-----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, CeJn/ePXY0D/bUZzwhtAv5wFedIx/51nYBC6L9PRGzBcffF+9C/0QPSD0/Pv2on9 J18biyVPM+kuqh7Vzi6+vA== 0000912057-99-005412.txt : 19991115 0000912057-99-005412.hdr.sgml : 19991115 ACCESSION NUMBER: 0000912057-99-005412 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99750854 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: 99750855 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 September 30, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 0-9109 Commission file number 0-9110 MEDITRUST CORPORATION MEDITRUST OPERATING COMPANY (Exact name of registrant as specified (Exact name of registrant as specified in its charter) in its charter) DELAWARE DELAWARE (State or other jurisdiction of (State or other jurisdiction of incorporation or organization) incorporation or organization) 95-3520818 95-3419438 (I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.) 197 FIRST AVENUE, SUITE 300 197 FIRST AVENUE, SUITE 100 NEEDHAM HEIGHTS, MASSACHUSETTS 02494-9127 NEEDHAM HEIGHTS, MASSACHUSETTS 02494-9127 (Address of principal executive (Address of principal executive offices including zip code) offices including zip code) (781) 433-6000 (781) 453-8062 (Registrant's telephone number, (Registrant's telephone number, including area code) including area code)
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares outstanding of each of the issuers' classes of common stock, as of the close of business on November 1, 1999 were: Meditrust Corporation: 142,320,378 Meditrust Operating Company: 141,015,001 THE MEDITRUST COMPANIES FORM 10-Q INDEX
PAGE(S) Part I. Item 1. Financial Information THE MEDITRUST COMPANIES Combined Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998 1 Combined Consolidated Statements of Operations for the three months ended September 30, 1999 (unaudited) and 1998 (unaudited) 2 Combined Consolidated Statements of Operations for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited) 3 Combined Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited) 4 MEDITRUST CORPORATION Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998 5 Consolidated Statements of Operations for the three months ended September 30, 1999 (unaudited) and 1998 (unaudited) 6 Consolidated Statements of Operations for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited) 7 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited) 8 MEDITRUST OPERATING COMPANY Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998 9 Consolidated Statements of Operations for the three months ended September 30, 1999 (unaudited) and 1998 (unaudited) 10 Consolidated Statements of Operations for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited) 11 Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 (unaudited) and 1998 (unaudited) 12 Notes to Combined Consolidated Financial Statements (unaudited) 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 26 Part II. Other Information Item 4. Submission of Matters to a Vote of Securityholders 45 Item 6. Exhibits and Reports on Form 8-K 45 Signatures 47
ITEM I. FINANCIAL INFORMATION THE MEDITRUST COMPANIES COMBINED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 -------------------------------------- (unaudited) ASSETS Real estate investments, net $ 4,907,303 $ 5,086,736 Cash and cash equivalents 12,374 305,456 Fees, interest and other receivables 58,739 54,712 Goodwill, net 469,015 486,051 Net assets of discontinued operations - 305,416 Other assets, net 238,085 221,180 -------------------------------------- Total assets $ 5,685,516 $ 6,459,551 -------------------------------------- -------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Indebtedness: Notes payable, net $ 1,144,131 $ 1,155,837 Convertible debentures, net 185,365 185,013 Bank notes payable, net 1,261,485 1,831,336 Bonds and mortgages payable, net 116,903 129,536 -------------------------------------- Total indebtedness 2,707,884 3,301,722 Accounts payable, accrued expenses and other liabilities 198,456 206,901 -------------------------------------- Total liabilities 2,906,340 3,508,623 -------------------------------------- Commitments and contingencies - - Shareholders' equity: Meditrust Corporation Series A Preferred Stock, $.10 par value; 6,000 shares authorized; 700 shares issued and outstanding at September 30, 1999 and December 31, 1998; stated liquidation preference of $250 per share 70 70 Paired Common Stock, $.20 combined par value; 500,000 shares authorized; 141,112 and 149,326 paired shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively (including treasury shares at December 31, 1998) 28,222 29,865 Additional paid-in-capital 3,630,813 3,891,987 Treasury stock at cost, 1,635 paired common shares at December 31, 1998 - (163,326) Unearned compensation (8,374) (6,718) Accumulated other comprehensive income 25,325 16,971 Distributions in excess of net income (896,880) (817,921) -------------------------------------- Total shareholders' equity 2,779,176 2,950,928 -------------------------------------- Total liabilities and shareholders' equity $ 5,685,516 $ 6,459,551 -------------------------------------- --------------------------------------
