (6,815) $(28,216)
Preferred stock dividends ..................................... -- --
-------- --------
Loss from continuing operations available to
common shareholders ......................................... $ (6,815) $(28,216)
======== ========
Weighted average outstanding shares of common stock ........... 141,230 147,983
Dilutive effect of:
Contingently issuable shares ................................ -- --
Stock options ............................................... -- --
-------- --------
Dilutive potential common stock ............................... 141,230 147,983
======== ========
Earnings per share:
Basic ....................................................... $ (0.05) $ (0.19)
======== ========
Diluted ..................................................... $ (0.05) $ (0.19)
======== ========
</TABLE>
Options to purchase 1,265,000 paired common shares at prices ranging from $8.13
to $16.06 were outstanding during the three months ended March 31, 2000 but were
not included in the computation of diluted EPS because the options' exercise
prices were greater than the average market price of the common shares. The
options, which expire on dates ranging from December 2008 to October 2009, were
still outstanding at March 31, 2000.
Convertible debentures outstanding for the three months ended March 31, 2000 and
1999 of 6,177,000 and 6,540,000 paired common shares, respectively, and
convertible preferred stock for the three months ended March 31, 2000 of 563,000
paired common shares are not included in the computation of diluted EPS because
the inclusion would result in an antidilutive effect.
Operating Company holds common shares of Realty which are unpaired pursuant to a
stock option plan approved by the shareholders. The common shares held totaled
1,305,000 as of March 31, 2000. These shares affect the calculations of Realty's
net income per common share but are eliminated in the calculation of net income
per paired common share for The Meditrust Companies.
10. TRANSACTIONS BETWEEN REALTY AND OPERATING COMPANY
Operating Company leases hotel facilities from Realty and its subsidiaries. The
hotel facility lease arrangements between Operating Company and Realty include
base and additional rent provisions and require Realty to assume costs
attributable to property taxes and insurance.
In connection with certain acquisitions, Operating Company issued shares to
Realty and recorded a receivable. Due to the affiliation of Realty and Operating
Company, the receivable from Realty has been classified in Operating Company's
shareholders' equity.
18
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. TRANSACTIONS BETWEEN REALTY AND OPERATING COMPANY (CONT.)
Periodically, Realty and Operating Company issue shares under the Share Award
Plan. Amounts due from Realty and Operating Company in connection with awards of
shares under the Share Award Plan are shown as a reduction of shareholders'
equity in the accompanying consolidated balance sheets of Realty and Operating
Company, respectively.
Realty provides certain services to Operating Company primarily related to
general tax preparation and consulting, legal, accounting, and certain aspects
of human resources. In the opinion of management, the costs associated with
these services were not material and have been excluded from the financial
statements.
11. SEGMENT REPORTING
MEASUREMENT OF SEGMENT PROFIT OR LOSS
The Companies evaluate performance based on contribution from each reportable
segment. Contribution is defined by the Companies as income from operations
before interest expense, depreciation, amortization, gains and losses on sales
of assets, provisions for losses on disposal or impairment of assets, income or
loss from unconsolidated entities, income taxes and nonrecurring income and
expenses. The measurement of each of these segments is made on a combined basis
with revenue from external customers and excludes lease income between Realty
and Operating Company. The Companies account for Realty and Operating Company
transactions at current market prices, as if the transactions were to third
parties.
19
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. SEGMENT REPORTING (CONTINUED)
The following table presents information used by management by reported segment.
The Companies do not allocate interest expense, income taxes or unusual items to
segments.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999
----------------------------
<S> <C> <C>
Healthcare:
Rental income ......................................................... $ 31,995 $ 43,712
Interest income ....................................................... 31,890 34,202
Rental property operating costs ....................................... (518) (2,254)
General and administrative expenses ................................... (2,795) (4,918)
-------- --------
Healthcare Contribution ............................................... 60,572 70,742
-------- --------
Lodging:
Room revenue .......................................................... 137,703 139,051
Guest services and other .............................................. 9,625 9,483
Operating expenses .................................................... (70,822) (66,602)
General and administrative expenses ................................... (6,494) (4,388)
Rental property operating costs ....................................... (7,125) (6,653)
-------- --------
Lodging Contribution .................................................. 62,887 70,891
-------- --------
Other contribution (a) ................................................ 673 --
-------- --------
Combined Contribution ........................................ 124,132 141,633
-------- --------
Reconciliation to Combined Consolidated Financial Statements:
Interest expense ...................................................... 55,236 66,657
Depreciation and amortization ......................................... 36,739 33,859
Amortization of goodwill .............................................. 5,699 5,308
Loss (gain) on sale of assets ......................................... 3,812 (12,271)
Other income .......................................................... -- (856)
Other expenses ........................................................ 12,364 34,887
-------- --------
113,850 127,584
-------- --------
Income from continuing operations before benefit for income taxes
and extraordinary item .............................................. 10,282 14,049
Income tax benefit .................................................... -- 826
-------- --------
Income from continuing operations before extraordinary item ........... 10,282 14,875
Discontinued operations:
Gain (loss adjustment) on disposal of discontinued operations ....... -- 4,869
-------- --------
Income before extraordinary item ...................................... 10,282 19,744
Extraordinary gain on early extinguishment of debt .................... 1,394 --
-------- --------
Net income ............................................................ 11,676 19,744
Preferred stock dividends ............................................. (4,500) (3,938)
-------- --------
Net income available to Paired Common shareholders ................... $ 7,176 $ 15,806
======== ========
</TABLE>
(a) Other contribution includes Telematrix, a provider of telephone software
and equipment for the lodging industry. Telematrix was acquired in October
1999 and generated a contribution of $673,000 during the first quarter,
which was comprised of revenue of $3,535,000, operating expenses of
$1,970,000 and general and administrative expenses of $892,000. Operations
of Telematrix are included in the lodging revenue and expense categories of
the combined and consolidated statements since consummation of the
acquisition.
20
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
(UNAUDITED)
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CERTAIN MATTERS DISCUSSED HEREIN MAY CONSTITUTE "FORWARD-LOOKING STATEMENTS"
WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. THE MEDITRUST COMPANIES (THE
"COMPANIES"), CONSISTING OF MEDITRUST CORPORATION ("REALTY") AND MEDITRUST
OPERATING COMPANY ("OPERATING"), INTEND SUCH FORWARD-LOOKING STATEMENTS TO BE
COVERED BY THE SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING STATEMENTS, AND ARE
INCLUDING THIS STATEMENT FOR PURPOSES OF COMPLYING WITH THESE SAFE HARBOR
PROVISIONS. ALTHOUGH THE COMPANIES BELIEVE THE FORWARD-LOOKING STATEMENTS ARE
BASED ON REASONABLE ASSUMPTIONS, THE COMPANIES CAN GIVE NO ASSURANCE THAT THEIR
EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS AND THE TIMING OF CERTAIN EVENTS
COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR CONTEMPLATED BY THE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING, WITHOUT
LIMITATION, GENERAL ECONOMIC AND REAL ESTATE CONDITIONS, THE CONDITIONS OF THE
CAPITAL MARKETS IN GENERAL, THE IDENTIFICATION OF SATISFACTORY PROSPECTIVE
BUYERS FOR HEALTHCARE RELATED ASSETS OF THE COMPANIES AND THE AVAILABILITY OF
FINANCING FOR SUCH PROSPECTIVE BUYERS, THE AVAILABILITY OF FINANCING FOR THE
COMPANIES' CAPITAL INVESTMENT PROGRAM, INTEREST RATES, COMPETITION FOR HOTEL
SERVICES AND HEALTHCARE FACILITIES IN A GIVEN MARKET, THE SATISFACTION OF
CLOSING CONDITIONS TO PENDING TRANSACTIONS DESCRIBED IN THIS FORM 10-Q, THE
ENACTMENT OF LEGISLATION FURTHER IMPACTING THE COMPANIES' STATUS AS A PAIRED
SHARE REAL ESTATE INVESTMENT TRUST ("REIT") OR REALTY'S STATUS AS A REIT, THE
FURTHER IMPLEMENTATION OF REGULATIONS GOVERNING PAYMENTS TO, AS WELL AS THE
FINANCIAL CONDITIONS OF OPERATORS OF, REALTY'S HEALTHCARE RELATED ASSETS,
INCLUDING THE FILING FOR PROTECTION UNDER THE US BANKRUPTCY CODE BY ANY
OPERATORS OF THE COMPANIES' HEALTHCARE ASSETS, THE IMPACT OF THE PROTECTION
OFFERED UNDER THE US BANKRUPTCY CODE FOR THOSE OPERATORS WHO HAVE ALREADY FILED
FOR SUCH PROTECTION AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE FILINGS OF
REALTY AND OPERATING WITH THE SEC, INCLUDING, WITHOUT LIMITATION, THOSE RISKS
DESCRIBED IN ITEM 7 OF THE JOINT ANNUAL REPORT ON FORM 10-K ENTITLED "CERTAIN
FACTORS YOU SHOULD CONSIDER" BEGINNING ON PAGE 67 THEREOF.
OVERVIEW
The basis of presentation includes Management's Discussion and Analysis of
Financial Condition and Results of Operations for the combined and separate
registrants under the Securities and Exchange Act of 1934, as amended.
Management of the Companies believes that the combined presentation is most
beneficial to the reader.
During 1998, the Companies pursued a strategy of diversifying into additional
new businesses. Implementation of this strategy included the evaluation of
numerous potential acquisition targets. On January 3, and January 11, 1998,
Realty entered into definitive merger agreements for La Quinta Inns, Inc. and
its wholly owned subsidiaries and its unincorporated partnership and joint
venture (collectively "La Quinta" and the "La Quinta Merger") and Cobblestone
Holdings, Inc. and its wholly owned subsidiary (collectively "Cobblestone" and
the "Cobblestone Merger"), respectively. In February 1998, legislation was
proposed which limited the ability of the Companies to utilize the paired share
structure.
The Companies consummated the Cobblestone Merger and the La Quinta Merger on May
29, 1998 and July 17, 1998, respectively. On July 22, 1998, the Internal Revenue
Service Restructuring and Reform Act of 1998 (the "Reform Act") was enacted. The
Reform Act limits the Companies' ability to grow through use of the paired share
structure. While the Companies' use of the paired share structure in connection
with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under
the Reform Act, the ability to use the paired share structure to acquire
additional real estate and operating businesses conducted with the real estate
assets (including the golf and lodging industries) was substantially limited. In
addition, during the summer of 1998, the debt and equity capital markets
available to REITs began to deteriorate, thus limiting the Companies' access to
cost-efficient capital.
BACKGROUND - NOVEMBER 1998 COMPREHENSIVE RESTRUCTURING PLAN
During the third and fourth quarters of 1998, the Companies performed an
analysis of the impact of the Reform Act, the Companies' limited ability to
access the capital markets, and the operating strategy of the Companies'
existing businesses. This analysis included advice from outside professional
advisors and presentations by management on the different alternatives available
to the Companies. The analysis culminated in the development of a comprehensive
restructuring plan (the "1998 Plan") designed to strengthen the Companies'
financial position and clarify its investment and operating strategy by focusing
on the healthcare and lodging business segments. The Plan was announced on
November 12, 1998 and included the following components:
- - Pursue the separation of the Companies' primary businesses, healthcare and
lodging, by creating two separately traded, publicly listed REITs. The
Companies intended to spin-off the healthcare financing business into a
stand-alone REIT;
- - Continue to operate the Companies' healthcare and lodging businesses using
the existing paired-share REIT structure until a healthcare spin-off were
to take place;
21
<PAGE>
- - Sell more than $1 billion of assets, including the portfolio of
golf-related real estate and operating properties (the "Cobblestone Golf
Group"), the Santa Anita Racetrack and approximately $550 million of
healthcare properties;
- - Use the proceeds from these asset sales to achieve significant near-term
debt reduction;
- - Settle fully the Companies' forward equity issuance transaction ("FEIT")
with certain affiliates of Merrill Lynch & Co., Inc. (together with its
agent and successor in interest, "MLI"); and
- - Reduce capital investments to respond to the current operating conditions
in each industry.
During the latter part of 1998 and throughout 1999, the Companies implemented
the various parts of the 1998 Plan including:
- - The sale of more than $1.4 billion of assets, including the Cobblestone
Golf Group, the Santa Anita Racetrack and approximately $820 million of
healthcare properties:
- - The repayment of more than $625 million of debt;
- - The full settlement of the FEIT; and
- - The realignment of capital investments to respond to the current operating
environment in the healthcare and lodging industries.
The Companies also endeavored to separate its healthcare and lodging businesses.
However, the ability to separate these businesses was contingent on the ability
of each business to obtain a separate credit facility. The ability to obtain
separate credit facilities was hindered by the capital markets heightened
uncertainty surrounding both the long-term healthcare and mid-priced lodging
industries. The Companies' Boards of Directors continued to evaluate the
Companies' businesses and the capital market's response to these businesses. As
a result, the Boards considered the Companies' alternatives and, after such
consideration, adopted a reorganization plan that is no longer focused on the
separation of the businesses and the spin-off of the healthcare business.
As part of the 1998 Plan, the Companies classified golf and horseracing
activities as discontinued operations for financial reporting purposes.
Accordingly, management's discussion and analysis of the results of operations
are focused on the Companies' primary businesses, healthcare and lodging.
RECENT DEVELOPMENTS - ADOPTION OF FIVE POINT PLAN OF REORGANIZATION
During the latter part of 1999, the Companies continued to analyze and evaluate
the impact of the Companies' continued inability to access the capital markets
and the operating strategy of the Companies' existing businesses. This analysis
included advice from outside professional advisors and presentations by
management on the different alternatives available to the Companies, and
included a review of the current state of the Companies' investments in the
healthcare industry and the long-term prospects of both the healthcare and
lodging industries.
A number of factors have negatively impacted the long-term care and assisted
living sectors of the healthcare industry. These include the federal
government's shift to a Medicare prospective payment system ("PPS") in the
skilled nursing industry, increased labor costs, fill-up periods of longer
duration for assisted living facilities, increased regulation and tighter and
more costly capital markets for both healthcare operating and financing
companies. These factors have caused investment spreads to narrow and have
caused a significant decline in the growth rate in the assisted living and
nursing home industries. Therefore, a decision was made to reduce the Companies'
investment in healthcare assets and focus its resources on its lodging division.
The mid-priced lodging segment has experienced a greater increase in the
supply of available rooms than in demand in much of the United States. The
relationship between supply and demand varies by region. Although the
mid-priced lodging segment continues to be impacted by the supply/demand
imbalance, the Companies believe that by focusing on internal growth and
improving the efficiency of operations, the lodging division will be
positioned to benefit from improving industry trends when the supply/demand
imbalance begins to moderate.
This analysis culminated in the development of a five-point plan of
reorganization ("Five Point Plan") designed to improve the overall financial
condition of the Companies by substantially deleveraging its balance sheet. The
Five Point Plan takes advantage of the Companies' demonstrated ability to sell
healthcare assets and use the proceeds from these sales to repay debt
obligations. As part of the Five Point Plan, the Companies suspended Realty's
common share dividend to provide additional operating funds to repay debt and
strengthen the Companies' balance sheet. These actions will permit the
Companies, when appropriate, to make disciplined investments to position its
lodging division to benefit from improving industry trends when the
supply/demand imbalance in its sector
22
<PAGE>
begins to moderate. The Five Point Plan was announced on January 28, 2000 and
included the following components:
- - An orderly disposition of a significant portion of healthcare assets;
- - Suspension of Realty's REIT common share dividend;
- - Expectation of the declaration of the minimum dividend required to maintain
REIT status in December 2000;
- - Substantial reduction in debt; and
- - Future disciplined investment in the lodging division.
The Companies also announced that consistent with the adoption of the Five Point
Plan to reduce its emphasis on the healthcare division, the Chief Executive
Officer of Realty would be leaving. The Boards of Directors, with the assistance
of a professional search firm, conducted a search for candidates with
significant lodging industry experience to assume the role of Chief Executive
Officer in the reorganized Companies. On March 23, 2000, the Companies announced
the appointment of Francis W. ("Butch") Cash as Chief Executive Officer of the
Companies. Mr. Cash joined the Companies on April 17, 2000.
