<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
January 31, 1997
MEDITRUST
--------------------------------------------------
(Exact name of registrant as specified in charter)
Massachusetts 0-14022 04-6532031
----------------------------------------------------------------
(State of (Commission (I.R.S. Employer
Incorporation) File No.) Identification No.)
197 First Avenue, Needham, Massachusetts 02194
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 433-6000
<PAGE> 2
Item 5: OTHER EVENTS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Revenues for the year ended December 31, 1996 were $254,024,000 compared
to $209,369,000 for the year ended December 31, 1995, an increase of $44,655,000
or 21%. Revenue growth was attributed to increased rental income of $23,503,000
and increased interest income of $21,152,000. These increases were principally
the result of additional real estate investments made during 1996.
For the year ended December 31, 1996, total expenses increased by
$6,651,000. Interest expense increased by $53,000 due to increases in debt
outstanding resulting from additional real estate investments. This increase was
partially offset by an equity offering in February, 1996, and lower interest
rates on the notes outstanding during 1996 compared to those outstanding during
1995. Depreciation and amortization increased by $5,031,000, as a result of
increased real estate investments. General and administrative expenses increased
by $1,567,000, principally due to a higher level of operating costs associated
with the portfolio growth and the issuance of Shares for executive compensation,
a noncash expense.
YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994
Revenues for the year ended December 31, 1995 were $209,369,000 compared
to $172,993,000 for the year ended December 31, 1994, an increase of $36,376,000
or 21%. Revenue growth resulted from increased rental income of $3,553,000 and
increased interest income of $32,823,000 resulting primarily from additional
real estate investments made during the past year.
For the year ended December 31, 1995, total expenses decreased by
$3,136,000. Interest expense decreased by $3,316,000 primarily due to lower
interest rates on newly issued notes which were used to prepay senior unsecured
notes payable and senior mortgage notes payable, which carried higher interest
rates. Depreciation and amortization expense increased by $1,005,000 as a result
of increased real estate investments. General and administrative expense
decreased by $825,000.
-2-
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996, the Company's gross real estate investments
totaled approximately $2,286,000,000, consisting of 274 long-term care
facilities, 84 retirement and assisted living facilities, 26 rehabilitation
hospitals, 17 medical office buildings, six alcohol and substance abuse
treatment facilities and psychiatric hospitals, and one acute care hospital
campus. As of December 31, 1996, the Company's outstanding commitments for
additional financing totaled approximately $143,244,000 for the completion of
eight medical office buildings, eight long-term care facilities and 26 assisted
living facilities currently under construction and additions to existing
facilities in the portfolio.
The Company provides funding for its investments through a combination of
long-term and short-term financing including both debt and equity. The Company
obtains long-term financing through the issuance of Shares, long-term unsecured
notes, convertible debentures and the assumption of mortgage notes. The Company
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, the Company
may utilize interest rate caps or swaps to hedge interest rate volatility. It is
the Company's objective to match mortgage and lease terms with the terms of its
borrowings. The Company seeks 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.
On August 10, 1995, the Company commenced a Medium-Term Note program,
offering on a continuing basis, notes due from nine months to 30 years from the
date of issue, as selected by the purchaser and agreed to by the Company at an
aggregate initial public offering price not to exceed $200,000,000. On January
16, 1996, the Company issued $20,000,000 in notes payable with a maturity date
of January 16, 2006, bearing interest at 7.3%. The net proceeds from the
issuance of this security were utilized to reduce the outstanding balance of the
Company's unsecured credit facilities. As of December 31, 1996, $139,000,000 of
these notes had been issued.
During February 1996, the Company completed the sale of 9,200,000 Shares
at $34.00 per Share. The net proceeds to the Company from this offering were
used to repay short-term borrowings and for investments in additional health
care facilities.
On July 25, 1996, the Company invested approximately $13,509,000 in
exchange for 7,936,000 shares of common stock, representing a 19.99% interest
in Nursing Home Properties Plc (NHP Plc), a property investment group that
specializes in the financing, through sale and leaseback transactions, of
nursing homes located in the United Kingdom. The Company does not have the
right to vote more than 9.99% of the shares of NHP Plc. As of December 31, 1996,
NHP Plc has invested or committed to invest approximately $163,000,000 in 52
nursing homes, totaling 2,923 beds.
On September 10, 1996, The Company completed the sale of $175,000,000 of
7.82% notes due September 10, 2026. The notes include a put feature which gives
each noteholder the right to redeem the notes at par on September 10, 2003. The
net proceeds from the issuance of these securities were utilized to repay the
outstanding balance of the Company's unsecured credit facilities and for
investments in additional health care facilities.
-3-
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES, continued
The Company had shareholders' equity of $1,384,941,000 and debt
constituted 38% of the Company's total capitalization as of December 31, 1996.
As of January 27, 1997, the Company had unsecured revolving lines of
credit expiring September 23, 1999 in the aggregate amount of $280,000,000
bearing interest at the lender's prime rate (8.25%) or LIBOR plus .875% (6.31%
at January 27, 1997), of which $259,000,000 was available. In addition, the
Company has effective shelf registrations on file with the Securities and
Exchange Commission under which the Company may issue up to approximately
$406,000,000 of securities including Shares, Preferred Shares of beneficial
interest ("Preferred Shares"), debt, convertible debt and warrants to purchase
Shares, Preferred Shares, debt and convertible debt.