The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 1 THE MEDITRUST COMPANIES COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 ----------------------------------- Revenue: Rental $ 40,198 $ 48,877 Interest 34,333 41,033 Hotel 160,297 126,292 Other 894 - ----------------------------------- 235,722 216,202 ----------------------------------- Expenses: Interest 59,256 57,723 Depreciation and amortization 33,277 30,782 Amortization of goodwill 5,099 4,516 General and administrative 6,522 10,345 Hotel operations 75,047 55,029 Rental property operations 9,151 7,119 Loss on securities held for sale - 3,620 Gain on sale of assets (179) - Income from unconsolidated joint venture and minority interests - (243) Other 1,025 66,941 ----------------------------------- 189,198 235,832 ----------------------------------- Income (loss) from continuing operations before benefit for income taxes 46,524 (19,630) Income tax benefit (135) (1,064) ----------------------------------- Income (loss) from continuing operations 46,659 (18,566) Discontinued operations: Income from operations, net - 969 Provision for loss on disposition - (177,194) Gain (loss adjustment) on disposal of Santa Anita, net 1,086 - Gain (loss adjustment) on disposal of Cobblestone Golf Group, net 15,558 - ----------------------------------- Net income (loss) 63,303 (194,791) Preferred stock dividends (3,938) (3,893) ----------------------------------- Net income (loss) available to Paired Common shareholders $ 59,365 $ (198,684) =================================== Basic earnings per Paired Common Share: Income (loss) from continuing operations $ .30 $ (.16) Discontinued operations .12 (1.26) ----------------------------------- Net income (loss) $ .42 $ (1.42) =================================== Diluted earnings per Paired Common Share: Income (loss) from continuing operations $ .30 $ (.16) Discontinued operations .12 (1.26) ----------------------------------- Net income (loss) $ .42 $ (1.42) ===================================
The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 2 THE MEDITRUST COMPANIES COMBINED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 ----------------------------------- Revenue: Rental $ 125,719 $ 141,936 Interest 104,166 118,179 Hotel 471,105 126,292 Other 1,750 26,000 ----------------------------------- 702,740 412,407 ----------------------------------- Expenses: Interest 184,599 107,835 Depreciation and amortization 101,359 51,327 Amortization of goodwill 15,946 7,670 General and administrative 24,440 18,652 Hotel operations 213,090 55,029 Rental property operations 26,872 9,841 Loss on securities held for sale - 3,620 Gain on sale of assets (12,463) - Income from unconsolidated joint venture and minority interests - (691) Other 40,228 88,482 ----------------------------------- 594,071 341,765 ----------------------------------- Income from continuing operations before benefit for income taxes 108,669 70,642 Income tax benefit (508) (1,064) ----------------------------------- Income from continuing operations 109,177 71,706 Discontinued operations: Income from operations, net - 10,721 Provision for loss on disposition - (177,194) Gain (loss adjustment) on disposal of Santa Anita, net 2,961 - Gain (loss adjustment) on disposal of Cobblestone Golf Group, net 18,552 - ----------------------------------- Net income (loss) 130,690 (94,767) Preferred stock dividends (11,814) (4,506) ----------------------------------- Net income (loss) available to Paired Common shareholders $ 118,876 $ (99,273) =================================== Basic earnings per Paired Common Share: Income from continuing operations $ .68 $ .61 Discontinued operations .15 (1.51) ----------------------------------- Net income (loss) $ .83 $ (.90) =================================== Diluted earnings per Paired Common Share: Income from continuing operations $ .68 $ .58 Discontinued operations .15 (1.44) ----------------------------------- Net income (loss) $ .83 $ (.86) ===================================
The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 3 THE MEDITRUST COMPANIES COMBINED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(IN THOUSANDS) 1999 1998 ------------------------------------- Cash Flows from Operating Activities: Net income (loss) $ 130,690 $ (94,767) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation of real estate 94,062 55,593 Goodwill amortization 15,946 10,231 Gain on sale of assets and disposal of discontinued operations (33,976) - Shares issued for compensation 133 398 Equity in income of joint venture, net of dividends received - 976 Other depreciation, amortization and other items, net 25,488 15,318 Other non cash items 5,520 256,203 ------------------------------------- Cash Flows from Operating Activities Available for Distribution 237,863 243,952 Net change in other assets and liabilities of discontinued operations (4,227) (4,314) Net change in other assets and liabilities (65,639) (180,844) ------------------------------------- Net cash provided by operating activities 167,997 58,794 ------------------------------------- Cash Flows from Financing Activities: Proceeds from issuance of