THE MEDITRUST COMPANIES--COMBINED RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999
Revenue for the three months ended March 31, 2000, was $214,748,000 compared
to revenue of $227,304,000 for the three months ended March 31, 1999, a
decrease of $12,556,000. The revenue decrease was primarily attributed to a
decrease in healthcare revenue of $14,029,000. The healthcare revenue
decrease primarily resulted from asset sales and mortgage repayments over the
last year net of the effect of additions to real estate investments made
during the same period. Other nonrecurring income for the three months ended
March 31, 1999 was $856,000, which arose from lease breakage fees received
from the sale of healthcare properties. Hotel revenue for the three months
ended March 31, 2000 was $147,328,000 compared to $148,534,000 for the three
months ended March 31, 1999, a decrease of $1,206,000. Hotel operating
revenues generally are measured as a function of the average daily rate
("ADR") and occupancy. The ADR increased to $64.33 in 2000 from $61.73 in
1999, an increase of $2.60 or 4.2%. Occupancy percentage decreased 6.0
percentage points to 61.1% in 2000 from 67.1% in 1999. Revenue per available
room ("RevPAR"), which is the product of occupancy percentage and ADR,
decreased 5.0% over 1999. The decrease in RevPAR is primarily due to a
greater increase in the supply of available rooms than in demand. The
relationship between supply and demand varies by region. The revenue impact
of the oversupply of available rooms was somewhat mitigated by revenue
increases resulting from a higher proportion of room rental income from the
Inn & Suites hotels as compared to the Inns during the comparable periods.
Inn & Suites hotels generally have higher room rental income per night than
the Inns. Other factors contributing to the decrease in RevPAR includes the
continuing short-term disruptive impact of the introduction of the new
property management system and the reorganization of the operations and sales
organizations. These revenue decreases were partially offset by the addition
of revenues from the acquisition of Telematrix, Inc. ("Telematrix"), a
provider of telephone software and equipment for the lodging industry in
October 1999. Revenues related to Telematrix for the three months ended March
31, 2000 were $3,535,000.
For the three months ended March 31, 2000, total recurring operating expenses
were $90,616,000 compared to $84,815,000 for the three months ended March 31,
1999, an increase of $5,801,000. This increase was primarily attributable to
the hotel business and included increases to operating expenses of
$4,220,000, general and administrative expenses of $2,106,000 and rental
property operating expenses of $472,000. The increase in hotel operating and
general and administrative expenses was primarily due to the opening of 13
Inn & Suites hotels since the comparable period in the prior year. Hotel
operating and general and administrative expenses include costs associated
with the operation such as salaries, wages, utilities, repair and
maintenance, credit card discounts and room supplies as well as corporate
expenses, such as the costs of general management, office rent, training and
field supervision of hotel managers and other marketing and administrative
expenses. In addition, $1,970,000 of operating expenses and $892,000 of
general and administrative expenses were related to the operations of
Telematrix. Rental property operating costs attributed to the lodging segment
principally consist of property taxes on hotel facilities.
For the three months ended March 31, 2000, rental property operating expenses
attributable to the healthcare business decreased $1,736,000. Rental property
operating expenses attributed to the healthcare business principally consist of
expenses for the management and operation of medical office buildings. The
decrease was primarily a result of the sale of principally all of the Companies'
medical office buildings in January 2000. General and administrative expenses
related to healthcare decreased by $2,123,000 primarily due to state tax savings
associated with the restructuring of certain healthcare subsidiaries and
reductions in legal and overhead expenses.
The Companies consider contribution from each primary business in evaluating
performance. Contribution includes revenue from each business, excluding
non-recurring or unusual income, less operating expenses, rental property
operating expenses and general and administrative expenses. The resulting
combined contribution of the healthcare and lodging businesses was $124,132,000
for the three months ended March 31, 2000, of which $60,572,000 related to
healthcare, $62,887,000 to hotels and $673,000 to Telematrix.
23
<PAGE>
For the comparable three months ended March 31, 1999, the combined contribution
of the healthcare and lodging businesses was $141,633,000, of which $70,742,000
related to healthcare and $70,891,000 related to hotels. The contribution of the
healthcare business decreased $10,170,000 from $70,742,000 for the comparative
three months ended March 31, 1999. The decrease was primarily a result of the
impact on revenue of asset sales and mortgage repayments over the last year net
of the impact of savings in rental and general and administrative expenses.
The lodging contribution was $62,887,000 or 42.7% of lodging revenues during the
three months ended March 31, 2000, compared to $70,891,000 or 47.7% of lodging
revenues during the three months ended March 31, 1999. The decrease in
contribution is primarily attributable to the impact of the oversupply of
available rooms, and was somewhat mitigated by revenue increases resulting from
a higher proportion of room rental income from the Inn & Suites hotels as
compared to the Inns during the comparable periods.
In addition, contribution from Telematrix was $673,000 for the three months
ended March 31, 2000. Operations of Telematrix are included in lodging revenue
and expense categories of the combined and consolidated statements since
consummation of the acquisition and separately disclosed as "Other Contribution"
in Note 11 "Segment Reporting" of the combined and consolidated statements.
Interest expense decreased by $11,421,000 due to reductions in debt from amounts
paid as a result of various asset sales and mortgage repayments over the past
twelve months. These decreases were partially offset by increases to borrowing
rates. Depreciation and amortization increased by $3,271,000.
ASSET SALES
During the three months ended March 31, 2000, Realty realized losses on the sale
of healthcare real estate assets of $3,812,000 compared to gains of $12,271,000
during the comparable three months ended March 31, 1999. For the three months
ended March 31, 2000, sales of healthcare properties included 23 medical office
buildings, 12 assisted living facilities and four long-term care facilities. For
the three months ended March 31, 1999 sales of healthcare properties included 15
assisted living facilities, one rehabilitation facility, and one long-term care
facility. During the first quarter of 1999, Realty also sold one hotel and land
held for development on which there was no gain or loss realized.
OTHER EXPENSES
During the first quarter of 2000, the Companies recorded approximately
$12,364,000 in other expenses.
On January 28, 2000, Realty entered into a separation and consulting agreement
with the former Chief Executive Officer of Realty. Under the terms of the
separation agreement, Realty paid the former Chief Executive Officer severance
payments totaling $9,500,000 (including consulting fees), converted 155,000
restricted paired common shares into unrestricted paired common shares and
agreed to continue certain medical, dental and other benefits. The vesting of
the shares resulted in a charge of approximately $2,500,000.
The Companies also incurred approximately $80,000 of professional fees related
to implementation of the Five Point Plan. During the quarter ended March 31,
2000, the Companies also recorded provisions of approximately $284,000 for other
receivables that management considers uncollectible.
During the first quarter of 1999, the Companies recorded approximately
$34,887,000 in other expenses.
On May 10, 1999, the Companies entered into a separation agreement with Abraham
D. Gosman, former Director and Chairman of the Companies and Chief Executive
Officer and Treasurer of Meditrust Operating Company. Under the terms of this
separation agreement, Mr. Gosman received severance payments totaling
$25,000,000 in cash and the continuation of certain life insurance benefits. The
Companies established a Special Committee of the Boards of Directors of Realty
and Operating (the "Special Committee") to evaluate Mr. Gosman's employment
contract and whether such severance or other payments were appropriate. Based on
the results of the evaluation and recommendation of the Special Committee, the
Boards of Directors concluded that the separation agreement was in the long-term
best interest of the shareholders of the Companies and approved the separation
agreement.
The Companies incurred approximately $5,889,000 of non-recurring costs
associated with the development and implementation of the 1998 Plan. These costs
primarily relate to the early repayment and modification of certain debt and
other advisory fees related to the 1998 Plan and the separation agreement with
Mr. Gosman.
Also, in conjunction with the implementation of the 1998 Plan, which included a
change in the focus of the lodging division to internal growth, La Quinta
management performed a review of the front desk system under development for its
lodging facilities, and made a decision to abandon the project. The decision was
based primarily on management's intent to integrate the front desk system with
new revenue management software, the availability of more suitable and flexible
externally developed software and a shift in information systems philosophy
toward implementation of externally developed software and outsourcing of
related support services.
24
<PAGE>
A charge of approximately $3,998,000 to write-off certain internal and external
software development costs related to the project was recorded in the first
quarter of 1999.
EXTRAORDINARY ITEM
During the three months ended March 31, 2000 the Companies retired $44,800,000
of corporate debt at a discount prior to its maturity date, and as part of
certain asset sale transactions repaid secured debt totaling $14,936,000. As a
result of these early repayments of debt, a net gain of $1,394,000 was realized
and is reflected as an extraordinary item.
DISCONTINUED OPERATIONS
For the three months ended March 31, 1999, and as part of the 1998 Plan, the
Companies sold the Santa Anita Racetrack during the fourth quarter of 1998 and
sold the Cobblestone Golf Group during the first quarter of 1999. The Companies
reflected the financial results for 1999 and 1998 of the Santa Anita Racetrack
and the Cobblestone Golf Group as discontinued operations. During the first
quarter of 1999, the Companies adjusted the provision for loss on disposal of
the Cobblestone Golf Group by recording a gain of approximately $2,994,000 which
includes an estimate of a working capital adjustment to the final selling price.
In addition, during the first quarter of 1999 the Companies recorded $1,875,000
as an adjustment to the estimated selling price of the Santa Anita Racetrack.
NET INCOME
The resulting net income available for common shareholders, after deducting
preferred share dividends, for the three months ended March 31, 2000, was
$7,176,000 compared to net income available for common shareholders, after
deducting preferred share dividends of $15,806,000 for three months ended March
31, 1999. The net income per paired common share (diluted) for the three months
ended March 31, 2000 was $0.05 compared to net income per paired common share
(diluted) of $0.11 for the three months ended March 31, 1999. The per paired
common share amount decreased primarily due to the reduction in contribution as
a result of healthcare asset sales during the twelve month period ended March
31, 2000 and the losses incurred on asset sales, which were partially offset by
decreases in interest expense and other expenses between the comparable periods.
THE MEDITRUST COMPANIES - COMBINED LIQUIDITY AND CAPITAL RESOURCES
The Companies earn revenue by (i) leasing healthcare assets under long-term
triple net leases in which the rental rate is generally fixed with annual
escalators; (ii) providing mortgage financing for healthcare facilities in which
the interest is generally fixed with annual escalators subject to certain
conditions and (iii) owning and operating 232 La Quinta Inns and 70 La Quinta
Inn and Suites. Approximately $1,049,000,000 of the Companies debt obligations
are floating rate obligations in which interest rate and related cash flows vary
with the movements in the London Interbank Offered Rate ("LIBOR"). The general
fixed nature of the Companies' assets and the variable nature of a portion of
the Companies' debt obligations creates interest rate risk. If interest rates
were to rise significantly, the Companies' interest payments may increase
resulting in decreases in net income and funds from operations. To mitigate this
risk the Companies have entered into interest rate swaps to convert some of
their floating rate debt obligations to fixed rate debt obligations. Interest
rate swaps generally involve the exchange of fixed and floating rate interest
payments on an underlying notional amount. At March 31, 2000, the Companies had
$500,000,000 of interest rate swaps outstanding in which the Companies pay a
fixed rate of 5.7% to the counterparty and receive LIBOR from the counterparty.
Accordingly, at March 31, 2000, the Companies have approximately $549,000,000 of
variable debt outstanding with interest rates that fluctuate with changes in
LIBOR.
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund the Companies' future operating
expenses, interest expense, recurring capital expenditures and distribution
payments, if any, will be cash flow provided by operating activities. The
Companies' anticipate that cash flow provided by operating activities will
provide the necessary funds on a short and long-term basis to meet operating
cash requirements including distributions to shareholders.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
The Companies provide funding for new investments and costs associated with
restructuring through a combination of long-term and short-term financing
including both debt and equity, as well as the previously announced sale of
healthcare related assets. As part of the Five Point Plan, the Companies have
decided to sell additional healthcare related assets to meet their commitments
and to provide them with additional liquidity. The Companies obtain long-term
financing through the issuance of shares, long-term secured or 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 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.
25
<PAGE>
During February 1998, the Companies entered into the FEIT with MLI pursuant to
which MLI purchased shares of capital stock of the Companies which were
ultimately converted into paired shares. The FEIT was designed to mature one
year after issuance and provided MLI the right to sell sufficient paired shares
(including the shares originally purchased) to provide MLI with a guaranteed
return. The FEIT also included a purchase price adjustment mechanism which, from
time to time, resulted in the issuance of additional paired shares to MLI as a
result of declines in the paired shares' market price.
After announcing in November 1998 that the Companies intended to settle fully
the FEIT, during December 1998, the Companies repurchased all of the paired
shares issued pursuant to the purchase price adjustment mechanism, as well as
some of the paired shares originally sold to MLI.
On July 17, 1998, Realty entered into a credit agreement (the "Credit
Agreement") which provided Realty with up to $2,250,000,000 in credit
facilities, replacing Realty's then existing $365,000,000 revolving credit
facilities. The Credit Agreement provided for borrowings in four separate
tranches (each a "Tranche"): Tranche A, a $1,000,000,000 revolving loan, amounts
of which if repaid may be reborrowed, which matures July 17, 2001; Tranche B, a
term loan in the amount of $500,000,000, amounts of which if repaid may not be
reborrowed, which matured July 17, 1999 and which had a $250,000,000 mandatory
principal payment on April 17, 1999; Tranche C, a term loan in the amount of
$250,000,000, amounts of which if repaid may not be reborrowed, which matured
July 17, 1999 with a six month extension option which management exercised for a
fee of 12.5 basis points; and Tranche D, a term loan in the amount of
$500,000,000, amounts of which if repaid may not be reborrowed, which matures
July 17, 2001.
The Credit Agreement includes covenants with respect to maintaining certain
financial benchmarks, limitations on the types and percentages of investments in
certain business lines, a subjective acceleration clause contingent upon the
occurrence of an event with a material adverse effect on the Companies,
limitations on dividends of Realty and Operating, and other restrictions.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT, to provide for the amendment
of certain financial covenants to accommodate asset sales, to exclude the impact
of non-recurring charges in certain covenant calculations, and to provide for
future operating flexibility. The amendment also provided for an increase to the
LIBOR pricing of the credit facility by approximately 125 basis points, and the
pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock
also extended on a pro rata basis to entitled bondholders. Realty also agreed to
a 25 basis point increase to the LIBOR pricing in the event that an equity
offering of at least $100,000,000 had not been completed by February 1, 1999. On
February 1, 1999 this increase went into effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that
was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment, became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provides for, among other things, upon the sale of Cobblestone Golf Group,
the elimination of limitations on certain healthcare related investments and a
lowering of the commitment on the revolving tranche to $850,000,000.
On March 10, 1999, the Companies entered into an agreement with MLI to use the
proceeds from the sale of the Cobblestone Golf Group in excess of $300,000,000
to repurchase all or a portion of the remaining paired shares originally issued
to MLI in the FEIT. On April 1, 1999, the Companies fully settled the FEIT by
paying MLI $89,840,000 million for the repurchase of 6,865,000 paired common
shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on July
17, 1999.
On August 16, 1999, Realty repaid $12,500,000 of its notes payable which matured
on that date and bore interest at 7.25%.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan
which was scheduled to mature on January 17, 2000.
On January 28, 2000, the Companies announced that the Boards of Directors had
approved the Five Point Plan, which provided for:
- - An orderly disposition of a significant portion of healthcare assets;
- - Suspension of Realty's REIT common share dividend;
- - Expectation of the declaration of the minimum dividend required to maintain
REIT status in December 2000;
- - Substantial reduction in debt; and
- - Future disciplined investment in the lodging division.
26
<PAGE>
The Companies also announced that consistent with the adoption of the Five Point
Plan to reduce its emphasis on the healthcare division, David F. Benson would be
leaving as Chief Executive Officer, President, and Treasurer of Realty. Mr.