The Company believes that its various sources of capital are adequate to
finance its operations as well as pending property acquisitions, mortgage
financings and future dividends. During 1997, as the Company identifies
appropriate investment opportunities, the Company may raise additional capital
through the sale of Shares or Preferred Shares or by the issuance of additional
long-term debt or through a securitization transaction.
-4-
<PAGE> 5
Item 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibits
Exhibit No. Description
----------- -----------
23 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
99 Consolidated Financial Statements of Meditrust as of
December 31, 1996 and 1995 and for the years ended
December 31, 1996, 1995 and 1994
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
---------
January 31, 1997 /s/ Laurie Tidor
-----------------------------
Laurie Tidor
Chief Financial Officer
-5-
<PAGE> 6
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31,
------------------------------
1996 1995
---------- ----------
(In thousands)
<S> <C> <C>
ASSETS
Real estate investments (Notes 1, 3, 5 and 8):
Land ....................................................................... $ 68,098 $ 47,993
Buildings and improvements, net of
accumulated depreciation of $98,082
and $77,204, respectively .............................................. 938,162 621,182
Real estate mortgages ...................................................... 1,181,818 1,108,623
---------- ----------
Total real estate investments .......................................... 2,188,078 1,777,798
Other assets, net (Note 4) ..................................................... 65,893 49,400
Fees, interest and other receivables ........................................... 20,178 20,406
Cash and cash equivalents ...................................................... 42,726 44,248
---------- ----------
Total assets .......................................................... $2,316,875 $1,891,852
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Indebtedness (Note 7):
Notes payable, net .......................................................... $ 494,790 $ 300,813
Convertible debentures, net ................................................. 280,813 295,209
Bank notes payable, net ..................................................... 24,114 113,709
Bonds and mortgages payable, net ............................................ 59,043 52,560
---------- ----------
Total indebtedness .................................................... 858,760 762,291
Deferred income ................................................................ 9,716 9,222
Accrued expenses and other liabilities ......................................... 63,458 58,584
---------- ----------
Total liabilities ..................................................... 931,934 830,097
---------- ----------
Commitments and contingencies (Notes 3, 9 and 10)
Shareholders' equity (Notes 6, 7, 11 and 13):
Shares of beneficial interest without par value:
Unlimited shares authorized; 61,349
and 51,177 shares issued and
outstanding in 1996 and 1995, respectively ............................. 1,520,454 1,192,612
Distributions in excess of net income ..................................... (135,513) (130,857)
---------- ----------
Total shareholders' equity ................................................ 1,384,941 1,061,755
---------- ----------
Total liabilities and shareholders' equity ............................ $2,316,875 $1,891,852
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE> 7
<TABLE>
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For The Year Ended December 31,
----------------------------------------
(In thousands, except per Share data) 1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Rental income ................................... $109,119 $ 85,616 $ 82,063
Interest income ................................. 144,905 123,753 90,930
-------- -------- --------
Total revenues ...................... 254,024 209,369 172,993
-------- -------- --------
Expenses:
Interest ........................................ 64,216 64,163 67,479
Depreciation and amortization ................... 23,207 18,176 17,171
General and administrative ...................... 8,625 7,058 7,883
-------- -------- --------
Total expenses ...................... 96,048 89,397 92,533
-------- -------- --------
Net income before extraordinary item ................ $157,976 $119,972 $ 80,460
Extraordinary item:
Loss on prepayment of debt (Note 7) ............. 33,454
-------- -------- --------
Net income .......................... $157,976 $ 86,518 $ 80,460
======== ======== ========
Per Share:
Net income before extraordinary item ................ $ 2.66 $ 2.52 $ 2.28
Extraordinary item:
Loss on prepayment of debt ...................... 0.70
-------- -------- --------
Net income .......................................... $ 2.66 $ 1.82 $ 2.28
======== ======== ========
Weighted average Shares outstanding (Note 6) ........ 59,458 47,563 35,314
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE> 8
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<CAPTION>
Shares Amount
------ ----------
(In thousands, except per Share data)
<S> <C> <C>
Balance, December 31, 1993 ..................................................... 32,836 $ 585,795
Proceeds from issuance of shares of beneficial
interest, net of offering costs of $8,371 ................................... 4,500 130,566
Issuance of shares of beneficial interest associated with:
Conversion of debentures, net of unamortized issue
costs of $1,632 .......................................................... 2,037 57,370
Exercise of warrants ........................................................ 122 2,431
Employee compensation and stock options ..................................... 124 3,485
Distributions paid ($2.62 per Share) ........................................... (89,960)
Net income for the year ended December 31, 1994 ................................ 80,460
------ ----------
Balance, December 31, 1994 ..................................................... 39,619 770,147
Proceeds from issuance of shares of beneficial
interest, net of offering costs of $16,703 .................................. 10,250 294,953
Issuance of shares of beneficial interest associated with:
Conversion of debentures, net of unamortized issue
costs of $628 ............................................................ 1,067 30,670
Employee compensation and stock options ..................................... 241 6,918
Distributions paid ($2.70 per Share) ........................................... (127,451)
Net income for the year ended December 31, 1995 ................................ 86,518
------ ----------