paired common and Realty preferred stock - 456,713 Purchase of treasury stock (103,269) - Proceeds from borrowings on bank notes payable 871,000 2,420,000 Repayment of bank notes payable (1,453,911) (730,000) Repayment of notes payable (12,500) (220,000) Equity offering and debt issuance costs (1,137) (47,337) Principal payments on bonds and mortgages payable (12,416) (10,016) Dividends to shareholders (209,648) (347,278) Proceeds from exercise of stock options 318 4,874 ------------------------------------- Net cash provided by (used in ) financing activities (921,563) 1,526,956 ------------------------------------- Cash Flows from Investing Activities: Acquisition of real estate and development funding (117,464) (538,597) Investment in real estate mortgages and development funding (30,797) (176,699) Prepayment proceeds and principal payments received on real estate mortgages 99,221 280,199 Net proceeds from sale of assets 507,450 7,671 Acquisition of Cobblestone - (178,523) Acquisition of La Quinta - (956,054) Cash acquired in Cobblestone merger - 723 Cash acquired in La Quinta merger - 18,004 Working capital and notes receivable advances, net of repayments and collections, and other items 2,074 1,271 Investment in equity securities - (30,222) ------------------------------------- Net cash provided by (used in) investing activities 460,484 (1,572,227) ------------------------------------- Net increase (decrease) in cash and cash equivalents (293,082) 13,523 Cash and cash equivalents at: Beginning of period 305,456 43,732 ===================================== End of period $ 12,374 $ 57,255 ===================================== Supplemental disclosure of cash flow information (Note 2)
The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K and for the year ended December 31, 1998, are an integral part of these financial statements. 4 MEDITRUST CORPORATION CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 ------------------------------------------- (Unaudited) ASSETS Real estate investments, net $ 4,887,172 $ 5,067,217 Cash and cash equivalents 11,099 292,694 Fees, interest and other receivables 37,045 42,039 Goodwill, net 439,387 451,672 Net assets of discontinued operations - 280,330 Other assets, net 194,912 187,033 ------------------------------------------- Total assets $ 5,569,615 $ 6,320,985 =========================================== LIABILITIES AND SHAREHOLDERS' EQUITY Indebtedness: Notes payable, net $ 1,144,131 $ 1,155,837 Convertible debentures, net 185,365 185,013 Bank notes payable, net 1,261,485 1,831,336 Bonds and mortgages payable, net 116,903 129,536 ------------------------------------------- Total indebtedness 2,707,884 3,301,722 ------------------------------------------- Due to (from) Meditrust Operating Company (11,207) 29,169 Accounts payable, accrued expenses and other liabilities 132,034 116,741 ------------------------------------------- Total liabilities 2,828,711 3,447,632 ------------------------------------------- Commitments and contingencies - - Shareholders' equity: Series A Preferred Stock, $.10 par value; 6,000 shares authorized; 700 shares issued and outstanding at September 30, 1999 and December 31, 1998; stated liquidation preference of $250 per share 70 70 Common Stock, $.10 par value; 500,000 shares authorized;142,417 and 150,631 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively (including treasury shares at December 31, 1998) 14,242 15,063 Additional paid-in-capital 3,563,430 3,820,436 Treasury stock at cost, 1,635 common shares at December 31, 1998 - (160,223) Unearned compensation (6,335) (6,718) Accumulated other comprehensive income 25,325 16,971 Distributions in excess of net income (840,492) (799,118) ------------------------------------------- 2,756,240 2,886,481 Due from Meditrust Operating Company (2,208) - Note receivable - Meditrust Operating Company (13,128) (13,128) ------------------------------------------- Total shareholders' equity 2,740,904 2,873,353 ------------------------------------------- Total liabilities and shareholders' equity $ 5,569,615 $ 6,320,985 ===========================================
The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 5 MEDITRUST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 --------------------------------- Revenue: Rental $ 40,198 $ 48,877 Interest 34,310 40,842 Rent from Meditrust Operating Company 73,279 63,497 Interest from Meditrust Operating Company - 215 Royalty from Meditrust Operating Company 3,917 3,111 Hotel operating revenue 3,078 2,862 Other 894 - --------------------------------- 155,676 159,404 --------------------------------- Expenses: Interest 59,245 57,692 Interest to Meditrust Operating Company 224 - Depreciation and amortization 31,425 28,928 Amortization of goodwill 4,989 4,315 General and administrative 2,364 5,806 Hotel operations 1,512 1,113 Rental property operations 9,151 7,119 Loss on securities held for sale - 3,620 Gain on sale of assets (179) - Income from unconsolidated joint venture and minority interests - (243) Other 7 65,000 --------------------------------- 108,738 173,350 --------------------------------- Income (loss) from continuing operations 