Benson is continuing to assist the Companies on a consulting basis as the
Companies move forward to implement the Five Point Plan.
During the three months ended March 31, 2000, the Companies sold Paramount Real
Estate Services Inc., its medical office building management company, as well as
the majority of its medical office building portfolio. Total consideration of
$204,000,000 included $144,000,000 in cash, $8,000,000 of assumed debt and
$52,000,000 of subordinated indebtedness due January 2005 bearing interest at
9%. The transaction involved the sale of the medical office building management
company, 23 medical office buildings and three medical office building mortgage
loans. Additionally, the Companies sold 12 assisted living facilities for
$28,000,000, four long-term care facilities for $22,000,000 and received
repayments of one mortgage loan and partial repayment of one mortgage loan for
approximately $12,000,000. The proceeds from the sale of these healthcare assets
and repayments were used to repay debt maturing in July 2000.
At March 31, 2000, the Companies had approximately $262,000,000 in available
borrowings under its revolving tranche commitment. During the calendar year
2000, the Companies have approximately $211,000,000 of debt maturing. The
Companies expect to obtain the necessary funds to repay these obligations
through asset sales and through the capacity available under the Companies'
revolving tranche commitment. However, there can be no assurance that the
Companies will be successful in its efforts to repay these obligations as they
come due or to meet its other liquidity requirements. As of May 1, 2000, the
Companies had outstanding borrowings under its revolving tranche commitment of
$501,000,000 (9.12% weighted average rate at May 1, 2000) and capacity for
additional borrowing of approximately $311,000,000.
As of March 31, 2000, the Companies' gross real estate investments totaled
approximately $4,740,718,000 consisting of 302 hotel facilities in service, 193
long-term care facilities, 105 retirement and assisted living facilities, eight
medical office buildings, one acute care hospital campus and six other
healthcare facilities. At March 31, 2000, Realty was committed to provide
additional financing of approximately $11,000,000 relating to two assisted
living facilities as well as additions to existing facilities in the portfolio.
The Companies had shareholders' equity of $2,648,832,000 and debt constituted
48% of the Companies' total capitalization as of March 31, 2000.
The Companies have an effective shelf registration statement on file with the
SEC under which the Companies may issue $1,825,000,000 of securities including
common stock, preferred stock, debt, series common stock, convertible debt and
warrants to purchase shares, preferred shares, debt, series common stock and
convertible debt.
The Companies believe that their various sources of capital, including
availability under the credit facility, operating cash flow and proceeds from
the sale of certain healthcare related assets as contemplated by the Five Point
Plan, are adequate to finance their operations as well as their existing
commitments, including financing commitments related to certain healthcare
facilities and repayment of debt maturing within the next twelve months.
Information Regarding Operators of Healthcare Assets
As of March 31, 2000, healthcare related facilities (the "Healthcare Portfolio")
comprised approximately 44.1% of Realty's total real estate investments. Life
Care Centers of America ("Lifecare") and Sun Healthcare Group, Inc. ("Sun")
currently operate approximately 20.6% of the total real estate investments, or
47.0% of the Healthcare Portfolio. A schedule of significant healthcare
operators follows:
<TABLE>
<CAPTION>
% of % of
Invested Entire # of Healthcare
Portfolio by Operator (in thousands) Portfolio Properties Portfolio
-------------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Life Care Centers of America, Inc. ......... $ 566,689 11.9% 93 27.1%
Sun Healthcare Group, Inc. ................. 415,511 8.7% 42 19.9%
Alterra .................................... 161,592 3.4% 57 7.7%
CareMatrix Corporation ..................... 182,624 3.8% 11 8.7%
Harborside ................................. 103,462 2.2% 18 4.9%
Balanced Care Corporation .................. 92,589 2.0% 19 4.4%
Health Asset Realty Trust .................. 69,115 1.5% 11 3.3%
Tenet Healthcare/Iasis ..................... 65,650 1.4% 1 3.1%
Rendina Companies .......................... 55,778 1.2% 2 2.7%
Integrated Health Services, Inc. ........... 50,973 1.1% 10 2.4%
Genesis Health Ventures, Inc. .............. 35,771 0.8% 8 1.7%
Assisted Living Concepts ................... 31,487 0.7% 16 1.5%
ARV Assisted Living, Inc. .................. 28,982 0.6% 4 1.4%
HealthSouth ................................ 25,531 0.5% 2 1.2%
Other Public Operators ..................... 29,711 0.6% 4 1.5%
Other Non-Public Operators ................. 121,334 2.6% 13 5.9%
Paramount Real Estate Services ............. 53,847 1.1% 2 2.6%
------------------------------------------------------
2,090,646 44.1% 313 100%
===============
LODGING:
La Quinta Companies ........................ 2,650,072 55.9% 302
----------------------------------------
Gross Real Estate Assets ................... $4,740,718 100% 615
========================================
</TABLE>
27
<PAGE>
In addition, companies in the assisted living sector of the healthcare industry
operate approximately 9.2% of Realty's total real estate investments (and
approximately 20.9% of the Healthcare Portfolio).
Realty monitors credit risk for its Healthcare Portfolio by evaluating a
combination of publicly available financial information, information provided by
the operators themselves and information otherwise available to Realty. The
financial condition and ability of these healthcare operators to meet their
rental and other obligations will, among other things, have an impact on
Realty's revenues, net income (loss), funds available from operations and its
ability to make distributions to its shareholders. The operations of the
long-term care (skilled nursing) companies have been negatively impacted by
changes in Medicare reimbursement rates (PPS), increases in labor costs,
increases in their leverage and certain other factors. In addition, any failure
by these operators to effectively conduct their operations could have a material
adverse effect on their business reputation or on their ability to enlist and
maintain patients in their facilities.
Operators of assisted living facilities are experiencing fill-up periods of a
longer duration, and are being impacted by concerns regarding the potential
of over-building, increased regulation and the use of certain accounting
practices. Accordingly, many of these operators have announced decreased
earnings or anticipated earnings shortfalls and have experienced a
significant decline in their stock prices. These factors have had a
detrimental impact on the liquidity of some assisted living operators, which
has caused their growth plans to decelerate and may have a negative effect on
their operating cash flows.
Citing the effects of changes in government regulation relating to Medicare
reimbursement as the precipitating factor, Sun filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on October 14, 1999. As of March 31,
2000, Realty had a portfolio of 42 properties operated by Sun, which consisted
of 38 owned properties with net assets of approximately $305,462,000 and four
mortgages with net assets of approximately $30,470,000. During the three months
ended March 31, 2000, income derived from these properties included rental
income of $11,915,000 from owned properties. No interest income was received on
the four mortgages for the three months ended March 31, 2000.
Sun has not formally indicated whether it will accept or reject any of Realty's
leases. However, Sun has indicated that it will continue to make lease payments
to Realty unless and until such leases are rejected. If necessary, Realty has a
plan in place to transition and to continue operating any of Sun's properties.
Realty has not received interest payments related to the mortgages since
November 1, 1999, and accordingly, such mortgages were put on non-accrual
status.
On January 18, 2000, Mariner Health Group, Inc. ("Mariner") filed for protection
under Chapter 11. As of March 31, 2000, Realty had a portfolio of 2 properties
operated by Mariner, which consisted of one owned property representing net
assets of approximately $7,176,000 and one mortgage representing a net asset
value of approximately $7,036,000. During the three months ended March 31, 2000,
income derived from these properties included rental income of $244,000 from
owned properties. No interest payments related to the Mariner mortgage were
received, and accordingly this mortgage was placed on non-accrual status.
On February 2, 2000, Integrated Health Services, Inc. ("Integrated") filed for
protection under Chapter 11. As of March 31, 2000, Realty had a portfolio of 10
owned properties operated by Integrated, representing net assets of
approximately $38,023,000. During the three months ended March 31, 2000, rental
income derived from these properties was $1,572,000.
Management has proactively initiated various actions to protect its interest
under its leases and mortgages including the drawdown and renegotiations of
certain escrow accounts and agreements. As part of this initiative, asset
impairments and loan valuations of $31,521,000 have been recorded on five
properties. In addition, 13 owned properties have been identified as assets held
for sale for which a provision for loss was recorded of $19,380,000. On April 7,
2000, two mortgages were repaid for which a provision for loss of $8,197,000 had
been provided. Except for these specifically identified items, management does
not believe any of its remaining
28
<PAGE>
owned real estate or mortgages are impaired at March 31, 2000. However, the
ultimate outcome of these bankruptcies is not currently predictable and
management is not able to make a meaningful estimate of the amount or range
of loss, if any, that could result from an unfavorable outcome. It is
possible that an unfavorable outcome could have a material adverse effect on
the Companies' cash flow, revenues and results of operations in a particular
quarter or annual period. However, the Companies believe that even if the
outcome of these bankruptcies is materially adverse to the Companies' cash
flow, revenues and results of operations, it should not have a material
adverse effect on the Companies' financial position.
Combined funds from operations
Combined Funds from Operations ("FFO") of the Companies was $47,702,000 and
$36,939,000 for the three months ended March 31, 2000 and 1999, respectively.
Effective January 1, 2000 the National Association of Real Estate Investment
Trusts (NAREIT) adopted a new definition of FFO. The Companies believe that FFO
has been calculated using the new definition for all periods presented in the
table below.
Management considers Funds from Operations to be a key external measurement of
REIT performance. Funds from Operations represents net income or loss available
to common shareholders (computed in accordance with generally accepted
accounting principles), excluding real estate related depreciation, amortization
of goodwill and certain intangible assets, gains and losses from the sale of
assets (including provisions for asset impairments) and non-recurring income and
expenses.
Funds from Operations should not be considered an alternative to net income or
other measurements under generally accepted accounting principles as an
indicator of operating performance or to cash flows from operating, investing,
or financing activities as a measure of liquidity. Funds from Operations does
not reflect working capital changes, cash expenditures for capital improvements
or principal payments on indebtedness.
The following reconciliation of net income and loss available to common
shareholders to Funds from Operations illustrates the difference between the two
measures of operating performance for the comparative three months ended March
31, 2000 and 1999. Certain reconciling items include amounts reclassified from
discontinued operations and, accordingly, do not necessarily agree to revenue
and expense captions in the Companies' financial statements.
<TABLE>
<CAPTION>
Combined funds from operations
Three months ended March 31,
(In thousands) 2000 1999
----------------------------
<S> <C> <C>
Net income available to common shareholders ........................... $ 7,176 $ 15,806
Depreciation of real estate and intangible amortization ............ 38,108 38,273
Other capital gains and losses ..................................... 3,812 (12,271)
Gain on disposal of business segments .............................. -- (4,869)
Extraordinary item: Gain on debt extinguishment .................... (1,394) --
-------- --------
Funds from Operations ................................................. $ 47,702 $ 36,939
-------- --------
Weighted average paired common shares outstanding:
Basic .............................................................. 141,230 147,983
-------- --------
Diluted ............................................................ 141,230 148,472
</TABLE>
REALTY--RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999
Revenue for the three months ended March 31, 2000, was $140,535,000 compared to
$153,676,000 for three months ended March 31, 1999, a decrease of $13,141,000.
The revenue decrease was primarily attributed to a decrease in healthcare
revenue of $13,894,000. This decrease primarily resulted from asset sales and
mortgage repayments over the last year net of the effect of additions to real
estate investments made during the same period. The revenue decrease was
partially offset by the addition of revenues from the acquisition of Telematrix
in October 1999. Revenues related to Telematrix for the three months ended March
31, 2000 consisted of licensing fees of $1,311,000. Other decreases of $558,000
consisted of changes in rental, interest, hotel operating revenue and other
income between the comparable three month periods.
For the three months ended March 31, 2000, total recurring operating expenses
were $107,262,000 compared to $118,467,000 for the three months ended March 31,
1999, a decrease of $11,205,000. This decrease was primarily attributable a
decrease in interest expense of $11,422,000 due to reductions in debt from
amounts paid as a result of various asset sales and mortgage repayments over
29
<PAGE>
the past twelve months. These decreases were partially offset by increases to
borrowing rates. Other increases of $217,000 consisted of changes in various
expenses between the comparable three month periods. These expenses include
hotel operating, rental property operating, general and administrative,
depreciation and amortization.
ASSET SALES
During the three months ended March 31, 2000, Realty realized losses on the sale
of healthcare real estate assets of $3,812,000 compared to gains of $12,271,000
during the comparable three months ended March 31, 1999. For the three months
ended March 31, 2000, sales of healthcare properties included 23 medical office
buildings, 12 assisted living facilities and four long-term care facilities. For
the three months ended March 31, 1999, sales of healthcare properties included
15 assisted living facilities, one rehabilitation facility, and one long-term
care facility, and Realty sold one hotel and land held for development on which
there was no gain or loss realized.
OTHER EXPENSES
During the first quarter of 2000, the Companies recorded approximately
$12,364,000 in other expenses.
On January 28, 2000, Realty entered into a separation and consulting agreement
with the former Chief Executive Officer of Realty. Under the terms of the
separation agreement, Realty paid the former Chief Executive Officer severance
payments totaling $9,500,000 (including consulting fees), converted 155,000
restricted paired common shares into unrestricted paired common shares and
agreed to continue certain medical, dental and other benefits. The vesting of
the shares resulted in a charge of approximately $2,500,000.
The Companies also incurred approximately $80,000 of professional fees related
to implementation of the Five Point Plan. During the quarter ended March 31,
2000, the Companies also recorded provisions of approximately $284,000 for other
receivables that management considers uncollectible.
During the first quarter of 1999, other non-recurring expenses of $4,389,000
were incurred which related to the 1998 Plan. Proceeds of asset sales completed
in December 1998 were used to repay debt prior to maturity and de-lever the
balance sheet. As a result, approximately $3,907,000 of capitalized debt costs
and $482,000 of breakage fees associated with swap contracts on repaid debt and
other items were charged off in the first quarter of 1999.
EXTRAORDINARY ITEM
During the three months ended March 31, 2000 the Companies retired $44,800,000
of debt prior to its maturity date, and as part of certain asset sale
transactions repaid secured debt totaling $14,936,000. As a result of these
early repayments of debt, a net gain of $1,394,000 was realized and is reflected
as an extraordinary item.
DISCONTINUED OPERATIONS
Pursuant to the 1998 Plan, Realty classified golf and horseracing activities as
discontinued operations for financial reporting purposes. Accordingly, Realty
presented as discontinued operations approximately $16,094,000 of gains on
disposal of the golf and horseracing segments during the three months ended
March 31, 1999. Realty also recorded a gain of $9,439,000 related to the sale of
the Cobblestone Golf Group, which was sold on March 31, 1999.
NET INCOME
The resulting net income available for common shareholders, after deducting
preferred share dividends, for the three months ended March 31, 2000, was
$13,991,000 compared to $55,247,000 for three months ended March 31, 1999. The
net income per common share (diluted) for the three months ended March 31, 2000
was $0.10 compared to net income per common share (diluted) of $0.37 for the
three months ended March 31, 1999. The per common share amount decreased
primarily due to losses on sale of assets and other expenses incurred between
the comparable three month periods.
REALTY - LIQUIDITY AND CAPITAL RESOURCES
Realty earns revenue by (i) leasing healthcare assets under long-term triple net
leases in which the rental rate is generally fixed with annual escalators; (ii)
providing mortgage financing for healthcare facilities in which the interest
rate is generally fixed with annual escalators subject to certain conditions and
(iii) leasing its 232 La Quinta Inns and 68 La Quinta Inn and Suites to
Operating. Approximately $1,049,000,000 of Realty's debt obligations are
floating rate obligations in which interest rate and related cash flows vary
with the movement in LIBOR. The general fixed nature of Realty's assets and the
variable nature of a portion of Realty's debt obligations creates interest rate
risk. If interest rates were to rise significantly, Realty's interest payments
may increase resulting in decreases in net income and funds from operations. To
mitigate this risk Realty has entered into interest rate swaps to convert some
of
30
<PAGE>
their floating rate debt obligations to fixed rate debt obligations. Interest
rate swaps generally involve the exchange of fixed and floating rate interest
payments on an underlying notional amount. As of March 31, 2000, Realty had
$500,000,000 of interest rate swaps outstanding in which Realty pays a fixed
rate of 5.7% to the counterparty and receives LIBOR from the counterparty.