Balance, December 31, 1995 ..................................................... 51,177 1,061,755
Proceeds from issuance of shares of beneficial
interest, net of offering costs of $16,316 .................................. 9,200 296,484
Issuance of shares of beneficial interest associated with:
Conversion of debentures, net of unamortized issue
costs of $259 ............................................................ 536 15,707
Employee compensation and stock options ..................................... 436 13,123
Distributions paid ($2.78 per Share) ........................................... (162,632)
Net income for the year ended December 31, 1996 ................................ 157,976
Current market value of equity investment in excess of cost (Note 4) ........... 2,528
------ ----------
Balance, December 31, 1996 ..................................................... 61,349 $1,384,941
====== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-8-
<PAGE> 9
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For The Year Ended December 31,
--------------------------------------
1996 1995 1994
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 157,976 $ 86,518 $ 80,460
Loss on prepayment of debt ................................ 33,454
Depreciation of real estate ............................... 21,269 16,582 15,209
Goodwill amortization ..................................... 1,557 1,557 1,557
Shares issued for compensation ............................ 2,039 959 863
Other depreciation, amortization and
provision for losses (Note 5) .......................... 1,044 2,764 6,916
Gain on sale of real estate ............................... (3,726)
Other items, net .......................................... 167 (284) (766)
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
AVAILABLE FOR DISTRIBUTION ................................... 184,052 141,550 100,513
Net change in other assets and liabilities (Note 2) ....... 4,499 8,447 306
--------- --------- ---------
Net cash provided by operating activities ................. 188,551 149,997 100,819
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from equity offerings ............................ 312,800 311,656 138,937
Proceeds from debt issuance ............................... 476,000 835,700 460,004
Repayment of bank notes payable ........................... (370,000) (492,200) (270,595)
Repayment of senior unsecured and
mortgage notes payable ................................. (309,300) (23,300)
Debt prepayment charges ................................... (31,228)
Equity offering and debt issuance costs ................... (19,235) (21,962) (11,484)
Principal payments on bonds and mortgages payable ......... (940) (6,727) (847)
Distributions to shareholders ............................. (162,632) (127,451) (89,960)
Proceeds from warrant conversions and stock options ....... 11,084 5,961 5,053
--------- --------- ---------
Net cash provided by financing activities ............. 247,077 164,449 207,808
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
-9-
<PAGE> 10
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
For The Year Ended December 31,
-----------------------------------------------
1996 1995 1994
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate and development
funding ........................................... $(325,789) $ (94,187) $ (20,210)
Investment in real estate mortgages and
development funding ............................... (265,084) (259,162) (291,027)
Prepayment proceeds and principal payments on real
estate mortgages .................................. 162,247 49,847 23,470
Proceeds from sale of real estate .................... 4,701 7,800 4,000
Working capital advances and acquisition of
receivables ...................................... (38,130) (45,026) (44,297)
Collection of receivables and repayment of working
capital advances ................................. 38,414 30,593 43,068
Investment in equity securities ...................... (13,509)
--------- --------- ---------
Net cash used in investing activities ....... (437,150) (310,135) (284,996)
--------- --------- ---------
Net increase (decrease) in cash and
cash equivalents ......................... (1,522) 4,311 23,631
Cash and cash equivalents at:
Beginning of year ........................... 44,248 39,937 16,306
--------- --------- ---------
End of year ................................. $ 42,726 $ 44,248 $ 39,937
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid during the period .......................... $ 56,666 $ 55,544 $ 63,323
Non-cash investing and financing transactions:
Acquisition and lease of real estate (Notes 3 and 5):
Value of real estate (sold) acquired:
Land and buildings ............................. 36,486 (34,386) (94,000)
Accumulated depreciation ....................... 389 3,486 22,463
Increase (reduction) of real estate mortgages
net of participation reduction .................. (29,642) 37,872 85,000
Change in market value of equity investment in
excess of cost (Note 4) ........................... 2,528
Value of Shares issued for:
Conversion of debentures .......................... 15,966 31,298 59,002
Executive compensation ............................ 2,039 959 863
</TABLE>
The accompanying notes are an integral part of these financial statements.
-10-
<PAGE> 11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Meditrust (the "Company"), a real estate investment trust, invests
primarily in health care facilities, including nursing homes, assisted living
facilities, medical office buildings, rehabilitation hospitals and other health
care related facilities. These facilities are located throughout the United
States and are operated by regional and national health care providers. The
Company also invests in other entities which invest in similar facilities
abroad.
Financial statements prepared in conformity with generally accepted
accounting principles require management to make estimates and assumptions
affecting reported amounts of assets, liabilities, revenues and expenses. Actual
results could differ from those estimates.
The Company's more significant accounting policies follow:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries and its majority-owned partnerships after
the elimination of all significant intercompany accounts and transactions.
REAL ESTATE INVESTMENTS
Land, buildings and improvements are stated at cost. Depreciation is
provided for on a straight-line basis over 40 years, the expected useful lives
of the buildings and major improvements. The Company provides reserves for
potential losses based upon management's periodic review of its assets and
classifies these reserves as reductions to the related assets or includes such
reserves in accrued expenses and other liabilities.
CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST
The Company capitalizes interest costs associated with funds used to
finance the construction of facilities. The amount capitalized is based upon the
borrowings outstanding during the construction period using the rate of interest
which approximates the Company's cost of financing.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of certificates of deposit and other
investments with less than 90-day maturities at the time of purchase and are
stated at cost which approximates fair market value.
OTHER ASSETS
Other assets include cash restricted for specified disbursement in
accordance with certain facility acquisitions and mortgage financings and the
corresponding liabilities are reflected in accrued expenses and other
liabilities. Other assets also include investments in equity securities,
facilities' operating receivables, working capital advances and goodwill
associated with the acquisition of the Company's previous investment advisor
which is being amortized on a straight-line basis over a ten-year period.
-11-
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INVESTMENTS IN EQUITY SECURITIES
Pursuant to Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company's investments in equity securities have been classified as
available-for-sale. Accordingly, these investments are recorded at current
market value. The difference between market value and cost (unrealized holding
gains and losses) is carried as a separate component of shareholders' equity.
DEBT ISSUANCE COSTS
Debt issuance costs have been deferred and are being amortized using the
effective interest or straight line method over the term of the related
borrowings.
REVENUE RECOGNITION
Rental income from operating leases is recognized as earned over the
life of the lease agreements. Interest income on real estate mortgages is
recognized on the accrual basis. Deferred income consists principally of fees
which are being amortized over the term of the lease, the mortgage or the
construction period related to such facilities.
NET INCOME PER SHARE
Net income per share of beneficial interest ("Shares") is computed using
the weighted average number of Shares outstanding during the year of
computation. The affect of common stock equivalents is immaterial.
INCOME TAXES
The Company has elected to be taxed as a real estate investment trust
under the Internal Revenue Code of 1986, as amended, and believes it has met all
the requirements for qualification as such. Accordingly, the Company will not be
subject to federal income taxes on amounts distributed to shareholders, provided
it distributes annually at least 95% of its real estate investment trust taxable
income and meets certain other requirements for qualifying as a real estate
investment trust. Therefore, no provision for federal income taxes is believed
necessary in the financial statements.
-12-
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
2. SUPPLEMENTAL CASH FLOW INFORMATION
Details of the net change in other assets and liabilities (excluding
noncash items, deferred income recognized in excess of cash received and changes
in restricted cash and related liabilities) follow:
<CAPTION>
For The Year Ended December 31,
------------------------------------
1996 1995 1994
------- ------- --------
(In thousands)
<S> <C> <C> <C>
Increase in fees, interest and other receivables.............. $(6,956) $(3,360) $(4,392)
Increase in other assets..................................... (2,834) (3,838) (434)
(Decrease) increase in deferred income........................ 5,669 4,331 (176)
Increase in accrued expenses
and other liabilities...................................... 8,620 11,314 5,308
------- ------- -------
$ 4,499 $ 8,447 $ 306
======= ======= =======
</TABLE>
3. REAL ESTATE INVESTMENTS
During 1996, the Company acquired 45 assisted living facilities and 13
long-term care facilities for $243,034,000. In addition, during 1996, the
Company provided net funding of $82,755,000 for the construction of 21 assisted
living facilities and one medical office building. The Company also received
proceeds of $4,701,000 from the sale of one rehabilitation facility in New York.
Also during 1996, the Company provided permanent mortgage financing of
$137,686,000 for 29 long-term care facilities located in California, Colorado,
Idaho, Missouri, New Mexico, New York, Rhode Island and Washington; 11 assisted
living facilities located in Michigan, Ohio and Wisconsin and one retirement
living facility located in North Carolina. The Company also provided $9,903,000
in additional permanent mortgage financing secured by eight long-term care
facilities located in six states, and one assisted living facility in Michigan.
The Company commenced new development funding of $59,862,000 relating to
five long-term care facilities in five states, five medical office buildings in
three states, and four assisted living facilities in two states. The Company
also provided $57,633,000 for on-going construction of facilities already in the
portfolio prior to 1996.
During 1996, the Company received principal payments on real estate
mortgages of $33,962,000 and received $128,285,000 in mortgage prepayments for
21 facilities located in Arizona, Connecticut, Michigan, New Jersey, North
Carolina and Pennsylvania.
The Company's real estate property and mortgage agreements generally
require payment of percentage, supplemental and/or additional rent or interest
during the lease or loan term. For the years ended December 31, 1996, 1995 and
1994, payments received from leases and mortgages amounted to $11,409,000,
$9,106,000 and $8,156,000 respectively.
From time to time, the Company enters into transactions with related
parties. As of December 31, 1996, the Company had total commitments of
$209,424,000 of which $153,114,000 were funded to
-13-
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. REAL ESTATE INVESTMENTS, continued
entities in which the Company's Chairman and Chief Executive Officer owned or
was expected to own a controlling equity interest or a minority interest. During
1996, the Company recognized interest income of $8,047,000 and rental income of
$2,821,000 from investments with these entities. The Company expects to enter
into additional transactions with related parties in the future. All of the
terms and conditions of such transactions are subject to approval by the
independent Trustees of the Company.