46,938 (13,946) Discontinued operations: Income from operations, net - 3,535 Provision for loss on disposition - (172,694) Gain (loss adjustment) on disposal of Cobblestone Golf Group, net 16,282 - --------------------------------- Net income (loss) 63,220 (183,105) Preferred stock dividends (3,938) (3,893) --------------------------------- Net income (loss) available to Common shareholders $ 59,282 $ (186,998) --------------------------------- --------------------------------- Basic earnings per Common Share: Income (loss) from continuing operations $ .30 $ (.13) Discontinued operations .12 (1.19) --------------------------------- Net income (loss) $ .42 $ (1.32) --------------------------------- --------------------------------- Diluted earnings per Common Share: Income (loss) from continuing operations $ .30 $ (.13) Discontinued operations .12 (1.19) --------------------------------- Net income (loss) $ .42 $ (1.32) --------------------------------- ---------------------------------
The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 6 MEDITRUST CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 --------------------------------- Revenue: Rental $ 125,719 $ 141,871 Interest 104,081 117,800 Rent from Meditrust Operating Company 218,849 63,562 Interest from Meditrust Operating Company - 639 Royalty from Meditrust Operating Company 11,507 3,111 Hotel operating revenue 9,435 2,862 Other 1,750 26,000 --------------------------------- 471,341 355,845 --------------------------------- Expenses: Interest 184,446 107,804 Interest to Meditrust Operating Company 1,813 - Depreciation and amortization 95,693 49,473 Amortization of goodwill 15,394 7,066 General and administrative 11,513 12,874 Hotel operations 3,462 1,113 Rental property operations 26,872 9,841 Loss on securities held for sale - 3,620 Gain on sale of assets (12,463) - Income from unconsolidated joint venture and minority interests - (691) Other 8,712 86,541 --------------------------------- 335,442 277,641 --------------------------------- Income from continuing operations 135,899 78,204 Discontinued operations: Income from operations, net - 14,635 Provision for loss on disposition - (172,694) Gain (loss adjustment) on disposal of Santa Anita, net 6,655 - Gain (loss adjustment) on disposal of Cobblestone Golf Group, net 25,721 - --------------------------------- Net income (loss) 168,275 (79,855) Preferred stock dividends (11,814) (4,506) --------------------------------- Net income (loss) available to Common shareholders $ 156,461 $ (84,361) --------------------------------- --------------------------------- Basic earnings per Common Share: Income from continuing operations $ .86 $ .66 Discontinued operations .22 (1.41) --------------------------------- Net income (loss) $ 1.08 $ (.75) --------------------------------- --------------------------------- Diluted earnings per Common Share: Income from continuing operations $ .86 $ .63 Discontinued operations .22 (1.35) --------------------------------- Net income (loss) $ 1.08 $ (.72) --------------------------------- ---------------------------------
The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 7 MEDITRUST CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(IN THOUSANDS) 1999 1998 ------------------ ------------------- Cash Flows from Operating Activities: Net income (loss) $ 168,275 $ (79,855) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation of real estate 91,770 53,111 Goodwill amortization 15,394 9,627 Gain on sale of assets and disposal of discontinued operations (44,839) - Shares issued for compensation 107 356 Equity in income of joint venture, net of dividends received - 976 Other depreciation, amortization and other items, net 20,109 12,389 Other non cash items (3,357) 246,467 ------------------ ------------------- Cash Flows from Operating Activities Available for Distribution 247,459 243,071 Net change in other assets and liabilities (48,999) (178,728) ------------------ ------------------- Net cash provided by operating activities 198,460 64,343 ------------------ ------------------- Cash Flows from Financing Activities: Proceeds from issuance of common stock and preferred stock - 447,044 Purchase of treasury stock (101,303) - Proceeds from borrowings on bank notes payable 871,000 2,420,000 Repayment of bank notes payable (1,453,911) (730,000) Repayment of notes payable (12,500) (220,000) Equity offering and debt issuance costs (1,137) (47,232) Interentity lending, net 4,216 5,500 Principal payments on bonds and mortgages payable (12,416) (10,016) Dividends to shareholders (209,648) (347,278) Proceeds from exercise of stock options 312 4,781 ------------------ ------------------- Net cash provided by (used in) financing activities (915,387) 1,522,799 ------------------ ------------------- Cash Flows from Investing Activities: Acquisition of real estate and development funding (116,353) (538,597) Investment in real estate mortgages and development funding (30,797) (176,699) Prepayment proceeds and principal payments received on real estate mortgages 99,221 280,199 Net proceeds from sale of real estate 481,187 7,671 Acquisition of Cobblestone - (178,523) Acquisition of La Quinta - (956,054) Cash acquired from Cobblestone merger - 723 Cash acquired from La Quinta merger - 18,004 Working capital and notes receivable advances, net of repayments and collections, and other items 2,074 1,271 Investment in equity securities - (30,222) ------------------ ------------------- Net cash provided by (used in) investing activities 435,332 (1,572,227) ------------------ ------------------- Net increase (decrease) in cash and cash equivalents (281,595) 14,915 Cash and cash equivalents at: Beginning of period 292,694 24,059 ------------------ ------------------- End of period $ 11,099 $ 38,974 ------------------ ------------------- ------------------ -------------------