Accordingly at March 31, 2000, Realty has approximately $549,000,000 of variable
debt outstanding with interest rates that fluctuate with changes in LIBOR.
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund Realty's future operating
expenses, interest expense, recurring capital expenditures and distribution
payments, if any, will be cash flow provided by operating activities. Realty
anticipates that cash flow provided by operating activities will provide the
necessary funds on a short and long-term basis to meet operating cash
requirements including all distributions to shareholders.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
Realty provides funding for new investments and costs associated with the
restructuring through a combination of long-term and short-term financing
including, both debt and equity, as well as the sale of healthcare related
assets. Realty obtains long-term financing through the issuance of shares,
long-term secured and unsecured notes, convertible debentures and the assumption
of mortgage notes. Realty obtains short-term financing through the use of bank
lines of credit, which are replaced with long-term financing as appropriate.
From time to time, Realty utilizes interest rate caps or swaps to attempt to
hedge interest rate volatility. It is Realty's objective to match mortgage and
lease terms with the terms of their borrowings. Realty attempts to maintain an
appropriate spread between its borrowing costs and the rate of return on its
investments. When development loans convert to sale/leaseback transactions or
permanent mortgage loans, the base rent or interest rate, as appropriate, is
fixed at the time of such conversion.
During February 1998, the Companies entered into the FEIT in which MLI purchased
shares of capital stock of the Companies which were ultimately converted into
paired shares. The FEIT was designed to mature one year after issuance and
provided MLI the right to sell sufficient paired shares (including the shares
originally purchased) to provide MLI with a guaranteed return. The FEIT also
included a purchase price adjustment mechanism which, from time to time,
resulted in the issuance of additional paired shares to MLI as a result of
declines in the paired shares' market price.
During December 1998, the Companies repurchased all of the paired shares issued
pursuant to the purchase price adjustment mechanism, as well as some of the
paired shares originally sold to MLI.
On July 17, 1998, Realty entered into a Credit Agreement which provided Realty
with up to $2,250,000,000 in credit facilities, replacing Realty's then existing
$365,000,000 revolving credit facilities. The Credit Agreement provided for
borrowings in four separate Tranches: Tranche A, a $1,000,000,000 revolving
loan, amounts of which if repaid may be reborrowed, which matures July 17, 2001;
Tranche B, a term loan in the amount of $500,000,000, amounts of which if repaid
may not be reborrowed, which matured July 17, 1999 and which had a $250,000,000
mandatory principal payment on April 17, 1999; Tranche C, a term loan in the
amount of $250,000,000, amounts of which if repaid may not be reborrowed, which
matured July 17, 1999 with a six month extension option which management
exercised for a fee of 12.5 basis points; and Tranche D, a term loan in the
amount of $500,000,000, amounts of which if repaid may not be reborrowed, which
matures July 17, 2001.
The Credit Agreement includes covenants with respect to maintaining certain
financial benchmarks, limitations on the types and percentages of investments in
certain business lines, a subjective acceleration clause contingent upon the
occurrence of an event with a material adverse effect on the Companies,
limitations on dividends of Realty and Operating, and other restrictions.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT, to provide for the amendment
of certain financial covenants to accommodate asset sales, to exclude the impact
of non-recurring charges in certain covenant calculations and to provide for
future operating flexibility. The amendment also provided for an increase to the
LIBOR pricing of the credit facility by approximately 125 basis points, and the
pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock
also extended on a pro rata basis to entitled bondholders. Realty also agreed to
a 25 basis point increase to the LIBOR pricing in the event that an equity
offering of at least $100,000,000 had not been completed by February 1, 1999. On
February 1, 1999 this increase went into effect.
On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that
was scheduled to mature on April 17, 1999.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provided for, among other things, upon the sale of Cobblestone Golf Group,
the elimination of limitations on certain healthcare related investments and a
lowering of the commitment on the revolving tranche to $850,000,000.
31
<PAGE>
On March 10, 1999, Realty entered into an agreement with MLI to use the proceeds
from the sale of the Cobblestone Golf Group in excess of $300,000,000 to
purchase all or a portion of the remaining 6,865,000 paired shares originally
issued to MLI in the FEIT. On April 1, 1999, the Companies fully settled the
FEIT by paying MLI $89,840,000 for the repurchase of the remaining 6,865,000
paired common shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on July
17, 1999.
On August 16, 1999, Realty repaid $12,500,000 of its notes payable which matured
on that date and bore interest at 7.25%.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan
which was scheduled to mature on January 17, 2000.
On January 28, 2000, the Companies announced that the Boards of Directors had
approved the Five Point Plan, which provided for:
- An orderly disposition of a significant portion of healthcare assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
The Companies also announced that consistent with the adoption of the Five Point
Plan to reduce its emphasis on the healthcare division, David F. Benson would be
leaving as Chief Executive Officer, President, and Treasurer of Realty. Mr.
Benson is continuing to assist the Companies on a consulting basis as the
Companies move forward to implement the Five Point Plan.
During the three months ended March 31, 2000, Realty sold Paramount Real Estate
Services Inc., its medical office building management company, as well as the
majority of its medical office building portfolio. Total consideration of
$204,000,000 included $144,000,000 in cash, $8,000,000 of assumed debt and
$52,000,000 of subordinated indebtedness due January 2005 bearing interest at
9%. The transaction involved the sale of the medical office building management
company, 23 medical office buildings and three medical office building mortgage
loans. Additionally, Realty sold 12 assisted living facilities for $28,000,000,
four long-term care facilities for $22,000,000 and received repayments of one
mortgage loan and partial repayment of one mortgage loan for approximately
$12,000,000. The proceeds from the sale of these healthcare assets and
repayments were used to repay debt maturing in July 2000.
At March 31, 2000, Realty had approximately $262,000,000 in available borrowings
under its revolving tranche commitment. During the calendar year 2000, Realty
has approximately $211,000,000 of debt maturing. The Companies expect to obtain
the necessary funds to repay these obligations through asset sales and through
the capacity available under Realty's revolving tranche commitment. However,
there can be no assurance that Realty will be successful in its efforts to repay
these obligations as they come due or to meet its other liquidity requirements.
As of May 1, 2000, Realty had outstanding borrowings under its revolving tranche
commitment of $501,000,000 (9.12% weighted average rate at May 1, 2000) and
capacity for additional borrowing of approximately $311,000,000.
As of March 31, 2000, Realty's gross real estate investments totaled
approximately $4,719,778,000 consisting of 300 hotel facilities in service, 193
long-term care facilities, 105 retirement and assisted living facilities, eight
medical office buildings, one acute care hospital campus and six other
healthcare facilities. At March 31, 2000, Realty was committed to provide
additional financing of approximately $11,000,000 relating to two assisted
living facilities as well as additions to existing facilities in the portfolio.
Realty had shareholders' equity of $2,620,164,000 and debt constituted 48% of
the Companies' total capitalization as of March 31, 2000.
Realty has an effective shelf registration statement on file with the SEC under
which the Companies may issue $1,825,000,000 of securities including common
stock, preferred stock, debt, series common stock, convertible debt and warrants
to purchase shares, preferred shares, debt, series common stock and convertible
debt.
Realty believes that its various sources of capital, including availability
under the credit facility, operating cash flow and proceeds from the sale of
certain healthcare related assets as contemplated by the Five Point Plan, are
adequate to finance its operations as well as its existing commitments,
including financing commitments related to certain healthcare facilities and
repayment of debt maturing within the next twelve months.
Information Regarding Operators of Healthcare Assets
As of March 31, 2000, healthcare related facilities (the "Healthcare Portfolio")
comprised approximately 44.1% of Realty's total real estate investments. Life
Care Centers of America ("Lifecare") and Sun Healthcare Group, Inc. ("Sun")
currently operate
32
<PAGE>
approximately 20.6% of the total real estate investments, or 47.0% of the
Healthcare Portfolio. A schedule of significant healthcare operators follows:
<TABLE>
<CAPTION>
% of % of
Invested Entire # of Healthcare
Portfolio by Operator (in thousands) Portfolio Properties Portfolio
-------------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Life Care Centers of America, Inc. ......... $ 566,689 11.9% 93 27.1%
Sun Healthcare Group, Inc. ................. 415,511 8.7% 42 19.9%
Alterra .................................... 161,592 3.4% 57 7.7%
CareMatrix Corporation ..................... 182,624 3.8% 11 8.7%
Harborside ................................. 103,462 2.2% 18 4.9%
Balanced Care Corporation .................. 92,589 2.0% 19 4.4%
Health Asset Realty Trust .................. 69,115 1.5% 11 3.3%
Tenet Healthcare/Iasis ..................... 65,650 1.4% 1 3.1%
Rendina Companies .......................... 55,778 1.2% 2 2.7%
Integrated Health Services, Inc. ........... 50,973 1.1% 10 2.4%
Genesis Health Ventures, Inc. .............. 35,771 0.8% 8 1.7%
Assisted Living Concepts ................... 31,487 0.7% 16 1.5%
ARV Assisted Living, Inc. .................. 28,982 0.6% 4 1.4%
HealthSouth ................................ 25,531 0.5% 2 1.2%
Other Public Operators ..................... 29,711 0.6% 4 1.5%
Other Non-Public Operators ................. 121,334 2.6% 13 5.9%
Paramount Real Estate Services ............. 53,847 1.1% 2 2.6%
---------------------------------------------------------
2,090,646 44.1% 313 100%
================
LODGING:
La Quinta Companies ........................ 2,650,072 55.9% 302
---------------------------------------------------------
Gross Real Estate Assets ................... $4,740,718 100% 615
========================================
</TABLE>
In addition, companies in the assisted living sector of the healthcare industry
operate approximately 9.2% of Realty's total real estate investments (and
approximately 20.9% of the Healthcare Portfolio).
Realty monitors credit risk for its Healthcare Portfolio by evaluating a
combination of publicly available financial information, information provided by
the operators themselves and information otherwise available to Realty. The
financial condition and ability of these healthcare operators to meet their
rental and other obligations will, among other things, have an impact on
Realty's revenues, net income (loss), funds available from operations and its
ability to make distributions to its shareholders. The operations of the
long-term care (skilled nursing) companies have been negatively impacted by
changes in Medicare reimbursement rates (PPS), increases in labor costs,
increases in their leverage and certain other factors. In addition, any failure
by these operators to effectively conduct their operations could have a material
adverse effect on their business reputation or on their ability to enlist and
maintain patients in their facilities.
Operators of assisted living facilities are experiencing fill-up periods of a
longer duration, and are being impacted by concerns regarding the potential
of over-building, increased regulation and the use of certain accounting
practices. Accordingly, many of these operators have announced decreased
earnings or anticipated earnings shortfalls and have experienced a
significant decline in their stock prices. These factors have had a
detrimental impact on the liquidity of some assisted living operators, which
has caused their growth plans to decelerate and may have a negative effect on
their operating cash flows.
Citing the effects of changes in government regulation relating to Medicare
reimbursement as the precipitating factor, Sun filed for protection under
Chapter 11 of the U.S. Bankruptcy Code on October 14, 1999. As of March 31,
2000, Realty had a portfolio of 42 properties operated by Sun, which consisted
of 38 owned properties with net assets of approximately $305,462,000 and four
mortgages with net assets of approximately $30,470,000. During the three months
ended March 31, 2000, income derived from these properties included rental
income of $11,915,000 from owned properties. No interest income was received on
the four mortgages for the three months ended March 31, 2000.
33
<PAGE>
Sun has not formally indicated whether it will accept or reject any of Realty's
leases. However, Sun has indicated that it will continue to make lease payments
to Realty unless and until such leases are rejected. If necessary, Realty has a
plan in place to transition and to continue operating any of Sun's properties.
Realty has not received interest payments related to the mortgages since
November 1, 1999, and accordingly, such mortgages were put on non-accrual
status.
On January 18, 2000, Mariner Health Group, Inc. ("Mariner") filed for protection
under Chapter 11. As of March 31, 2000, Realty had a portfolio of 2 properties
operated by Mariner, which consisted of one owned property representing net
assets of approximately $7,176,000 and one mortgage representing a net asset
value of approximately $7,036,000. During the three months ended March 31, 2000,
income derived from these properties included rental income of $244,000 from
owned properties. No interest payments related to the Mariner mortgage were
received, and accordingly this mortgage was placed on non-accrual status.
On February 2, 2000, Integrated Health Services, Inc. ("Integrated") filed for
protection under Chapter 11. As of March 31, 2000, Realty had a portfolio of 10
owned properties operated by Integrated, representing net assets of
approximately $38,023,000. During the three months ended March 31, 2000, rental
income derived from these properties was $1,572,000.
Management has proactively initiated various actions to protect its interest
under its leases and mortgages including the drawdown and renegotiations of
certain escrow accounts and agreements. As part of this initiative, asset
impairments and loan valuations of $31,521,000 have been recorded on five
properties. In addition, 13 owned properties have been identified as assets held
for sale for which a provision for loss was recorded of $19,380,000. On April 7,
2000, two mortgages were repaid for which a provision for loss of $8,197,000 had
been provided. Except for these specifically identified items, management does
not believe any of its remaining owned real estate or mortgages are impaired at
March 31, 2000. However, the ultimate outcome of these bankruptcies is not
currently predictable and management is not able to make a meaningful estimate
of the amount or range of loss, if any, that could result from an unfavorable
outcome. It is possible that an unfavorable outcome could have a material
adverse effect on Realty cash flow, revenues and results of operations in a
particular quarter or annual period. However, Realty believes that even if the
outcome of these bankruptcies is materially adverse to Realty's cash flow,
revenues and results of operations, it should not have a material adverse effect
on Realty's financial position.
OPERATING--RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 VS. THREE MONTHS ENDED MARCH 31, 1999
Hotel revenues for the three months ended March 31, 2000 were $144,535,000
compared to $145,324,000 for the three months ended March 31, 1999, a
decrease of $789,000. Approximately $137,703,000 or 95% of hotel revenues
were derived from room rentals. Hotel operating revenues generally are
measured as a function of the ADR and occupancy. The ADR increased to $64.33
during the three months ended March 31, 2000 from $61.73 during the three
months ended March 31, 1999, an increase of $2.60 or 4.2%. Occupancy
percentage decreased 6.0 percentage points to 61.1% in 2000 from 67.1% in
1999. RevPAR decreased 5.0% over 1999. The decrease in RevPAR is primarily
due to a greater increase in the supply of available rooms than in demand.
The relationship between supply and demand varies by region. The revenue
impact of the oversupply of available rooms was somewhat mitigated by revenue
increases resulting from a higher proportion of room rental income from the
Inn & Suites hotels as compared to the Inns during the comparable periods.
Inn & Suites hotels generally have higher room rental income per night than
the Inns. Other factors contributing to the decrease in RevPAR includes the
continuing short-term disruptive impact of the introduction of the new
property management system and the reorganization of the operations and sales
organizations. The hotel revenue decrease was offset by the addition of
revenues from the acquisition of Telematrix in October 1999. Revenues related
to Telematrix for the three months ended March 31, 2000 were $3,535,000.
For the three months ended March 31, 2000, total recurring expenses were
$154,922,000 compared to $144,040,000 for the same period in 1999, or an
increase of 10,882,000. This increase was primarily attributable to lodging
related expenses, which include an increase in operating expenses of
$5,806,000, increases to rent, royalty and interest due Realty of $2,026,000
and an increase to general and administrative expenses of $1,801,000. These
increases arose primarily from the addition of 13 new Inn & Suites hotels
since the comparable period in the prior year. The increase to hotel
operating expenses also includes $1,729,000 of operating costs incurred
related to the operations of Telematrix. Hotel operating and general and
administrative expenses include costs associated with the operation such as
salaries, wages, utilities, repair and maintenance, credit card discounts and
room supplies as well as corporate expenses, such as the costs of general
management, office rent, training and field supervision of hotel managers and
other marketing and administrative expenses. Depreciation and amortization
for the three months ended March 31, 2000, was $3,270,000 compared to
$2,022,000 for the same period in 1999, or an increase of $1,248,000.