Minority interest in partnerships relating to the Company's investments
in seven rehabilitation facilities is $2,128,000 and $2,204,000 as of December
31, 1996 and 1995, respectively, and is included in accrued expenses and other
liabilities in the consolidated financial statements. The Company has a 94%
equity interest in these partnerships.
At December 31, 1996, the Company was committed to provide additional
financing of approximately $143,244,000 relating to eight medical office
buildings, eight long-term care facilities, and 26 assisted living facilities
currently under construction and additions to existing facilities in the
portfolio. As of December 31, 1996, 39% of the Company's gross real estate
portfolio was invested with two operators. These operators represent 22% and 17%
of the Company's portfolio.
4. INVESTMENT IN EQUITY SECURITIES
On July 25, 1996, the Company invested approximately $13,509,000 in
exchange for 7,936,000 shares of common stock, representing a 19.99% interest in
Nursing Home Properties Plc (NHP Plc), a property investment group that
specializes in the financing, through sale and leaseback transactions, of
nursing homes located in the United Kingdom. The Company does not have the
right to vote more than 9.99% of the shares of NHP Plc.
As of December 31, 1996, the market value of this investment was
$16,037,000 and is included in other assets in the accompanying balance sheet.
The resulting difference between the current market value and cost, $2,528,000,
is included in shareholders' equity in the accompanying balance sheet.
5. MERGER BETWEEN SUN HEALTHCARE AND MEDIPLEX
In June 1994, Sun Healthcare Group, Inc. ("Sun") merged with The Mediplex
Group, Inc. ("Mediplex"). The merged entities comprise approximately 17% of the
Company's portfolio of gross real estate investments as of December 31, 1996. A
condition of the Company's consent to this merger was the extension of all
existing Mediplex lease and mortgage terms to between 2004 and 2008 and the
addition of annual rate escalators.
In connection with this transaction, the Company (a) terminated its
leases with Mediplex on three properties (two alcohol and substance abuse
treatment facilities and one psychiatric hospital located in New York) with a
net book value of $101,537,000 and replaced these leases with mortgages from Sun
totaling $74,000,000, (b) loaned $11,000,000 to Sun which was collateralized by
a mortgage on a rehabilitation facility located in Colorado and (c) entered into
sale/leaseback transactions with Sun
-14-
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. MERGER BETWEEN SUN HEALTHCARE AND MEDIPLEX, continued
totaling $30,000,000 for two rehabilitation facilities located in Kentucky and
Massachusetts and for a long-term care facility located in Connecticut. This
transaction resulted in a deferred gain of $13,463,000 at December 31, 1994.
During 1995, these facilities were sold by Sun, and the Company recognized the
previously deferred gain. This gain was offset by an addition to the valuation
allowance for approximately the same amount. During 1996 and 1995, approximately
$4,765,000 and $17,733,000, respectively, of receivables purchased by the
Company and other receivables were charged off against the valuation allowance.
As of December 31, 1996 and 1995 the valuation allowance aggregated $9,182,000
and $13,947,000, respectively.
6. SHARES OF BENEFICIAL INTEREST
Distributions paid to shareholders are determined by the Company's Board
of Trustees based on an analysis of cash flows from operating activities. Cash
flows from operating activities available for distribution differ from net
income primarily due to depreciation and amortization expense, a noncash item.
For 1995, the difference included the extraordinary loss on prepayment of debt.
Distributions in excess of net income as reflected on the Company's consolidated
balance sheets are primarily a result of an accumulation of this difference. All
Shares participate equally in distributions and in net assets available for
distribution to shareholders on liquidation or termination of the Company. The
Trustees of the Company have the authority to effect certain Share redemptions
or prohibit the transfer of Shares under certain circumstances.
Total distributions to shareholders during the years ended December 31,
1996, 1995, and 1994 included a return of capital per Share of $.1460, $.8292,
and, $.3306, respectively. The 1996 and 1995 distributions also include
long-term capital gain distributions of $.0064 and $.2851 per Share,
respectively.