Supplemental disclosure of cash flow information (Note 2) The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 8 MEDITRUST OPERATING COMPANY CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 ------------------------------------- (unaudited) ASSETS Cash and cash equivalents $ 1,275 $12,762 Fees, interest and other receivables 21,694 12,673 Due from Meditrust Corporation - 46,874 Other current assets, net 9,839 10,423 ------------------------------------- Total current assets 32,808 82,732 Investment in common stock of Meditrust Corporation 37,581 37,581 Goodwill, net 29,628 34,379 Property, plant and equipment, less accumulated depreciation of $2,344 and $760, respectively 44,739 30,895 Other non-current assets 8,726 12,603 ------------------------------------- Total assets $ 153,482 $198,190 ------------------------------------- ------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable $ 25,608 $18,349 Accrued payroll and employee benefits 25,881 33,457 Accrued expenses and other current liabilities 10,287 30,980 Due to Meditrust Corporation 36,974 - ------------------------------------- Total current liabilities 98,750 82,786 Note payable to Meditrust Corporation 13,128 13,128 Other non-current liabilities 4,646 7,629 Net liabilities of discontinued operations - 16,140 ------------------------------------- Total liabilities 116,524 119,683 ------------------------------------- Commitments and contingencies - Shareholders' equity: Common Stock, $.10 par value; 500,000 shares authorized; 141,112 and 149,326 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively (including treasury shares at December 31, 1998) 14,111 14,933 Additional paid-in-capital 104,833 109,001 Unearned compensation (2,039) - Treasury stock at cost, 1,635 common shares at December 31, 1998 - (3,103) Retained earnings (deficit) (56,388) (18,803) ------------------------------------- 60,517 102,028 Due from Meditrust Corporation (23,559) (23,521) ------------------------------------- Total shareholders' equity 36,958 78,507 ------------------------------------- Total liabilities and shareholders' equity $ 153,482 $198,190 ------------------------------------- -------------------------------------
The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 9 MEDITRUST OPERATING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 --------------------------------------- Revenue: Hotel $ 157,219 $123,430 Interest 23 191 Interest from Meditrust Corporation 224 - --------------------------------------- 157,466 123,621 --------------------------------------- Expenses: Hotel operations 73,535 53,916 Depreciation and amortization 1,852 1,854 Amortization of goodwill 110 201 Interest and other 11 31 Interest to Meditrust Corporation - 215 General and administrative 4,158 4,539 Royalty to Meditrust Corporation 3,917 3,111 Rent to Meditrust Corporation 73,279 63,497 Other 1,018 1,941 --------------------------------------- 157,880 129,305 --------------------------------------- Loss from continuing operations before benefit for income taxes (414) (5,684) Income tax benefit (135) (1,064) --------------------------------------- Loss from continuing operations (279) (4,620) Discontinued operations: Loss from operations, net - (2,566) Provision for loss on disposition - (4,500) Gain (loss adjustment) on disposal of Santa Anita, net 1,086 - Loss adjustment on disposal of Cobblestone Golf Group, net (724) - --------------------------------------- --------------------------------------- Net income (loss) $ 83 $(11,686) --------------------------------------- --------------------------------------- Basic earnings per Common Share: Loss from continuing operations $ (.00) $ (.03) Discontinued operations .00 (.05) --------------------------------------- Net income (loss) $ .00 $ (.08) --------------------------------------- --------------------------------------- Diluted earnings per Common Share: Loss from continuing operations $ (.00) $ (.03) Discontinued operations .00 (.05) --------------------------------------- Net income (loss) $ .00 $ (.08) --------------------------------------- ---------------------------------------