OTHER EXPENSES
During the first quarter of 1999, Operating recorded approximately $30,498,000
in other expenses.
34
<PAGE>
On May 10, 1999, the Companies entered into a separation agreement with Abraham
D. Gosman, former Director and Chairman of the Companies and Chief Executive
Officer and Treasurer of Operating. Under the terms of this separation
agreement, Mr. Gosman received severance payments totaling $25,000,000 in cash
and the continuation of certain life insurance benefits. The Companies
established a Special Committee to evaluate Mr. Gosman's employment contract and
whether such severance or other payments were appropriate. Based on the results
of the evaluation and recommendation of the Special Committee, the Boards of
Directors concluded that the separation agreement was in the long-term best
interest of the shareholders of the Companies and approved the separation
agreement.
In conjunction with the implementation of the 1998 Plan, which included a change
in the focus of the lodging division to internal growth, La Quinta management
performed a review of the front desk system under development for its lodging
facilities, and made a decision to abandon the project. The decision was based
primarily on management's intent to integrate the front desk system with new
revenue management software, the availability of more suitable and flexible
externally developed software and a shift in information systems philosophy
toward implementation of externally developed software and outsourcing of
related support services. A charge of approximately $3,998,000 to write-off
certain internal and external software development costs related to the project
was recorded in the first quarter of 1999. Operating also incurred approximately
$1,500,000 of non-recurring costs associated with advisory fees related to the
separation agreement with Mr. Gosman.
DISCONTINUED OPERATIONS
Pursuant to the 1998 Plan, Operating classified golf and horseracing activities
as discontinued operations for financial reporting purposes. Accordingly,
Operating presented as discontinued operations approximately $11,225,000 of
losses on disposal from the golf and horseracing segments during the three
months ended March 31, 1999. Operating recorded a loss of $6,445,000 related to
the sale of the Cobblestone Golf Group, which was sold on March 31, 1999. The
loss includes an estimate of working capital balances at the sale date. The
horseracing segment was sold on December 10, 1998. During the three months ended
March 31, 1999, a loss of $6,655,000 was recorded which related to an adjustment
of the selling price between Realty and Operating. This loss was partially
offset by an estimated gain of $1,875,000 arising from an adjustment relating to
working capital balances at the sale date.
NET LOSS
The resulting net loss available for common shareholders for the three months
ended March 31, 2000, was $6,815,000 compared to $39,441,000 for the three
months ended March 31, 1999. The net loss per common share for the three months
ended March 31, 2000 was $0.05 compared to $0.27 for the three months ended
March 31, 1999. The per common share amount increased primarily as a result of
other expenses incurred during the three months ended March 31, 1999, which did
not recur in the three month period ended March 31, 2000. This increase was
partially offset by increases to operating expenses.
OPERATING - LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FROM OPERATING ACTIVITIES
The principal source of cash to be used to fund Operating's future operating
expenses and recurring capital expenditures will be cash flow provided by
operating activities. Operating anticipates that cash flow provided by operating
activities will provide the necessary funds on a short and long-term basis to
meet operating cash requirements.
CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES
Operating provides funding for costs associated with the restructuring through a
combination of long-term and short-term financing including, both debt and
equity. Operating obtains long-term financing through the issuance of common
shares and unsecured notes. Operating obtains short-term financing through
borrowings from Realty.
During February 1998, the Companies entered into the FEIT pursuant to which MLI
purchased shares of capital stock of the Companies which were ultimately
converted into paired shares. The FEIT was designed to mature one year after
issuance and provided MLI the right to sell sufficient paired shares (including
the shares originally purchased) to provide MLI with a guaranteed return. The
FEIT also included a purchase price adjustment mechanism which, from time to
time, resulted in the issuance of additional paired shares to MLI as a result of
declines in the paired shares' market price.
During December 1998, the Companies repurchased all of the paired shares issued
pursuant to the purchase price adjustment mechanism, as well as some of the
paired shares originally sold to MLI.
On July 17, 1998, Realty entered into a Credit Agreement which provided Realty
with up to $2,250,000,000 in credit facilities, replacing Realty's then existing
$365,000,000 revolving credit facilities. The Credit Agreement provided for
borrowings in four separate Tranches: Tranche A, a $1,000,000,000 revolving
loan, amounts of which if repaid may be reborrowed, which matures July 17, 2001;
Tranche B, a term loan in the amount of $500,000,000, amounts of which if repaid
may not be reborrowed, which matured
35
<PAGE>
July 17, 1999 and which had a $250,000,000 mandatory principal payment on April
17, 1999; Tranche C, a term loan in the amount of $250,000,000, amounts of which
if repaid may not be reborrowed, which matured July 17, 1999 with a six month
extension option which management exercised for a fee of 12.5 basis points; and
Tranche D, a term loan in the amount of $500,000,000, amounts of which if repaid
may not be reborrowed, which matures July 17, 2001.
The Credit Agreement includes covenants with respect to maintaining certain
financial benchmarks, limitations on the types and percentages of investments in
certain business lines, a subjective acceleration clause contingent upon the
occurrence of an event with a material adverse effect on the Companies,
limitations on dividends of Realty and Operating, and other restrictions.
On November 23, 1998, Realty amended its Credit Agreement to provide for
Realty's cash repayment of a portion of its FEIT to provide for the amendment of
certain financial covenants to accommodate asset sales, to exclude the impact of
non-recurring charges in certain covenant calculations and to provide for future
operating flexibility. The amendment also provided for an increase to the LIBOR
pricing of the credit facility by approximately 125 basis points, and the pledge
of stock of the Companies' subsidiaries. This pledge of subsidiary stock also
extended on a pro rata basis to entitled bondholders. Realty also agreed to a 25
basis point increase to the LIBOR pricing in the event that an equity offering
of at least $100,000,000 had not been completed by February 1, 1999. On February
1, 1999 this increase went into effect.
On March 10, 1999, Realty reached a second agreement with its bank group to
further amend the Credit Agreement. The second amendment became effective upon
the successful completion of the sale of Cobblestone Golf Group and provided for
a portion of the sale proceeds to be applied to the FEIT. The second amendment
also provided for, among other things, upon the sale of Cobblestone Golf Group,
elimination of limitations on certain healthcare related investments and a
lowering of the commitment on the revolving tranche to $850,000,000.
On March 10, 1999, the Companies entered into an agreement with MLI to use the
proceeds from the sale of the Cobblestone Golf Group in excess of $300,000,000
to purchase all or a portion of the remaining 6,865,000 paired shares originally
issued to MLI in the FEIT. On April 1, 1999, the Companies fully settled the
FEIT by paying MLI $89,840,000 for the repurchase of the remaining 6,865,000
paired common shares.
On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and
cancelled a $250,000,000 swap contract. Both were scheduled to mature on July
17, 1999.
On August 16, 1999 Realty repaid $12,500,000 of its notes payable which matured
on that date and bore interest at 7.25%.
On December 24, 1999, Realty repaid $250,000,000 of its Tranche C term loan
which was scheduled to mature on January 17, 2000.
On January 28, 2000, the Companies announced that the Boards of Directors had
approved the Five Point Plan, which provided for:
- An orderly disposition of a significant portion of healthcare assets;
- Suspension of Realty's REIT common share dividend;
- Expectation of the declaration of the minimum dividend required to
maintain REIT status in December 2000;
- Substantial reduction in debt; and
- Future disciplined investment in the lodging division.
Operating had shareholders' equity of $28,801,000 as of March 31, 2000.
The Companies have an effective shelf registration statement on file with the
SEC under which the Companies may issue 1,825,000,000 of securities including
common stock, preferred stock, debt, series common stock, convertible debt and
warrants to purchase shares, preferred shares, debt, series common stock and
convertible debt.
Operating believes that its various sources of capital available including
operating cash flow and borrowings from Realty are adequate to finance its
operations.
RECENT LEGISLATIVE DEVELOPMENTS
The Ticket to Work and Work Incentives Improvement Act of 1999 (the "Act"),
signed into law by the President of the United States on December 17, 1999, has
modified certain provisions of federal income tax law applicable to REITs. All
of the changes described below will be effective with respect to the Companies
beginning after the year ending December 31, 2000. These changes include new
rules permitting a REIT to own up to 100% of the stock of a corporation (a
"taxable REIT subsidiary"), taxable as a C corporation, that may provide
non-customary services to the REIT's tenants and may engage in certain other
business activities. However, the taxable REIT subsidiary cannot directly or
indirectly operate or manage a lodging or healthcare facility. Although the
taxable REIT subsidiary may lease a lodging facility (I.E., a hotel) from the
REIT (provided no gambling revenues were derived from
36
<PAGE>
the hotel or on its premises), with the lodging facility operated by an
"eligible independent contractor," such eligible independent contractor must be
actively engaged in the trade or business of operating lodging facilities for
persons or entities unrelated to the REIT. On account of the foregoing
restrictions imposed on the use of taxable REIT subsidiaries in the case of
lodging and healthcare facilities, the opportunity for the Companies to make use
of taxable REIT subsidiaries will be limited.
The Act also replaces the former rule permitting a REIT to own more than 10% of
a corporate subsidiary by value, provided its ownership of the voting power is
limited to 10% (a "decontrolled subsidiary"), with a new rule prohibiting a REIT
from owning more than 10% of a corporation by vote or value, other than a
taxable REIT subsidiary (described above) or a "qualified REIT subsidiary" (a
wholly owned corporate subsidiary that is treated as part of the REIT for all
federal income tax purposes). Existing decontrolled subsidiaries are
grandfathered, but will lose such status if they engage in a substantial new
line of business or acquire any substantial new asset after July 12, 1999, other
than pursuant to a contract binding on such date and at all times thereafter
prior to acquisition. Accordingly, and taking into account the Companies'
general inability to utilize taxable REIT subsidiaries, the Act severely limits
the ability of Realty to own substantial ownership interests in taxable
corporate subsidiaries. Direct ownership by Realty of assets that otherwise
would be held in a decontrolled subsidiary may not be possible without
disqualifying Realty as a REIT, and transfer of such assets to Operating
similarly may not be possible without causing Realty to recognize taxable income
or jeopardizing the Companies' current grandfather status under the 1998
anti-paired share legislation enacted as part of the Reform Act.
Other provisions in the Act include a reduction in the annual minimum
distribution requirement from 95% to 90% of its taxable income (excluding net
capital gain) and a provision which allows a REIT to own and operate a
healthcare facility for at least two years (with extensions for up to another
four years possible) if the facility is acquired by the termination or
expiration of a lease, with net income with respect to such property subject to
corporate tax but not counted as disqualifying income for purposes of
qualification as a REIT.
NEWLY ISSUED ACCOUNTING STANDARDS
Financial Accounting Standards Board Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133") requires that all
derivative investments be recorded in the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings or
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction, and the type of hedge transaction. The Companies anticipate
that due to their limited use of derivative instruments, the adoption of SFAS
133 will not have a material effect on the financial statements.
During 1999, Financial Accounting Standards Board Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activities--Deferral of the Effective
Date of the Statement of Financial Accounting Standards No 133" ("SFAS 137") was
issued. This statement amended SFAS 133 by deferring the effective date to
fiscal quarters of all fiscal years beginning after June 15, 2000.
In November 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 100, "Restructuring and Impairment Charges" ("SAB
100"). This SAB expresses the views of the Staff regarding the accounting for
the disclosure of certain expenses commonly reported in connection with exit
activities and business combinations. The Companies do not expect the provisions
of SAB 100 to have a material impact on its financial statements.
In December 1999, the Staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"). This SAB summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Companies do not expect the provisions of SAB 101 to have a
material impact on its financial statements.
YEAR 2000
The "Year 2000 problem" arose as a result of the fact that many existing
computer programs and embedded chip technology systems were developed using only
the last two digits (rather than four) to define the applicable year. Thus, any
information technology ("IT") systems with time-sensitive software might
recognize a date using "00" as the year 1900 rather than the year 2000, which
could result in miscalculations and system failures. In addition, the Companies
were at risk from Year 2000 failures on the part of third parties with which the
Companies interact.
The Companies use a significant number of IT systems that are essential to their
operations. For this reason, the Companies developed and implemented a
five-phase plan to address their year 2000 issues (the "Year 2000 Plan") and to
insure that the Companies' IT systems would function properly in the year 2000
and thereafter.
The Companies believe that they have successfully rendered IT systems year 2000
compliant. Since January 1, 2000, the Companies have experienced no disruptions
to their business operations as a result of year 2000 compliance problems or
otherwise and have received no reports of any material year 2000 compliance
problems with any third parties with which they have material interactions.
Although the Companies do not believe that they have continued exposure to the
year 2000 issue, the Companies cannot give assurances that they will not detect
unanticipated year 2000 compliance issues in the future.
37
<PAGE>
The Companies budgeted $1,650,000 for its year 2000 Plan and estimate that the
costs of repairing, updating and replacing their standard IT systems were
approximately $1,600,000. Additionally, the Companies estimate that they spent
approximately $300,000 to address other Year 2000 issues. Because the Companies
year 2000 assessment is ongoing and additional funds may be required as a result
of unexpected future findings in the first few quarters of the year 2000, the
Companies are not able to estimate the final aggregate cost of the year 2000
problem. While these efforts may 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 have funded the costs to date of addressing the Year
2000 issue from cash flows resulting from operations.
The preceding "Year 2000 disclosure" contains various forward-looking
statements within the meaning of the private Securities Litigation Reform Act of
1995. These forward-looking statements represent the Companies' beliefs of
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, 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.
38
<PAGE>
MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY
AND SUBSIDIARIES
PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On March 22, 2000, Meditrust Corporation entered into an employment agreement
with Francis W. ("Butch") Cash ("Mr. Cash"), whereby Mr. Cash became President
and Chief Executive Officer of Meditrust Corporation effective April 17, 2000.
The full text of Mr. Cash's employment agreement is attached hereto as Exhibit
10.2.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation of Meditrust
Corporation filed with the Secretary of State of Delaware on June 21,
1999 (incorporated by reference to Exhibit 3.1 to Joint Annual
Report on Form 10-K of Meditrust Corporation and Meditrust Operating
Company for the fiscal year ended December 31, 1999);
3.2 Amended and Restated Certificate of Incorporation of Meditrust
Operating Company filed with the Secretary of State of Delaware on
June 21, 1999 (incorporated by reference to Exhibit 3.2 to Joint
Annual Report on Form 10-K of Meditrust Corporation and Meditrust Operating
Company for the fiscal year ended December 31, 1999);
3.3 Amended and Restated By-laws of Meditrust Corporation (incorporated by
reference to Exhibit 3.5 to the Joint Registration Statement on Form
S-4 of Meditrust Corporation and Meditrust Operating Company (File
Nos. 333-47737 and 333-47737-01));
3.4 Amended and Restated By-laws of Meditrust Operating Company
(incorporated by reference to Exhibit 3.6 to the Joint Registration
Statement on Form S-4 of Meditrust Corporation and Meditrust
Operating Company (File Nos. 333-47737 and 333-47737-01));
10.1 Termination and Severance Agreement dated as of January 28, 2000 by
and among Meditrust Corporation, Meditrust Operating Company, David
F. Benson and other parties thereto (incorporated by reference to
Exhibit 99.2 to Joint Current Report on Form 8-K of Meditrust
Corporation and Meditrust Operating Company event date January 28,
2000);
10.2 Employment Agreement dated as of March 22, 2000, by and between
Meditrust Corporation and Francis W. Cash (filed herewith);
27.1 Financial Data Schedule (filed herewith); and
27.2 Financial Data Schedule (filed herewith).
</TABLE>
(b) Reports on Form 8-K. During the quarter ended March 31, 2000, the
Companies filed the following Current Reports on Form 8-K:
1. Joint Current Report on Form 8-K, event date January 28, 2000, which
contains the Termination and Severance Agreement dated as of
January 28, 2000 by and among Meditrust Corporation, Meditrust
Operating Company and David F. Benson, and a press release dated
January 28, 2000 announcing the Companies' Five Point Plan.