7. INDEBTEDNESS
<TABLE>
Indebtedness of the Company at December 31, 1996 and 1995 is as follows:
<CAPTION>
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Notes payable, net:
Principal payments aggregating $118,500,000 due from
August 1999 to August 2015, bearing interest at rates
between 7.25% and 8.625% ............................................... $117,661 $ 97,698
Principal payments aggregating $125,000,000 due in July 2000,
bearing interest at 7.375% ............................................. 124,070 123,851
Principal payments aggregating $80,000,000 due in July 2001,
bearing interest at 7.6% ............................................... 79,404 79,264
Principal payments aggregating $175,000,000 due in September
2026, (redeemable September 2003 at the option of the note
holder), bearing interest at 7.82% ..................................... 173,655
-------- --------
494,790 300,813
-------- --------
</TABLE>
-15-
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INDEBTEDNESS, continued
<TABLE>
<CAPTION>
1996 1995
-------- --------
(In thousands)
<S> <C> <C>
Convertible debentures, net:
7% interest, convertible at $30.625 per Share, due March 1998 ............. $ 8,122 $ 20,379
6 7/8% interest, convertible at $37.125 per Share, due
November 1998 .......................................................... 85,399 84,935
8.54% interest, convertible at $32.625 per Share, due July 2000 ........... 42,664 42,582
7 1/2% interest, convertible at $36.18 per Share, due March 2001 .......... 88,875 88,356
9% interest, convertible at $27.00 per Share, due January 2002 ............ 4,886 8,188
8.56% interest, convertible at $32.625 per Share due July 2002 ............ 50,867 50,769
-------- --------
280,813 295,209
-------- --------
Bank notes payable, net:
Revolving credit agreement expiring September 23, 1999 .................... 24,114 113,709
-------- --------
Bonds and mortgages payable, net:
Mortgage notes, interest ranging from 3.8% to 12.2%,
monthly principal and interest payments ranging from
$36,000 to $78,000 and maturing from January 1998
through March 2033, collateralized by ten facilities ................... 55,623 49,085
Manatee County, Florida Industrial Revenue Bonds, Series
1983, serial payments ranging from $45,000 to $90,000 due
in 1995 through 2000 and $345,000 due in December 2003
and $2,770,000 due in December 2013, interest ranging from
12.0% to 13.5%, collateralized by one facility ......................... 3,420 3,475
-------- --------
59,043 52,560
-------- --------
Total indebtedness ............................................................. $858,760 $762,291
======== ========
</TABLE>
Convertible Debentures
The 9% convertible debentures issued in April 1992 are subject to
redemption by the Company on or after April 23, 1995 at 100% of the principal
amount plus accrued interest. During the year ended December 31, 1996,
$3,416,000 of debentures were converted into 126,507 Shares. During the year
ended December 31, 1995, $10,287,000 of debentures were converted into 380,977
Shares.
The 7% debentures issued in February 1993 are subject to redemption by
the Company on or after March 1, 1996 at 100% of the principal amount plus
accrued interest. During the year ended December 31, 1996, $12,550,000 of
debentures were converted into 409,787 Shares. During the year ended December
31, 1995, $21,011,000 of debentures were converted into 686,062 Shares.
The 6 7/8% debentures issued in November 1993, the 7 1/2 % debentures
issued in March 1994, and the 8.54% and 8.56% debentures issued in July 1995 are
subject to redemption by the Company at 100% of the principal amount plus
accrued interest to the extent necessary to preserve the Company's status as a
real estate investment trust.
-16-
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INDEBTEDNESS, continued
Bank Notes Payable
The Company has unsecured revolving lines of credit expiring September
23, 1999 in the amount of $280,000,000, of which $254,000,000 was available at
December 31, 1996, bearing interest at the lender's prime rate (8.25%) or LIBOR
plus .875% (6.56% at December 31, 1996).
Bonds and Mortgages Payable
The notes payable, convertible debentures, bank notes payable, bonds and
mortgages payable are presented net of unamortized debt issuance costs of
$8,198,000 and $8,174,000 at December 31, 1996 and 1995, respectively.
Amortization expense associated with the debt issuance costs amounted to
$2,636,000, $4,994,000 and $3,028,000 for the years ended December 31, 1996,
1995 and 1994, respectively, and is reflected in interest expense.
All debt instruments contain certain covenants, the most restrictive of
which limits the ratio of total liabilities to consolidated tangible
shareholders' equity.
<TABLE>
The aggregate maturities of notes payable, convertible debentures, and
bonds and mortgages payable, excluding the bank notes payable, for the five
years subsequent to December 31, 1996, are as follows:
<CAPTION>
<S> <C>
1997................. $ 910,000
1998................. 109,909,000
1999................. 31,939,000
2000................. 174,073,000
2001................. 177,150,000
</TABLE>
In July and August 1995, the Company prepaid senior unsecured notes and
senior mortgage notes payable of $296,800,000, which were due between 1995 and
2001, with interest rates ranging from 10.00% to 10.86%. The transaction
resulted in prepayment penalties and acceleration of unamortized debt costs
totaling $33,454,000, which was an extraordinary item reflected as a loss from
prepayment of debt in the accompanying income statement for the year ended
December 31, 1995. Net proceeds from the issuance of approximately $300 million
of notes and convertible debentures with interest rates ranging from 7.375% to
8.56% were used for the prepayment.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates are subjective in nature and are dependent on a
number of significant assumptions associated with each financial instrument or
group of financial instruments. Because of a variety of permitted calculations
and assumptions regarding estimates of future cash flows, risks, discount rates
and relevant comparable market information, reasonable comparisons of the
Company's fair value information with other companies cannot necessarily be
made.
The following methods and assumptions were used to estimate the fair
value of financial instruments for which it is practicable to estimate that
value:
-17-
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. FAIR VALUE OF FINANCIAL INSTRUMENTS, continued
Real Estate Mortgages
The fair value of real estate mortgages has been estimated by discounting
future cash flows using current interest rates at which similar loans would be
made to borrowers with similar credit ratings and for the same remaining
maturities. The fair value of real estate mortgages amounted to approximately
$1,203,000,000 and $1,114,000,000 as of December 31, 1996 and 1995,
respectively.
The quoted market price for the Company's publicly traded convertible
debentures and rates currently available to the Company for debt with similar
terms and remaining maturities were used to estimate fair value of existing
debt. The fair value of the Company's indebtedness amounted to approximately
$911,000,000 and $774,000,000 as of December 31, 1996 and 1995, respectively.