The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 10 MEDITRUST OPERATING COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 --------------------------------------- Revenue: Hotel $ 461,670 $ 123,430 Interest 85 444 Interest from Meditrust Corporation 1,813 - --------------------------------------- 463,568 123,874 --------------------------------------- Expenses: Hotel operations 209,628 53,916 Depreciation and amortization 5,666 1,854 Amortization of goodwill 552 604 Interest and other 153 31 Interest to Meditrust Corporation - 639 General and administrative 12,927 5,778 Royalty to Meditrust Corporation 11,507 3,111 Rent to Meditrust Corporation 218,849 63,562 Other 31,516 1,941 --------------------------------------- 490,798 131,436 --------------------------------------- Loss from continuing operations before benefit for income taxes (27,230) (7,562) Income tax benefit (508) (1,064) --------------------------------------- Loss from continuing operations (26,722) (6,498) Discontinued operations: Loss from operations, net - (3,914) Provision for loss on disposition - (4,500) Loss adjustment on disposal of Santa Anita, net (3,694) - Loss adjustment on disposal of Cobblestone Golf Group, net (7,169) - --------------------------------------- Net loss $ (37,585) $ (14,912) --------------------------------------- --------------------------------------- Basic earnings per Common Share: Loss from continuing operations $ (.19) $ (.06) Discontinued operations (.07) (.07) --------------------------------------- Net loss $ (.26) $ (.13) --------------------------------------- --------------------------------------- Diluted earnings per Common Share: Loss from continuing operations $ (.19) $ (.06) Discontinued operations (.07) (.07) --------------------------------------- Net loss $ (.26) $ (.13) --------------------------------------- ---------------------------------------
The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 11 MEDITRUST OPERATING COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 ----------------------------------- Cash Flows from Operating Activities: Net loss $ (37,585) $ (14,912) Adjustment to reconcile net loss to cash used in operating activities: Goodwill amortization 552 604 Loss on sale of assets and disposal of discontinued operations 10,863 - Shares issued for compensation 26 42 Other depreciation and amortization 7,671 5,411 Other items 8,877 9,736 Net change in other assets and liabilities of discontinued operations (4,227) (4,314) Net change in other assets and liabilities (16,640) (2,116) ----------------------------------- Net cash used in operating activities (30,463) (5,549) ----------------------------------- Cash Flows from Financing Activities: Proceeds from issuance of common stock - 9,669 Purchase of treasury stock (1,966) - Equity offering costs - (105) Interentity lending, net (4,216) (5,500) Proceeds from stock option exercises 6 93 ----------------------------------- Net cash provided by (used in) financing activities (6,176) 4,157 ----------------------------------- Cash Flows from Investing Activities: Capital improvements to real estate (1,111) - Net proceeds from sale of assets 26,263 - ----------------------------------- Net cash provided by investing activities 25,152 - ----------------------------------- Net decrease in cash and cash equivalents (11,487) (1,392) Cash and cash equivalents at: Beginning of period 12,762 19,673 ----------------------------------- End of period $ 1,275 $ 18,281 ----------------------------------- -----------------------------------
Supplemental disclosure of cash flow information (Note 2) The accompanying notes, together with the Notes to the Combined Consolidated Financial Statements contained within the Companies' Form 10-K for the year ended December 31, 1998, are an integral part of these financial statements. 12 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted in this Form 10-Q in accordance with the Rules and Regulations of the Securities and Exchange Commission. The accompanying unaudited combined consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position as of September 30, 1999 and the results of operations for each of the three and nine month periods ended September 30, 1999 and 1998 and cash flows for each of the nine month periods ended September 30, 1999 and 1998. The results of operations for the nine month period ended September 30, 1999 are not necessarily indicative of the results which may be expected for any other interim period or for the entire year. In the opinion of Meditrust Corporation ("Realty") and Meditrust Operating Company and subsidiaries ("Operating Company" or "Operating" and collectively with Realty the "Companies" or "The Meditrust Companies"), the disclosures contained in this Form 10-Q are adequate to make the information presented not misleading. See the Companies' Joint Annual Report on Form 10-K for the year ended December 31, 1998 for additional information relevant to significant accounting policies followed by the Companies. BASIS OF PRESENTATION AND CONSOLIDATION Separate financial statements have been presented for Realty and for Operating Company. Combined Realty and Operating Company financial statements have been presented as The Meditrust Companies. All significant intercompany and inter-entity balances and transactions have been eliminated in combination. The Meditrust Companies and Realty use an unclassified balance sheet presentation. The consolidated financial statements