39
<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.
MEDITRUST CORPORATION
May 9, 2000 /s/ Laurie T. Gerber
--------------------
Laurie T. Gerber
Chief Financial Officer
MEDITRUST OPERATING COMPANY
May 9, 2000 /s/ Francis W. Cash
-------------------
Francis W. Cash
Chief Executive Officer and
Treasurer
40
<PAGE>
Exhibit 10.2
EMPLOYMENT AGREEMENT
This Employment Agreement (the "AGREEMENT") dated as of March 22, 2000, is
entered between Meditrust Corporation (the "COMPANY") and Francis W. Cash (the
"EXECUTIVE").
WHEREAS, the Company and the Executive wish to enter into an employment
agreement whereby the Executive will be employed by the Company in accordance
with the terms and conditions stated below;
NOW, THEREFORE, the parties hereby agree as follows:
ARTICLE I
EMPLOYMENT, DUTIES AND RESPONSIBILITIES
1.1 EMPLOYMENT. The Executive shall serve as the President and Chief
Executive Officer of the Company. The Company will also use its best efforts to
assure the Executive's election to the Board of Directors of the Company. The
Executive hereby accepts such employment. The Executive agrees to devote
substantially all of his time and efforts to promoting the interests of the
Company.
1.2 DUTIES AND RESPONSIBILITIES. Subject to the supervision of and
direction by the Board of Directors of the Company, the Executive shall (a)
perform such duties as are customarily associated with the position of President
and Chief Executive Officer, and (b) be responsible, together with other senior
executives of the Company, for the implementation of the operating plan and
budget of the Company. The Executive shall also have oversight of the lodging
properties of Meditrust Operating Company and is expected to oversee the
disposition of the Company's healthcare assets and the eventual transition of
the Company into a lodging company.
1.3 BASE OF OPERATION. The Executive's principal base of operation for the
performance of his duties and responsibilities under this Agreement shall be the
offices of the Company in Dallas, Texas.
ARTICLE II
TERM
2.1 TERM. The term of this Agreement (the "TERM") shall commence on or
before May 22, 2000, and shall continue for a period of THREE YEARS from the
commencement date hereof. The Term and this Agreement will be renewed
automatically thereafter for successive one-year terms unless 6 months notice of
non-renewal is given by either party to the other. Regardless of the term
remaining on this Agreement determined as provided above, upon the occurrence of
a Change of Control of the Company, the Term of this Agreement shall not expire
until the later of the end of the
<PAGE>
remaining term then in effect or two years from the date of such Change of
Control. The Executive shall use his best efforts to commence his employment by
April 17, 2000 consistent with any other employment obligations that he may
have.
ARTICLE III
COMPENSATION AND EXPENSES
3.1 SALARY AND BENEFITS. As compensation and consideration for the
performance by the Executive of his obligations under this Agreement, the
Executive shall be entitled to the following (subject, in each case, to the
provisions of Article V hereof):
(a) The Company shall pay the Executive a base salary, payable in
accordance with the ordinary payment procedures of the Company and subject to
such withholdings and other ordinary employee deductions as may be required by
law. The total base salary paid to the Executive for the first year of this
Agreement shall be $800,000. The base salary to be paid the Executive during the
Term for subsequent years shall be reviewed by the Company on an annual basis,
but in no event shall such base salary be less than $800,000 per annum.
(b) The Executive shall participate during the Term in the annual
cash bonus plan maintained by the Company, subject to the goals and criteria
established by the Compensation Committee of the Company from time to time. For
the year 2000, the Company shall pay the Executive an end-of-year bonus of no
less than the pro rata amount of $800,000, based on the number of days worked in
2000, payable in accordance with the ordinary payment procedures of the Company
and subject to such withholdings and other ordinary employee deductions as may
be required by law. Executive's base target bonus opportunity for each fiscal
year for satisfaction of goals for such fiscal year shall be 100 percent of
Executive's base salary ("Base Target"). In the event Executive significantly
exceeds annual goals for any fiscal year, he may receive cash bonus up to 200
percent of Executive's base salary.
(c) During the Term the Company shall pay Executive $25,000 per annum
in lieu of furnishing him coverage under life insurance and long-term disability
plans. If the Executive so elects by written notice provided to the Company, the
obligations of the Company set forth in the first sentence of this clause (c)
shall terminate as of 30 days after the date of the notice and from that date,
during the Term, the Executive shall participate in such life insurance and
long-term disability plans as may be maintained from time to time during the
Term by the Company for the benefit of the employees of the Company, to the
extent and in such manner available to other executive officers of the Company
and subject to the terms and provisions of such plans and programs.
(d) The Executive shall participate during the Term in such
retirement, pension, health, and medical insurance plans, and in such other
employee benefit plans and programs (other than the Company's life insurance and
long-term disability plans, described in paragraph (c) above), as may be
maintained from time to time during the Term by the Company for the benefit of
the
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employees of the Company, in each case to the extent and in such manner
available to other executive officers of the Company and subject to the terms
and provisions of such plans or programs.
(e) The Executive shall be entitled to an annual paid vacation period
(but not necessarily consecutive vacation weeks) during the Term, in accordance
with the Company's employee benefit policies, but in no event less than four
weeks per year.
3.2 SIGN UP BONUS. Upon execution of this agreement the Company shall pay
Executive $600,000 subject to such withholdings and other ordinary employee
deductions as may be required by law.
3.3 EXPENSES. The Company will reimburse the Executive for reasonable
business-related expenses incurred by him in connection with the performance of
his duties hereunder during the Term subject, however, to the Company's policies
relating to business-related expenses as in effect from time to time during the
Term. The Company will reimburse the Executive, in accordance with the Company's
relocation policy, for all reasonable and normal costs related to relocating his
permanent residence from Hilliard, Ohio to Dallas, Texas, "grossed up" to the
greater amount so that the net benefit to Executive after taxes equals his
actual costs relating to such relocation.
3.4 STOCK COMPENSATION. As compensation and consideration for the
performance by the Executive of his obligations under this Agreement, the
Executive shall be entitled to the following (subject, in each case, to the
provisions of Article V hereof):
(a) PERFORMANCE SHARES. The Company shall award to the Executive
500,000 shares of the common stock of the Company and shares of the common stock
of The Meditrust Operating Company which are paired for trading purposes
("Paired Shares") in accordance with the terms described below and the Company's
1995 Share Award Plan (the "Award" of the "Performance Shares" under the
"Plan"):
(i) the Performance Shares shall be deemed issued as of the
first day of the Term upon payment of the par value thereof to the
Company. Subject to the terms of an agreement to be entered into
between the Executive and the Company related to the Award (the
"Award Agreement"), the Performance Shares shall vest on the third
anniversary of the grant date or, if sooner, the first business day
after 30 consecutive days on which the closing price (the "30-Day
Closing Price") of a Paired Share equals or exceeds three times the
closing price for a Paired Share on March 22, 2000 (the "Benchmark
Share Price").
(ii) the Executive shall receive all voting rights and
dividends paid with respect to unvested Performance Shares from the
date of issuance so long as the Executive is an employee of the
Company and the Executive shall have no obligation to return any
funds or other property received as dividends or otherwise with
respect to the Performance Shares, regardless of whether such shares
are vested.
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(iii) upon the consummation of a Change in Control, as defined
herein,
(1) (A) if the Company is the surviving entity and
remains a public company, the Performance Shares shall remain
in effect; and (B) if the Company is not the surviving entity
and the common stock of the surviving entity is publicly
traded, all unvested Performance Shares shall be converted into
shares of common stock of the surviving entity worth, as of the
date of the Change in Control, the amount that Executive's
unvested Performance Shares were worth immediately prior to the
Change in Control (based on the public market price paid by the
acquiring company per share). The replacement unvested
Performance Shares shall continue to vest at least as soon as
they would have vested had there been no Change in Control;
(2) if the Performance Shares do not remain in effect
after a Change in Control or the successor entity does not
provide substitute Performance Shares as provided above, all
unvested Performance Shares shall become fully vested.
(b) STOCK OPTIONS. On the first day of the Term, the Company shall
award to the Executive options to purchase 2,400,000 Paired Shares (the
"Options") subject to the Award Agreement which shall include the following
provisions:
(i) The Option exercise price with respect to 600,000 Paired
Shares (Option A) shall be equal to one and one-half times the
Benchmark Share Price. Option A shall become exercisable in 25%
increments on each anniversary of the grant date (an "A-Annual
Tranche") so that Option A is fully exercisable on the fourth
anniversary of the grant; provided, however, at the first such time
as the 30- Day Closing Price exceeds the exercise price for Option A,
the Paired Shares subject to Option A shall accelerate and become
exercisable as to 20% of the original number of Paired Shares in any
A-Annual Tranche not yet fully exercisable; furthermore, at the first
such time as the 30-Day Closing Price equals or exceeds three times
the Benchmark Share Price, the Paired Shares subject to Option A
shall accelerate and become exercisable as to an additional 20% of
the original number of Paired Shares in any A-Annual Tranche not yet
fully exercisable.
(ii) The Option exercise price with respect to 600,000 Paired
Shares (Option B) shall be equal to two times the Benchmark Share
Price. Option B shall become exercisable in 25% increments on each
anniversary of the grant date (a "B-Annual Tranche") so that Option B
is fully exercisable on the fourth anniversary of the grant;
provided, however, at the first such time as the 30-Day Closing Price
exceeds the exercise price for Option B, the Paired Shares subject to
Option B shall accelerate and become exercisable as to 20% of the
original number of Paired Shares in any B-Annual Tranche not yet
fully exercisable; furthermore, at the first such time
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as the 30-Day Closing Price equals or exceeds three times the
Benchmark Share Price, the Paired Shares subject to Option B shall
accelerate and become exercisable as to an additional 20% of the
original number of Paired Shares in any B-Annual Tranche not yet
fully exercisable.
(iii) The Option exercise price with respect to 1,200,000
Paired Shares (Option C) shall be equal to two and one-half times the
Benchmark Share Price. Option C shall become exercisable in 25%
increments on each anniversary of the grant date (the "Annual
Tranche") so that Option C is fully exercisable on the fourth
anniversary of the grant; provided, however, at the first such time
as the 30-Day Closing Price exceeds the exercise price for Option C,
the Paired Shares subject to Option C shall accelerate and become
exercisable as to 20% of the original number of Paired Shares in any
C-Annual Tranche not yet fully exercisable; furthermore, at the first
such time as the 30-Day Closing Price equals or exceeds three times
the Benchmark Share Price, the Paired Shares subject to Option C
shall accelerate and become exercisable as to an additional 20% of
the original number of Paired Shares in any C-Annual Tranche not yet
fully exercisable.
(iv) Upon the consummation of a Change in Control, as defined
herein:
(1) (A) if the Company is the surviving entity and
remains a public company, the Options shall remain in effect;
and (B) if the Company is not the surviving entity and the
common stock of the surviving entity is publicly traded, the
surviving entity shall issue to the Executive replacement
options for at least the number of shares of common stock of
the surviving entity worth, as of the date of the Change of
Control, the amount that Executive's unexercised Paired Shares
subject to each Option were worth immediately prior to the
Change of Control (based on the public market price paid by the
acquiring company per share), which replacement options shall
vest proportionally at least as soon as the unvested portion of
each of Option A, B and C would have vested had there been no
Change in Control. The exercise price of the replacement
options shall be determined by multiplying the exercise price
of each Option by the ratio of the number of unexercised Paired
Shares subject to each Option divided by the number of shares
subject to the replacement options issued to the Executive by
the surviving company in respect of each Option. In either
event, 20% of the original number of Paired Shares subject to
each Option in any Annual Tranche which had not become fully
exercisable as of the date of the Change in Control shall
accelerate and become exercisable and the consideration
realized by the shareholders of the Company for each Paired
Share shall be deemed to be the 30-Day Closing Price for
purposes of this Section 3.4;
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(2) if the Options do not continue after a Change in
Control or the successor entity does not provide substitute
options as provided above, then the portion of each of Option
A, B and C that is not then exercisable shall become fully
vested and exercisable immediately prior to the consummation of
the Change in Control.
(v) The Options shall have a term of 10 years.
ARTICLE IV
EXCLUSIVITY, ETC.
4.1 EXCLUSIVITY. The Executive agrees to perform his duties,
responsibilities and obligations hereunder efficiently and to the best of his
ability. The Executive agrees that he will devote substantially all of his
working time, care and attention and best efforts to such duties,
responsibilities and obligations throughout the Term. The foregoing shall not be
interpreted to prohibit the Executive from serving as director or trustee of one
or more corporations or foundations (either for-profit or not-for-profit) other
than the Company. The Executive also agrees that he will not engage in any other
business activities, pursued for gain, profit or other pecuniary advantage, that
are competitive with the activities of the Company.
4.2 OTHER BUSINESS VENTURES. The Executive agrees that, so long as he is
employed by the Company, he will not own, directly or indirectly, any
controlling or substantial stock or other beneficial interest in any business
enterprise which is engaged in, or competitive with, any business engaged in by
the Company. Notwithstanding the foregoing, the Executive may own, directly or
indirectly, up to 5% of the outstanding capital stock or any business having a
class of capital stock which is traded on any national stock exchange or in the
over-the-counter market.
4.3 CONFIDENTIALITY. The Executive agrees that he will not, at any time
during or after the Term, make use of or divulge to any other person, firm or
corporation any trade or business secret, process, method or means, or any
other confidential information concerning the business or policies of the
Company, which he may have learned in connection with his employment
hereunder. For purposes of this Agreement, a "TRADE OR BUSINESS SECRET,
PROCESS, METHOD OR MEANS, OR ANY OTHER CONFIDENTIAL INFORMATION" shall mean
and include written information treated as confidential or as a trade secret
by the Company. The Executive's obligation under this Section 4.3 shall not
apply to any information which (a) is known publicly; (b) is in the public
domain or hereafter enters the public domain without the fault of the
Executive; (c) is known to the Executive prior to his receipt of such
information from the Company, as evidenced by written records of the
Executive; or (d) is hereafter disclosed to the Executive by a third party
not under an obligation of confidence to the Company. The Executive agrees
not to remove from the premises of the Company, except as an employee of the
Company in pursuit of the business of the Company or except as specifically
permitted in writing by the Company, any document or other object containing
or reflecting any such confidential information. The Executive recognizes
that all such documents and objects, whether
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developed by him or by someone else, will be the sole and exclusive property
of the Company. Upon termination of his employment hereunder, the Executive
shall forthwith deliver to the Company all such confidential information,
including without limitation all lists of lessees, customers, correspondence,
accounts, records and any other documents or property made or held by him or
under his control in relation to the business or affairs of the Company, and
no copy of any such confidential information shall be retained by him. The
provisions of this Section 4.3 shall survive any termination of this
Agreement.
4.4 NONCOMPETITION. During the period commencing on the date hereof and
ending on the first anniversary of the date on which the Executive's employment
is terminated, whether before or after the Term the Executive shall not,
directly or indirectly, whether as an employee, consultant, independent
contractor, partner, joint venturer or otherwise, (A) solicit or induce, or in
any manner attempt to solicit or induce, any person employed by, or as agent of,
the Company to terminate such person's employment or agency, as the case may be,
with the Company or (B) divert, or attempt to divert, any person, concern, or
entity from doing business with the Company (including entering into a lease),
nor will he attempt to induce any such person, concern or entity to cease being
a lessee, customer or supplier of the Company. If Executive is terminated by the
Company for other than Cause or by the Executive for Good Reason, or after a
Change of Control and Executive Termination Event, the provisions of this
Section 4.4 shall not be binding on Executive.
