-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BcHkllTOs9GvKdQCxetgTcPVzwEYOIWY+zkv9dFib3hG0s+U2SAxsBSSb3bOT1Gz IXdF4PAMHUrpjtFXrUSWzg== 0000912057-00-022629.txt : 20000510 0000912057-00-022629.hdr.sgml : 20000510 ACCESSION NUMBER: 0000912057-00-022629 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDITRUST CORP CENTRAL INDEX KEY: 0000314661 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 953520818 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08131 FILM NUMBER: 623420 BUSINESS ADDRESS: STREET 1: MEDITRUST CORP STREET 2: 197 FIRST AVE STE 100 CITY: NEEDHAM STATE: MA ZIP: 02494 BUSINESS PHONE: 7814336000 MAIL ADDRESS: STREET 1: MEDITRUST CORP STREET 2: 197 FIRST AVENUE SUITE 100 CITY: NEEDHAM STATE: MA ZIP: 02494 FORMER COMPANY: FORMER CONFORMED NAME: SANTA ANITA REALTY ENTERPRISES INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDITRUST OPERATING CO CENTRAL INDEX KEY: 0000313749 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 953419438 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-08132 FILM NUMBER: 623421 BUSINESS ADDRESS: STREET 1: 197 FIRST AVE STREET 2: STE 100 CITY: NEEDHAM STATE: MA ZIP: 02494 BUSINESS PHONE: 7814336000 MAIL ADDRESS: STREET 1: MEDITRUST OPERATING CO STREET 2: 197 FIRST AVENUE SUITE 100 CITY: NEEDHAM STATE: MA ZIP: 02494 FORMER COMPANY: FORMER CONFORMED NAME: SANTA ANITA OPERATING CO DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q 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 THE MEDITRUST COMPANIES FORM 10-Q INDEX
PAGE(S) 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
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE MEDITRUST COMPANIES COMBINED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 ------------------------- (unaudited) 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 =========== ===========
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 THE MEDITRUST COMPANIES COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 --------------------- 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 ========= =========
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 THE MEDITRUST COMPANIES COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS) 2000 1999 --------------------- 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 ========= =========
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 MEDITRUST CORPORATION CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 --------------------------------- (unaudited) 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 =========== ===========
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 MEDITRUST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 ---------------------- 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 ========= =========
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 MEDITRUST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS) 2000 1999 ---------------------- 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 ========= =========
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 MEDITRUST OPERATING COMPANY CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 ------------------------- (unaudited) 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 ========= =========
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 MEDITRUST OPERATING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 ---------------------- 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) ========= =========
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 MEDITRUST OPERATING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 ------------------------- 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 ======= ========
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 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 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:
THREE MONTHS ENDED MARCH 31, --------------------------- (IN THOUSANDS) 2000 1999 --------------------------- 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
MEDITRUST CORPORATION:
THREE MONTHS ENDED MARCH 31, --------------------------- (IN THOUSANDS) 2000 1999 --------------------------- 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
MEDITRUST OPERATING COMPANY:
THREE MONTHS ENDED MARCH 31, -------------------------------- (IN THOUSANDS) 2000 1999 ------------------------------- Interest paid during the period ................................................... $ 209 $ 110 Interest capitalized during the period ............................................ 98 --
11 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:
MARCH 31, DECEMBER 31, ------------------------------- (IN THOUSANDS) 2000 1999 ------------------------------- 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 ========== ==========
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 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
% of % of Invested Entire # of Healthcare Portfolio by Operator (in thousands) Portfolio Properties Portfolio -------------- --------- ---------- --------- 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 ========================================
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 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 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):
THREE MONTHS ENDED MARCH 31, ------------------------ (IN THOUSANDS) 2000 1999 ------------------------ 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 ========================
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 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 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:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS ENDED MARCH 31, -------------------------- 2000 1999 --------------------------- 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 ======== ========
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:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS ENDED MARCH 31, --------------------------- 2000 1999 --------------------------- 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 ======== ========
17 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:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS ENDED MARCH 31, ---------------------------- 2000 1999 ---------------------------- 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) ======== ========
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 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 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.
THREE MONTHS ENDED MARCH 31, ---------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2000 1999 ---------------------------- 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 ======== ========
(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 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 - - 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 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 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 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 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 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:
% of % of Invested Entire # of Healthcare Portfolio by Operator (in thousands) Portfolio Properties Portfolio -------------- --------- ---------- --------- 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 ========================================
27 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 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.
Combined funds from operations Three months ended March 31, (In thousands) 2000 1999 ---------------------------- 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
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 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 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 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 approximately 20.6% of the total real estate investments, or 47.0% of the Healthcare Portfolio. A schedule of significant healthcare operators follows:
% of % of Invested Entire # of Healthcare Portfolio by Operator (in thousands) Portfolio Properties Portfolio -------------- --------- ---------- ---------- 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 ========================================
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 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 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 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 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 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 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
EXHIBIT NO. DESCRIPTION - ----------- ----------- 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).
(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 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 EX-10.2 2 EXHIBIT 10.2 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 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 2 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. 3 (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 4 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; 5 (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 6 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 7 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 8 (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: 9 (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; 10 (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 11 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. 12 (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 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 (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 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 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 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 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 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 EX-27.1 3 EXHIBIT 27.1
5 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. 0000314661 MEDITRUST CORPORATION 1,000 U.S. DOLLARS 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1 10,316 0 114,139 0 0 0 3,650,714 322,536 5,113,052 0 2,413,948 0 70 3,602,501 (968,543) 5,113,052 0 140,535 0 0 0 0 55,125 17,097 0 17,097 0 1,394 0 18,491 0.10 0.10
EX-27.2 4 EXHIBIT 27.2
5 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. 0000313749 MEDITRUST OPERATING COMPANY 1,000 U.S. DOLLARS 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1 1,241 0 22,017 0 0 36,130 56,401 4,071 161,858 115,023 0 0 0 118,941 (66,556) 161,858 0 148,107 0 71,465 0 0 252 (6,815) 0 (6,815) 0 0 0 (6,815) (.05) (.05)
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