9. LEASE COMMITMENTS
The Company's land and facilities are generally leased pursuant to
noncancelable, fixed-term operating leases expiring from 1997 to 2011. The
leases ordinarily provide multiple, five-year renewal options and the right of
first refusal or the option to purchase the facilities at the greater of the
fair market value or the Company's investment at the end of the initial term of
the lease or at various times during the lease.
The lessees are required to pay aggregate base rent during the lease term
and applicable debt service payments as well as percentage, supplemental and
additional rent (as defined in the lease agreements). The majority of the leases
are triple net which generally require the lessees to pay all taxes, insurance,
maintenance and other operating costs of the land and facilities.
<TABLE>
Future minimum lease payments, excluding debt service payments, expected
to be received by the Company during the initial term of the leases for the
years subsequent to December 31, 1996, are as follows:
<CAPTION>
<S> <C>
1997 $109,842,000
1998 107,686,000
1999 101,450,000
2000 96,814,000
2001 90,651,000
Thereafter 439,991,000
</TABLE>
10. LEGAL PROCEEDINGS
In December 1993, the Chapter 11 Trustee of Towers Financial Corporation
commenced an action in the Suffolk County Superior Court for the Commonwealth of
Massachusetts against one of the Company's former lessees and in January, 1994
two subsidiaries of the Company were named as additional defendants. The
plaintiff alleges that it holds a prior security interest in accounts receivable
of seven health care facilities, one of which is owned by the Company. The
plaintiff demands payment of all such receivables including those collected by
the Company, as well as interest and attorney's fees in
-18-
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LEGAL PROCEEDINGS, continued
an amount up to $18,000,000. The Company is vigorously defending this action,
denies any liability to the plaintiff and has asserted that the plaintiff does
not have a valid prior security interest in any assets of the Company or its
borrowers. The trial on this matter has commenced and on September 4, 1996, the
judge in this matter issued a decision which was unfavorable to the Company in
Phase I of the trial, which trial had previously been segregated by agreement
of the parties into three distinct phases. The Company intends to continue to
defend the matter with regard to the remaining two phases and is considering an
appeal of the Phase I ruling. The Company is also a party to a number of other
claims and lawsuits arising out of the normal course business; the Company
believes that none of these claims or pending lawsuits, either individually or
in the aggregate, will have a material adverse affect on the Company's business
or on its consolidated financial position.
11. STOCK OPTION AND BENEFIT PLANS
At December 31, 1996, the Company has two fixed stock option-based
compensation plans which are described below. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
these plans. Accordingly, no compensation cost has been recognized for the fixed
stock option plans.
The two fixed stock option plans are the "1988 Stock Option Plan" and the
"1992 Equity Incentive Plan" (the "Plans"). Incentive awards under the Plans
which may be granted by the Board of Trustees include nonqualified or
nonstatutory options to purchase Company shares and incentive stock options
(collectively, "options"). The aggregate number of Shares available for issuance
under the Plans is 5% of the number of outstanding Shares (3,067,000 Shares at
December 31, 1996). Up to 500,000 Shares available under each Plan may be issued
pursuant to incentive stock options. Trustees, officers and key employees of the
Company or any other entity providing similar services to the Company and its
officers, directors and key employees, and all persons retained by the Company
solely as consultants are eligible to participate in the Plans. As of December
31, 1996, no consultants have been granted options. Such options expire 10 years
after the date granted. Generally, one third of all options granted become
exercisable at the end of each year following the date of issuance. Options to
purchase 424,000 Shares were exercisable as of December 31, 1996.
Had compensation cost for the Company's two stock option-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method pursuant to Financial
Accounting Standard No. 123 ("FAS No. 123"), "Accounting for Stock-Based
Compensation," the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
-19-
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTION AND BENEFIT PLANS, continued
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C> <C>
Net income As reported $157,976 $86,518 $80,460
Pro forma* $157,209 $85,964
Weighted average earnings per share As reported $ 2.66 $ 1.82 $ 2.28
Pro forma* $ 2.64 $ 1.81
<FN>
*FAS No. 123 requires pro forma disclosure of the effect of all options granted
in fiscal years that begin after December 15, 1994; therefore, there are no
pro forma amounts required for 1994. The pro forma effect of compensation
costs determined using the fair value based method are not indicative of
future amounts when the new method will apply to all outstanding vested and
nonvested awards.
</TABLE>
<TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively: dividend yield of
8.2 and 7.9 percent, expected volatility of 16 and 17 percent for each year,
respectively; risk-free interest rates ranging from 5.9 to 6.6 percent in 1996
and 6.9 percent for 1995; and expected life of four years for each grant.
<CAPTION>
1996 1995 1994*
--------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
----- ----- ----- ----- ----- -----
FIXED OPTIONS
- -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,326 $29 538 $28 618 $27
Granted 106 33 1,054 30 61 33
Exercised (397) 30 (211) 31 (97) 27
Forfeited (60) 32 (55) 28 (44) 33
------ ------ ---
Outstanding at end of year 975 30 1,326 29 538 28
====== ====== ===
Options exercisable at
year-end 424 330 411
Weighted-average fair value
of options granted during
the year $ 3.03 $ 2.29
<FN>
* FAS No. 123 requires pro forma disclosure of the effect of all options granted
in fiscal years that begin after December 15, 1994; therefore, there are no
associated fair value amounts required for 1994.