ARTICLE V
TERMINATION
5.1 TERMINATION BY THE COMPANY.
(a) The Company shall have the right to terminate the Executive's
employment at any time with or without "Cause". For purposes of this Agreement,
"CAUSE" shall mean that, prior to any termination the Executive shall have
committed: (i) an act of fraud, embezzlement, theft, or any other act
constituting a felony, involving moral turpitude or causing material harm,
financial or otherwise, to the Company; (ii) a demonstrably intentional and
deliberate act or failure to act (other than as a result of incapacity due to
physical or mental illness) which is committed in bad faith by the Executive,
which causes or can be expected to cause material financial injury to the
Company; or (iii) an intentional and material breach of this Agreement that is
not cured by the Executive within 30 days after written notice from the Board of
Directors specifying the breach and requesting a cure. For purposes of this
Agreement, no act, or failure to act, on the part of the Executive shall be
deemed "intentional" if it was due primarily to an error in judgment or
negligence, but shall be deemed "intentional" only if done, or omitted to be
done, by the Executive not in good faith and without reasonable belief that his
action or omission was in, or not opposed to, the best interest of the Company.
Notwithstanding the foregoing, the Executive shall not be deemed to have been
terminated for "Cause" hereunder unless and until there shall have been
delivered to the Executive a copy of a resolution duly adopted by the
affirmative vote of not less than three-quarters of the Board then in office at
a meeting of the Board of Directors called and held for such purpose (after
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reasonable notice to the Executive and an opportunity for the Executive,
together with his counsel, to be heard before the Board), finding that, in the
good faith opinion of the Board, the Executive had committed an act set forth
above and specifying the particulars thereof in detail. Nothing herein shall
limit the right of the Executive or his beneficiaries to contest the validity or
propriety of any such determination.
(b) The end of the Term, due to the exercise by the Company of its
non-renewal right under Section 2.1, shall also constitute termination by the
Company of Executive's employment.
5.2 DEATH. In the event the Executive dies during the Term, this Agreement
shall automatically terminate, such termination to be effective on the date of
the Executive's death.
5.3 DISABILITY. In the event that the Executive shall suffer a disability
which shall have prevented him from performing satisfactorily his obligations
hereunder for a period of at least 120 consecutive days, the Company shall have
the right to terminate this Agreement, such termination to be effective upon the
giving of notice thereof to the Executive in accordance with this Agreement.
5.4 TERMINATION BY THE EXECUTIVE IF ENJOINED OR FOR GOOD REASON.
(a) If the Executive's performance of services to the Company
pursuant to this Agreement should be enjoined beyond August 18, 2000 by action
of a court of final jurisdiction which judgment is not subject to further
appeals under applicable legal proceedings, the Company may request the
Executive to resign immediately from the Company and in that event neither the
Executive nor the Company shall have any further obligations pursuant to this
Agreement. A termination pursuant to this clause shall be considered a voluntary
termination by the Executive without Good Reason.
(b) The Executive's employment may be terminated during the Term by
the Executive for Good Reason, by giving to the Company 30 days advance written
notice specifying the event or circumstance which the Executive alleges
constitutes Good Reason. Such notice of resignation will take effect, if not
revoked by the Executive, at the conclusion of such thirty-day period. For
purposes of this Agreement, the following circumstances shall constitute "GOOD
REASON" if not cured prior to the expiration of such thirty-day period:
(i) the assignment to the Executive of duties that are
materially inconsistent with the Executive's position or with his
authority, duties or responsibilities as contemplated by Sections 1.1
and 1.2 of this Agreement, or any other action by the Company or its
successor which results in a material diminution or material adverse
change in such position, authority, duties or responsibilities;
(ii) any material breach by the Company or its successor of the
provisions of this Agreement; or
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(iii) a relocation of the Executive's principal base of
operation to any location which requires Executive to increase his
daily inbound commute by more than 45 miles.
5.5 EFFECT OF TERMINATION.
(a) In the event of termination of the Executive's employment for any
reason or by reason of the Executive's death or disability, the Company shall
pay to the Executive (or his beneficiary in the event of his death) any base
salary, bonus or other compensation earned but not paid to the Executive prior
to the effective date of such termination and, other than the circumstances of
termination by the Company for Cause or by the Executive voluntarily without
Good Reason, the pro rata amount of the annual cash bonus payable under the plan
based on the Base Target bonus for the year during which such termination
occurs, based on the number of days worked during such year.
(b) In the event of termination of the Executive's employment (other
than a termination following a Change of Control as hereafter defined and
provided for) (i) by the Company other than for Cause or (ii) by the Executive
for Good Reason, the Company shall pay to the Executive, in addition to the
amounts described in Section 5.5(a) hereof, a lump sum equal to two times the
sum of Executive's base salary and Base Target bonus. Further, 20% of the
original number of Performance Shares and the Options covering 20% of the
original number of Paired Shares in each Option shall accelerate and become
vested and exercisable.
(c) In the event of the termination of the executive's employment
(other than a termination following a Change in Control as hereafter defined and
provided for) (i) by the Company other than for Cause, (ii) by the Executive for
Good Reason or (iii) on account of the Executive's death or disability, for 24
months (or, if later, the date the Executive becomes eligible for Medicare if
his employment terminates on account of disability) following the Termination
Date, the Company shall arrange to provide the Executive with health benefits
(medical and dental) substantially similar to those which the Executive was
receiving or entitled to receive immediately prior to the Termination Date. If
and to the extent that such benefits shall not or cannot be paid or provided
under any policy, plan, program or arrangement of the Company solely due to the
fact that the Executive is no longer an officer or employee of the Company, then
the Company shall pay to the Executive, his dependents and beneficiaries, the
amount of premiums that would have been incurred by the Company were the Company
able to provide such coverage through its plan, program or arrangement. Such
health benefits shall be discontinued prior to the end of the specified
continuation period if the Executive receives comparable coverage from a
subsequent employer or becomes entitled to Medicare.
5.6 TERMINATION FOLLOWING A CHANGE OF CONTROL.
(a) DEFINITIONS. As used herein, the following terms shall have the
following meanings:
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(i) Change in Control. "Change in Control" shall mean
(1) any transaction, or series of transactions,
including, but not limited to any merger, consolidation, or
reorganization, which results when any "person" as defined in
Section 3(a)(9) of the Exchange Act and as used in Sections
13(d) and 14(d) thereof, including a "group" as defined in
Section 13(d) of the Exchange Act, but excluding the Company,
any subsidiary of the Company, and any employee benefit plan
sponsored or maintained by the Company or any subsidiary of the
Company, directly or indirectly, becomes the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act) of securities
of the Company representing more than 50% of the combined
voting power of the Company's then outstanding securities;
(2) when, during any period of 24 consecutive months the
individuals who, at the beginning of such period, constitute
the Board (the "Incumbent Directors") cease for any reason
other than death to constitute at least a majority of the
Board; provided, however, that a director who was not a
director at the beginning of such period shall be deemed to
have satisfied such 24-month requirement (and be an Incumbent
Director) if such director was elected by, or on the
recommendation of or with the approval of, at least two-thirds
of the directors who then qualified as Incumbent Directors
either actually (because they were directors at the beginning
of such 24-month period) or by prior operation of this
Section; or
(3) when the stockholders of the Company approve a plan
of complete liquidation of the Company; or an agreement for the
sale or disposition of substantially all the Company's assets
other than a sale of the Company's health care assets; or a
merger, consolidation, or reorganization of the Company in
which stockholders of the Company immediately prior to the
transaction own less than 50% of the combined voting power of
the surviving entity.
(ii) "Termination Date" shall mean the date on which
Executive's employment with the Company is terminated.
(b) TERMINATION BY COMPANY. Following a Change in Control, the
Executive's employment may be terminated by Company ("Company Termination
Event") and the Executive shall not be entitled to the severance benefits
provided under Section 5.7, provided that Executive's termination occurs as a
result of one or more of the following events:
(i) The Executive's death;
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(ii) The Executive's disability, provided Executive actually
begins to receive disability benefits pursuant to the long-term
disability plan in effect for senior executives of the Company
immediately prior to the Change in Control; or
(c) EXECUTIVE TERMINATION EVENT. If at any time during the two year
period commencing on the date of a Change in Control, the Company or Executive
terminates his employment following the occurrence of one or more of the
following events ("Executive Termination Event"), Executive shall be entitled to
the severance benefits provided in Section 5.7 below:
(i) Any termination by the Company of Executive's employment
during such two year period for any reason, other than for Cause, as
a result of Executive's death, or by reason of the Executive's
disability and the actual receipt of disability benefits in
accordance with Section 3.1(c) hereof; or
(ii) Termination by the Executive of his employment with the
Company at any time within two years after the Change in Control upon
the occurrence of any of the following events:
(1) The Company's failure to elect, re-elect or otherwise
maintain the Executive in the office or position in the Company
which the Executive held immediately prior to a Change in
Control, or the removal of the Executive as a Director of the
Company (or any successor thereto) if the Executive was a
Director of the Company immediately prior to the Change in
Control other than a change to Co-Chief Executive Officer or
Vice-Chief Executive Officer;
(2) A significant, adverse change (increase or decrease)
in the nature or scope of the authorities, powers, functions,
responsibilities or duties attached to the position with the
Company which the Executive held immediately prior to the
Change in Control, or a reduction in the aggregate of the
Executive's base pay or annual incentive bonus opportunity (and
relative level of goal achievement) in which the Executive
participated immediately prior to the Change in Control, or the
termination of the Executive's rights to any employee benefits
to which he was entitled immediately prior to the Change in
Control, or a reduction in scope or value of such benefits,
without prior written consent of the Executive, any of which is
not remedied within 10 calendar days after receipt by the
Company of a written notice from the Executive of such change,
reduction, or termination, as the case may be;
(3) The Company or its successor becomes a subsidiary of
another company and the Executive is neither the President and
Chief Executive
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Officer, the Co-Chief Executive Officer or Vice-Chief
Executive Officer of the ultimate parent company;
(4) The Company shall relocate its principal executive
offices, or require the Executive to have his principal
location of work changed, to any location which is in excess of
45 miles from the location thereof immediately prior to the
Change in Control; or
(5) Without limiting the generality or effect of the
foregoing, any material breach of this Agreement by the Company
or any successor thereto.
5.7 SEVERANCE BENEFITS. In the event Executive's employment is terminated
within two years of the date of a Change in Control as a result of an Executive
Termination Event, Executive shall be entitled to the benefits set forth below.
All amounts payable under this Section 5.7(a) (b) and (c) shall be paid to
Executive in one lump sum within 45 days after his termination of employment.
(a) The Company shall pay to Executive an amount equal to three times
the average of his annual base salary for the three fiscal years (or such fewer
fiscal years that Executive is actually employed by the Company) preceding the
Change in Control and three times the average of his cash bonuses paid with
respect to the last two fiscal years (or such fewer fiscal years that Executive
is actually employed by the Company) preceding the Change in Control.
(b) The Company shall pay Executive his full base salary through
Executive's Termination Date. The Company shall also pay Executive an amount
equal to the pro rata amount of the maximum Base Target bonus award available to
the Executive under the bonus plan during the year of termination, based on the
number of days of the year elapsed prior to the Termination Date.
(c) All unvested equity, including Performance Shares and the
Options, shall become fully vested and exercisable.
(d) The Company will provide outplacement assistance from a service
selected by the Executive for a period of one year from the Termination Date.
All associated costs will be paid by the Company, up to a maximum of $50,000.
(e) The Executive may elect, within 120 calendar days following the
Termination Date, to have the Company purchase the Executive's house at its then
current market value (which shall be established by taking the average of three
appraisals from real estate firms, one selected by the Executive, one selected
by the Company, and one selected by the two selected firms, with the Company
paying the costs of the appraisals). Such purchase shall occur on a date
specified by the Executive but in any event within six months following the
Executive's election to have the house purchased by the Company.
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(f) For the balance of the Term, the Company shall arrange to provide
the Executive with health benefits (medical and dental) substantially similar to
those which the Executive was receiving or entitled to receive immediately prior
to the Termination Date. If and to the extent that such benefits shall not or
cannot be paid or provided under any policy, plan, program or arrangement of the
Company solely due to the fact that the Executive is no longer an officer or
employee of the Company, then the Company shall pay to the Executive, his
dependents and beneficiaries, the amount of premiums that would have been
incurred by the Company were the Company able to provide such coverage through
its plan, program or arrangement. Such health benefits shall be discontinued
prior to the end of the specified continuation period if the Executive receives
comparable coverage from a subsequent employer or becomes entitled to Medicare.
5.8 OTHER RIGHTS. A termination of the Executive's employment by the
Company pursuant to this Agreement or by the Executive shall not affect
adversely any rights which the Executive may have pursuant to any agreement,
employment contract, policy, plan, program or arrangement of the Company
providing employee benefits, which rights shall be governed by the terms of such
employee benefit plan.
ARTICLE VI
INDEMNIFICATION
The Company will indemnify the Executive to the fullest extent that would
be permitted by law (including a payment of expenses in advance of final
disposition of a proceeding) as in effect at the time of the subject act or
omission, or by the charter or by-laws of the Company as in effect at such time,
or by the terms of any indemnification agreement between the Company and the
Executive, whichever affords greatest protection to the Executive, and the
Executive shall be entitled to the protection of any insurance policies the
Company may elect to maintain generally for the benefit of its officers or,
during the Executive's service in such capacity, directors (and to the extent
the Company maintains such an insurance policy or policies, in accordance with
its or their terms to the maximum extent of the coverage available for any
company officer or director); against all costs, charges and expenses whatsoever
incurred or sustained by the Executive (including but not limited to any
judgment entered by a court of law) at the time such costs, charges and expenses
are incurred or sustained, in connection with any action, suit or proceeding to
which the Executive may be made a party by reason of his being or having been an
officer or employee of the Company, or serving as a director, officer or
employee of an affiliate of the Company, at the request of the Company, other
than any action, suit or proceeding brought against the Executive by or on
account of his breach of the provisions of an employment agreement with a third
party that has not been disclosed by the Executive to the Company. The Executive
has disclosed to the Company that he is a party to the following agreements: (a)
an Employment Agreement dated as of September 8, 1999 with Mariner Post-Acute
Network, Inc., (b) an amended and restated Agreement dated as of August 17, 1999
with Red Roof Inns, Inc., (c) an Agreement dated January 30, 1997 with Red Roof
Inns, Inc., and (d) an Employment Agreement dated as of June 26, 1995 with Red
Roof Inns, Inc. (collectively, the "Prior Employment Agreements"). The
Executive's rights under this Section shall
13
<PAGE>
continue without time limit for so long as he may be subject to any such
liability, whether or not his term of employment may have ended.
ARTICLE VII
TAXES AND MISCELLANEOUS OTHER PROVISIONS
7.1 TAX CONSIDERATIONS. Notwithstanding anything herein to the contrary, in
the event any payments to Executive hereunder are determined by the Company to
be subject to the tax imposed by Section 4999 of the Code or any similar federal
or state excise tax, FICA tax, or any interest or penalties are incurred by the
Executive with respect to such excise tax (such excise tax, together with any
such interest and penalties are hereinafter collectively referred to as the
"Excise Tax"), Company shall pay to Executive at the time specified in Section
4(a) above, an additional amount (the "Gross-Up Payment") such that after the
payment by Executive of all federal, state, or local income taxes, Excise Taxes,
FICA tax, or other taxes (including any interest or penalties imposed with
respect thereto) imposed upon the receipt of the Gross-Up Payment, Executive
retains an amount of the Gross-Up Payment equal to the Excise Tax imposed on the
severance payments provided herein.
(a) For purposes of determining whether any payments to Executive
hereunder will be subject to the Excise Tax and the amount of such Excise Tax:
(i) any other payments or benefits received or to be received
by Executive in connection with a Change in Control or the
termination of employment (whether pursuant to the terms of this
Agreement or of any other plan, arrangement or agreement with
Company) shall be treated as "parachute payments" within the meaning
of Section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of Section 280G(b)(1) shall be treated
as subject to the Excise Tax, unless in the opinion of tax counsel
selected by Company and acceptable to Executive, other payments or
benefits (in whole or in part) do not constitute parachute payments
under Section 280G of the Code, or such excess parachute payments (in
whole or in part) represent reasonable compensation for services
actually rendered within the meaning of Section 280G(b)(4) of the
Code;
(ii) the amount of the severance payments which shall be
treated as subject to the Excise Tax shall be equal to the amount of
excess parachute payments within the meaning of Sections 280G(b)(1)
and (4) (after applying clause (a), above); and
(iii) the parachute value of any noncash benefits or any
deferred payment or benefit shall be determined by Company in
accordance with the principles of Sections 280G(d)(3) and (4) of the
Code.
14
<PAGE>
(b) If the Excise Tax is subsequently determined to be less than the
amount taken into account hereunder at the time of termination of employment,
Executive shall repay to Company, at the time the reduction in Excise Tax is
finally determined, the portion of the Gross-Up Payment attributable to such
reduction. If the Excise Tax is determined to exceed the amount taken into
account hereunder at the time of termination of employment, Company shall make
an additional Gross-Up Payment to Executive in respect of such excess at the
time the amount of such excess is finally determined. The Executive shall notify
the Company in writing of any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company of the Gross-Up Payment.
Such notification shall be given as soon as practicable but no later that ten
business days after the Executive is informed in writing of such claim and shall
apprise the Company of the nature of such claim and the date on which such claim
is requested to be paid. The Executive shall not pay such claim prior to the
expiration of the 30 calendar day period following the date on which it gives
such notice to the Company (or such shorter period ending on the date that any
payment of taxes with respect to such claim is due). If the Company notifies the
Executive in writing prior to the expiration of such period that it desires to
contest such claim, the Executive shall:
(i) give the Company any information reasonably requested by
the Company relating to such claim,
(ii) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney reasonably selected by the
Company,
(iii) cooperate with the Company in good faith in order to
effectively contest such claim, and
(iv) permit the Company to participate in any proceedings
relating to such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including legal and accounting fees and additional interest and
penalties) incurred in connection with such contest and shall indemnify and hold
the Executive harmless, on an after-tax basis, for any Excise Tax, FICA tax or
income tax (including interest and penalties with respect thereto) imposed as a
result of such representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this section, the Company shall
control all proceedings taken in connection with such contest and, at its sole
option, may pursue or forgo any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim and
may, at its sole option, either direct the Executive to pay the tax claimed and
sue for a refund or contest the claim in any permissible manner, and the
Executive 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 Company shall determine; provided, however, that if the
Company directs the Executive to pay such claim and sue for a refund, the
Company shall advance the amount of such
15
<PAGE>
payment to the Executive, on an interest-free basis, and shall indemnify and
hold the Executive harmless, on an after-tax basis, from any Excise Tax or
income tax (including interest or penalties with respect thereto) imposed with
respect to such advance or with respect to any imputed income with respect to
such advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of the Executive
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount. Furthermore, the Company's control of the
contest shall be limited to issues with respect to which a Gross-Up Payment
would be payable hereunder and the Executive shall be entitled to settle or
contest, as the case may be, any other issue raised by the Internal Revenue
Service or any other taxing authority.
If any such claim referred to in this Section is made by the Internal
Revenue Service and the Company does not request the Executive to contest the
claim within the 30 calendar day period following notice of the claim, the
Company shall pay to the Executive the amount of any Gross-Up Payment owed to
the Executive, but not previously paid pursuant to Section 7.1(b), immediately
upon the expiration of such 30 calendar day period. If any such claim is made by
the Internal Revenue Service and the Company requests the Executive to contest
such claim, but does not advance the amount of such claim to the Executive for
purposes of such contest, the Company shall pay to the Executive the amount of
any Gross-Up Payment owed to the Executive, but not previously paid under the
provisions of Section 7.1(b), within 5 business days of a Final Determination of
the liability of the Executive for such Excise Tax. For purposes of this
Agreement, a "Final Determination" shall be deemed to occur with respect to a
claim when (i) there is a decision, judgment, decree or other order by any court
of competent jurisdiction, which decision, judgment, decree or other order has
become final, i.e., all allowable appeals pursuant to this section have been
exhausted by either party to the action, (ii) there is a closing agreement made
under Section 7121 of the Code, or (iii) the time for instituting a claim for
refund has expired, or if a claim was filed, the time for instituting suit with
respect thereto has expired.
If, after the receipt by the Executive of an amount advanced by the Company
pursuant to this section, the Executive becomes entitled to receive any refund
with respect to such claim, the Executive shall (subject to the Company's
complying with the requirements of this section) promptly pay to the Company the
amount of such refund (together with any interest paid or credited thereon after
taxes applicable thereto). If, after the receipt by the Executive of an amount
advanced by the Company pursuant to this section, a determination is made by the
Internal Revenue Service that the Executive is not entitled to any refund with
respect to such claim and the Company does not notify the Executive in writing
of its intent to contest such denial of refund prior to the expiration of 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 Gross-Up Payment required to be paid.
7.2 NO SET-OFF. There shall be no set-off or counterclaim against, or delay
in, any payment of severance benefits by the Company to Executive provided for
in this Agreement with respect to any claim against or debt or obligation of
Executive, whether arising hereunder or otherwise except for health benefits as
provided in Sections 5.5(b) or 5.7(c).
16
<PAGE>
7.3 NO MITIGATION OBLIGATION. Executive's benefits hereunder shall be
payable to him as severance pay in consideration of his services under this
Agreement. The Company hereby acknowledges that it will be difficult, and may be
impossible, for the Executive to find reasonably comparable employment following
the Termination Date. Accordingly, the parties hereto expressly agree that the
payment of the severance benefits by the Company to the Executive in accordance
with the terms of this Agreement will be liquidated damages, and that the
Executive shall not be required to mitigate the amount of any payment provided
for in this Agreement by seeking other employment or otherwise, nor shall any
profits, income, earnings or other benefits from any source whatever create any
mitigation, offset, reduction or any other obligation on the part of the
Executive hereunder or otherwise.
7.4 ENFORCEMENT COSTS. Company is aware that, upon the occurrence of a
Change in Control, the Board of Directors or a shareholder of the Company, or
the Company's successor in interest, may then cause or attempt to cause Company
to refuse to comply with its obligations under this Agreement, or may cause or
attempt to cause Company to institute, or may institute litigation seeking to
have this Agreement declared unenforceable, or may take, or attempt to take,
other action to deny Executive the benefits intended under this Agreement. In
these circumstances, the purpose of this Agreement could be frustrated. It is
the intent of Company that Executive not be required to incur the expenses
associated with the enforcement of his rights under this Agreement by litigation
or other legal action, nor be bound to negotiate any settlement of his rights
hereunder under threat of incurring such expenses because the cost and expense
thereof would substantially detract from the benefits intended to be extended to
Executive hereunder. Accordingly, if following a Change in Control Executive
should conclude in good faith that Company has failed to comply with any of its
obligations under this Agreement or in the event that Company or any other
person takes any action to declare this Agreement void or unenforceable, or
institutes any litigation or other legal action designed to deny, diminish or to
recover from Executive the benefits intended to be provided to Executive
hereunder, Company irrevocably authorizes Executive from time to time to retain
legal counsel of his choice at the expense of Company to represent Executive in
connection with the initiation or defense of any litigation or other legal
action, whether by or against Company or any director, officer, stockholder or
other person affiliated with Company. The reasonable fees and expenses of
counsel selected from time to time by Executive as provided herein shall be paid
or reimbursed to Executive by Company on a regular, periodic basis upon
presentation by Executive of a statement or statements prepared by his counsel
in accordance with its customary practices. In any action involving this
Agreement, Executive shall be entitled to prejudgment interest on any amounts
found to be due him as of the date such amounts would have been payable to
Executive pursuant to this Agreement at an annual rate of interest of 10%.
7.5 ARBITRATION. The Company and Executive hereby agree that certain issues
and/or disagreements arising in connection with this Agreement shall be settled
by arbitration. Accordingly, in the event the Company or Executive believes that
the other party has violated any provision of this Agreement, including but not
limited to any action by the Company which Executive believes would entitle
Executive to terminate his employment with severance benefits in accordance with
Section 3(b) hereof, the party alleging such violation shall notify the other
party in writing of such alleged
17
<PAGE>
violation. In the event the party receiving such violation notice disagrees with
the position taken by the other party in such written notice, the recipient of
the violation notice may, within 20 days of receipt of such written notice,
notify the other party, in writing, that it has elected to submit such
disagreement to arbitration. Arbitration of such dispute shall be settled in
Dallas, Texas, in accordance with the then applicable rules of the American
Arbitration Association. The Company shall bear all costs associated with such
arbitration. In the event the party receiving a violation notice does not elect
to submit any issue or disagreement to arbitration within 10 days of its receipt
of the written violation notice, such party will be deemed to have accepted the
position taken in such written notice. Notwithstanding anything herein to the
contrary, neither the Company nor the Executive shall be required to arbitrate
the basis of any involuntary termination of Executive's employment with the
Company by the Company or its successor.
7.6 EMPLOYMENT RIGHTS. Nothing expressed or implied in this Agreement shall
create any right or duty on the part of the Company or the Executive to have the
Executive remain in the employment of the Company prior to any Change in
Control, provided, however, that any event which would constitute an Executive
Termination Event had a Change in Control occurred following the commencement of
active negotiations with a third party (which negotiations are evidenced by the
delivery of evaluation material) that ultimately results in a Change in Control
shall be deemed to be a termination or removal of the Executive by the Company
other than for Cause after a Change in Control for purposes of this Agreement.
7.7 BENEFIT OF AGREEMENT; ASSIGNMENT; BENEFICIARY. This Agreement shall
inure to the benefit of and be binding upon the Company and its successors and
assigns, including, without limitation, any corporation or person which may
acquire all or substantially all of the Company's assets or business, or with or
into which the Company may be consolidated or merged. This Agreement shall also
inure to the benefit of, and be enforceable by, the Executive and his personal
or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amount would still be payable to the Executive hereunder if he had continued to
live, all such amounts shall be paid in accordance with the terms of this
Agreement to the Executive's beneficiary, devisee, legatee or other designee, or
if there is no such designee, to the Executive's estate.
7.8 NOTICES. Any notice required or permitted hereunder shall be in writing
and shall be sufficiently given if personally delivered or if sent by telegram
or telex or by registered or certified mail, postage prepaid, with return
receipt requested, addressed:
(a) in the case of the Company, Meditrust Corporation, 197 First
Avenue, Needham, Massachusetts 02494, Attention: General Counsel; and
(b) in the case of the Executive, to Francis W. Cash, 360 Devil's
Bight, Naples, Florida 34103.
18
<PAGE>
7.9 ENTIRE AGREEMENT; AMENDMENT. This Agreement contains the entire
agreement of the parties hereto with respect to the terms and conditions of the
Executive's employment during the Term and supersedes any and all prior
agreements and understandings, whether written or oral, between the parties
hereto with respect to compensation due for services rendered hereunder. This
Agreement may not be changed or modified except by an instrument in writing
signed by both of the parties hereto.
7.10 WAIVER. The waiver by either party of a breach of any provision of
this Agreement shall not operate or be construed as a continuing waiver or as a
consent to or waiver of any subsequent breach hereof.
7.11 HEADINGS. The article and section headings herein are for convenience
of reference only, do not constitute a part of this Agreement and shall not be
deemed to limit or affect any of the provisions hereof.
7.12 GOVERNING LAW. This Agreement shall be governed by, and construed and
interpreted in accordance with, the internal laws of the State of Texas without
reference to the principles of conflict of laws.
7.13 AGREEMENT TO TAKE ACTIONS. Each party hereto shall execute and deliver
such documents, certificates, agreements and other instruments, and shall take
such other actions, as may be reasonably necessary or desirable in order to
perform his or its obligations under this Agreement or to effectuate the
purposes hereof.
7.14 SURVIVORSHIP. The respective rights and obligations of the parties
hereunder shall survive any termination of this Agreement to the extent
necessary to the intended preservation of the rights and obligations under this
Agreement.
7.15 SEVERABILITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.
7.16 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
7.17 CORPORATE AUTHORIZATION. The Company hereby represents that the
execution, delivery and performance by the Company of this Agreement are within
the corporate powers of the Company, and that the Chairman of its Board of
Directors has the requisite authority to bind the Company hereby.
7.18 THIRD PARTY AGREEMENTS AND RIGHTS. The Executive represents to the
Company that the Executive's execution of this Agreement, the Executive's
employment with the Company and the
19
<PAGE>
performance of Executive's proposed duties for the Company will not violate any
obligations the Executive may have to any employer, former employer or other
party (other than those obligations in the Prior Employment Agreements
previously disclosed to the Company), and Executive does not possess tangible
embodiments of non-public information belonging to or obtained from any such
previous employment or other party. Further, the Executive represents and
acknowledges that to the extent that he is under any continuing obligation under
any agreement with any employer, former employer or other party with regard to
non-solicitation, non-inducement and confidentiality, he shall not violate any
such obligation.
7.19 LITIGATION AND REGULATORY COOPERATION. During and after Executive's
employment, Executive shall reasonably cooperate with the Company in the defense
or prosecution of any claims or actions now in existence or which may be brought
in the future against or on behalf of the Company which relate to events or
occurrences that transpired while Executive was employed by the Company;
provided, however, that such cooperation shall not materially and adversely
affect Executive or expose Executive to an increased probability of civil or
criminal litigation. Executive's cooperation in connection with such claims or
actions shall include, but not be limited to, being available to meet with
counsel to prepare for discovery or trial and to act as a witness on behalf of
the Company at mutually convenient times. During and after Executive's
employment, Executive also shall cooperate fully with the Company in connection
with any investigation or review of any federal, state or local regulatory
authority as any such investigation or review relates to events or occurrences
that transpired while Executive was employed by the Company. The Company shall
also provide Executive with compensation on an hourly basis (to be derived from
his base compensation) for requested litigation and regulatory cooperation that
occurs after his termination of employment, and reimburse Executive for all
costs and expenses incurred in connection with his performance under this
Section 7.19, including, but not limited to, reasonable attorneys' fees and
costs.
IN WITNESS WHEREOF, each of the parties hereto has duly executed this
Agreement as of the date first above written.
MEDITRUST CORPORATION
By:
---------------------
Chairman of the Board
EXECUTIVE
------------------------
Francis W. Cash
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of March 31, 2000 and the Consolidated Statement
of Income for the three months ended March 31, 2000 of Meditrust Corporation and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000314661
<NAME> MEDITRUST CORPORATION
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 10,316
<SECURITIES> 0
<RECEIVABLES> 114,139
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,650,714
<DEPRECIATION> 322,536
<TOTAL-ASSETS> 5,113,052
<CURRENT-LIABILITIES> 0
<BONDS> 2,413,948
0
70
<COMMON> 3,602,501
<OTHER-SE> (968,543)
<TOTAL-LIABILITY-AND-EQUITY> 5,113,052
<SALES> 0
<TOTAL-REVENUES> 140,535
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,125
<INCOME-PRETAX> 17,097
<INCOME-TAX> 0
<INCOME-CONTINUING> 17,097
<DISCONTINUED> 0
<EXTRAORDINARY> 1,394
<CHANGES> 0
<NET-INCOME> 18,491
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of March 31, 2000 and the Consolidated Statement
of Operations for the three months ended March 31, 2000 of Meditrust Operating
Company and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000313749
<NAME> MEDITRUST OPERATING COMPANY
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 1,241
<SECURITIES> 0
<RECEIVABLES> 22,017
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 36,130
<PP&E> 56,401
<DEPRECIATION> 4,071
<TOTAL-ASSETS> 161,858
<CURRENT-LIABILITIES> 115,023
<BONDS> 0
0
0
<COMMON> 118,941
<OTHER-SE> (66,556)
<TOTAL-LIABILITY-AND-EQUITY> 161,858
<SALES> 0
<TOTAL-REVENUES> 148,107
<CGS> 0
<TOTAL-COSTS> 71,465
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 252
<INCOME-PRETAX> (6,815)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,815)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,815)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