</TABLE>
-20-
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK OPTION AND BENEFIT PLANS, continued
<TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1996:
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
EXERCISE PRICES AT 12/31/96 LIFE EXERCISE PRICE 12/31/96 EXERCISE PRICE
--------------- ----------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$18.625 - $26.375 189,060 4.43 $25.40 189,060 $25.40
$31.375 - $33 2,734 6.97 31.63 2,734 31.63
$32.375 - $33 18,701 7.61 32.89 12,468 32.89
$30.125 - $30.25 658,497 8.21 30.13 219,280 30.13
$30-$33.625 105,856 9.47 32.67
------- ------ -------
974,848 $29.55 423,542 $28.83
======= ====== ======= ======
</TABLE>
The Company has a savings plan which qualifies under Section 401(K) of
the Internal Revenue Code under which all employees are entitled to participate
up to a specified annual maximum contribution level. The Company matches 50% of
each employee's contributions which amounted to $198,000, $151,000, and $160,000
for the years ended December 31, 1996, 1995 and 1994, respectively.
The Company entered into a non-qualified Trustee Retirement Plan (the
"Plan") during 1996. The Plan, which is unfunded, provides eligible Trustees
defined retirement benefits based on Trustee fees and years of service. At
December 31, 1996, the present value of the accumulated benefit obligation was
$1,345,000 ($995,000 of which is subject to amortization). Retirement expense
including prior amortization cost and a current provision for the Plan totaled
$350,000 in the accompanying income statement for 1996.
During 1995, the Company entered into a Split-Dollar Life Insurance
Agreement with a trust established by the Chairman and Chief Executive Officer,
pursuant to which the Company has agreed to advance policy premiums on life
insurance policies paying a death benefit to the trust. The Company is entitled
to reimbursement of the amounts advanced, without interest, which right is
secured by an assignment of the life insurance policies and a promissory note of
the Chairman in the amount of the excess, if any, of the premiums paid by the
Company over the cash surrender value of the insurance policies.
-21-
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
The following quarterly financial data summarizes the unaudited quarterly
results for the years ended December 31, 1996 and 1995:
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
1996 (In thousands, except per Share amounts)
- ----
<S> <C> <C> <C> <C>
Revenues.................................. $59,327 $62,173 $64,801 $67,723
Net income................................ 35,533 40,243 40,721 41,479
Per Share:
Net income................................ .64 .66 .67 .68
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------
1995 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
(In thousands, except per Share amounts)
<S> <C> <C> <C> <C>
Revenues................................ $48,933 $52,437 $52,753 $55,246
Net income before extraordinary item.... 24,183 30,929 31,702 33,158
Extraordinary item: Loss on
prepayment of debt.................... 33,454
Net income (loss)....................... 24,183 30,929 (1,752) 33,158
Per Share:
Net income before extraordinary item.... .60 .63 .64 .65
Extraordinary item: Loss on
prepayment of debt.................... .68
Net income per Share.................... .60 .63 (.04) .65
</TABLE>
13. SUBSEQUENT EVENTS
On January 10, 1997, the Board of Trustees of the Company declared a
distribution of $.7075 per Share payable February 14, 1997, to shareholders of
record on January 31, 1997. The distribution related to the period October 1,
1996 through December 31, 1996.
-22-
<PAGE> 1
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the registration
statements of Meditrust on Form S-8 (File Nos. 33-25072, 33-49218, 33-57377,
333-01461 and 333-01935) and on Form S-3 (File Nos. 33-40005, 33-40926,
33-42596, 33-43931, 33-45979, 33-48695, 33-59215, 33-62293 and 333-01843) of our
report dated January 16, 1997 on our audits of the consolidated financial
statements of Meditrust as of December 31, 1996 and 1995, and for the years
ended December 31, 1996, 1995 and 1994, which report is included in this Current
Report on Form 8-K.
Boston, Massachusetts
January 31, 1997 /s/ Coopers & Lybrand L.L.P.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of December 31, 1996 and the Consolidated
Statement of Income for the year ended December 31, 1996 of Meditrust and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 42,726
<SECURITIES> 0
<RECEIVABLES> 20,178
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,006,260
<DEPRECIATION> 98,082
<TOTAL-ASSETS> 2,316,875
<CURRENT-LIABILITIES> 0
<BONDS> 858,760
0
0
<COMMON> 1,520,455
<OTHER-SE> (135,514)
<TOTAL-LIABILITY-AND-EQUITY> 2,316,875
<SALES> 0
<TOTAL-REVENUES> 254,024
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,216
<INCOME-PRETAX> 157,976
<INCOME-TAX> 0
<INCOME-CONTINUING> 157,976
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 157,976
<EPS-PRIMARY> 2.66
<EPS-DILUTED> 2.66
</TABLE>
<PAGE> 1
Exhibit 99
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of Meditrust:
We have audited the accompanying consolidated balance sheets of
Meditrust as of December 31, 1996 and 1995, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Meditrust at December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
Boston, Massachusetts
January 16, 1997