of Realty and Operating Company include the accounts of the respective entity and its majority-owned subsidiaries, including unincorporated partnerships and joint ventures, after the elimination of all significant intercompany accounts and transactions. On July 17, 1998, Realty acquired La Quinta Inns, Inc. and its subsidiaries (all wholly owned) and its unincorporated partnership and joint venture ("La Quinta", "The La Quinta Merger"). La Quinta is a fully-integrated lodging company that focuses on the ownership, operation and development of hotels. As of September 30, 1999, the portfolio of hotels operated under the La Quinta name included 302 operating hotels with approximately 39,000 rooms located in the western and southern regions of the United States. The La Quinta Merger was accounted for under the purchase method of accounting. Accordingly, the financial statements, including the results of operations and cash flows, do not include the operations of La Quinta prior to July 17, 1998. On November 11, 1998, the Boards of Directors of Realty and Operating Company approved a comprehensive restructuring plan (the "Plan") designed to strengthen the Companies' financial position and clarify their investment and operating strategy by focusing on the healthcare and lodging businesses. Significant components of the Plan included selling more than $1,000,000,000 of non-strategic assets, including their portfolio of golf-related real estate and operating properties ("Cobblestone Golf Group"), the Santa Anita Racetrack and adjacent property, and approximately $550,000,000 of non-strategic healthcare properties. As a result of the Plan, the Companies have reflected the Cobblestone Golf Group and Santa Anita Racetrack as discontinued operations and certain healthcare properties as assets held for sale, in the accompanying financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. RECLASSIFICATION Certain reclassifications have been made to the 1998 presentation to conform to the 1999 presentation. 13 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2. SUPPLEMENTAL CASH FLOW INFORMATION Details of interest and income taxes paid and non-cash investing and financing transactions follow: THE MEDITRUST COMPANIES:
NINE MONTHS ENDED SEPTEMBER 30, ------------------ ---------------- 1999 1998 ------------------ ---------------- (IN THOUSANDS) Interest paid during the period $ 207,415 $ 122,628 Interest capitalized during the period 6,284 8,434 Non-cash investing and financing transactions: Value of real estate acquired (sold): Land and buildings - 4,059 Retirements and write-offs of project costs (7,722) - Accumulated depreciation of buildings sold 17,570 6,256 Debt assumed by buyer of Cobblestone Golf Group 5,637 - Increase (reduction) in real estate mortgages net of participation reduction 373 (31,540) Change in market value of equity securities in excess of cost 8,354 17,097 Value of shares issued for conversion of debentures - 7,167
MEDITRUST CORPORATION:
NINE MONTHS ENDED SEPTEMBER 30, ------------------ ----------------- 1999 1998 ------------------ ----------------- Interest paid during the period $ 206,810 $ 122,410 Interest capitalized during the period 5,832 8,434 Non-cash investing and financing transactions: Value of real estate acquired (sold): Land and buildings - 4,059 Retirements and write-offs of project costs (7,722) - Accumulated depreciation of buildings sold 17,570 6,256 Debt assumed by buyer of Cobblestone Golf Group 5,637 - Increase (reduction) in real estate mortgages net of participation reduction 373 (31,540) Change in market value of equity securities in excess of cost 8,354 17,097 Value of shares issued for conversion of debentures - 7,031
MEDITRUST OPERATING COMPANY:
NINE MONTHS ENDED SEPTEMBER 30, ------------------ ---------------- 1999 1998 ------------------ ---------------- (IN THOUSANDS) Interest paid during the period $ 605 $ 271 Interest capitalized during the period 452 - Non-cash investing and financing transactions: Value of shares issued for conversion of debentures - 136
14 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. DISCONTINUED OPERATIONS On December 10, 1998, the Companies sold certain assets, leases, and licenses used in connection with the horseracing business conducted at Santa Anita Racetrack and recorded an estimated loss on sale of $67,913,000 for the year ended December 31, 1998. During the nine months ended September 30, 1999, the Companies recorded an adjustment of $2,961,000. This change in the previously reported estimated loss on disposal resulted from working capital purchase price adjustments and differences to estimated costs of sale. The Companies recorded a provision for loss on the disposition of Cobblestone Golf Group of approximately $237,035,000, which included estimated income taxes of $56,848,000, as of December 31, 1998, based upon the estimated proceeds to be realized upon sale. At December 31, 1998, the net assets subject to sale totaled $305,416,000 and were classified as net assets of discontinued operations on the combined consolidated balance sheet. During the nine months ended September 30, 1999, the Companies recorded a gain of $18,552,000 to adjust the estimated loss on disposal of the Cobblestone Golf Group. This change resulted from working capital purchase price adjustments, differences to estimated costs of sale and a revision to the estimated income tax provision for the disposal. Combined operating results of discontinued golf operations for the nine months ended September 30, 1999 (exclusive of any interest expense, depreciation and corporate charges) follow. Operating results arose from the period between January 1, 1999 and March 29, 1999:
COBBLESTONE GOLF GROUP ------------------ (IN THOUSANDS) Revenues $ 22,694 Operating expenses 20,536 ------------------ Contribution 2,158 Other expenses 6,260 ------------------ Income before income taxes (4,102) Income tax benefit - ------------------ Net income $ (4,102) ------------------ ------------------
4. REAL ESTATE INVESTMENTS The following is a summary of the Companies' real estate investments:
SEPTEMBER 30, DECEMBER 31, 1999 1998 ------------------------ ------------------- Land $ 474,873 $ 475,376 Buildings and improvements, net of accumulated depreciation and other provisions of $270,890 and $186,594 3,275,557 3,381,392 Real estate mortgages and loans receivable, net of a valuation allowance of $19,191 and $18,991 1,129,383 1,197,634 Assets held for sale, net of accumulated depreciation and other provisions of $36,369 and $41,562 27,490 32,334 ------------------------ ------------------- $ 4,907,303 $ 5,086,736 ------------------------ ------------------- ------------------------ -------------------
During the nine months ended September 30, 1999, the Companies provided net funding of $34,977,000 for ongoing construction of healthcare facilities committed to prior to 1999. The Companies also provided net funding of $72,946,000 for construction and capital improvements to hotels acquired in The La Quinta Merger, and net funding of approximately $9,541,000 for capital improvements to golf courses which were included in net assets of discontinued operations as of December 31, 1998 and subsequently sold on March 31, 1999. Also during the nine months ended September 30, 1999, Realty provided $30,797,000 for ongoing construction of mortgaged facilities already in the portfolio. 15 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 4. REAL ESTATE INVESTMENTS (CONTINUED) During the nine months ended September 30, 1999, Realty received net proceeds of $127,040,000 from the sale of one long-term care facility, one rehabilitation facility and 20 assisted living facilities. Realty realized a net gain on these sales of $12,463,000. In connection with these sales, $1,044,000 in lease breakage fees were received and have been included in other income in the consolidated statements of operations. Realty also received $4,306,000 from the sale of a hotel and land held for development. There was no gain or loss realized on these sales. On March 31, 1999, Realty sold 43 golf courses (or leasehold interests in golf courses) as part of the sale of Cobblestone Golf Group (See Note 3). These golf courses were included in net assets of discontinued operations as of December 31, 1998. During the nine months ended September 30, 1999, Realty received principal payments of $99,221,000 on real estate mortgages. Of this amount $90,714,000 represents payments in accordance with the Plan (see Note 1). In connection with these payments, Realty received $706,000 in prepayment fees which have been included in other income in the consolidated statements of operations. At September 30, 1999, Realty was committed to provide additional financing of approximately $50,000,000 relating to one long-term care facility and three assisted living facilities as well as additions to existing facilities in the portfolio. 5. INDEBTEDNESS On July 17, 1998, Realty entered into a credit agreement (the "Credit Agreement") which provided Realty with up to $2,250,000,000 in credit facilities, replacing Realty's then existing $365,000,000 revolving credit facilities. The Credit Agreement provided for borrowings in four separate tranches (each a "Tranche"): Tranche A, a $1,000,000,000 revolving loan, amounts of which if repaid may be reborrowed, which matures July 17, 2001; Tranche B, a term loan in the amount of $500,000,000, amounts of which if repaid may not be reborrowed, which 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 that was exercised in June, 1999; and Tranche D, a term loan in the amount of $500,000,000, amounts of which if repaid may not be reborrowed, which matures July 17, 2001. On November 23, 1998, Realty amended its Credit Agreement to provide for Realty's cash repayment of a portion of its Forward Equity Issuance Transaction ("FEIT"), the amendment of certain financial covenants to accommodate asset sales, to exclude the impact of non-recurring charges in certain covenant calculations, and to provide for future operating flexibility. The amendment also provided for an increase to the LIBOR pricing of the credit facility by approximately 125 basis points, and the pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock also extended on a pro rata basis to entitled bondholders. Realty also agreed to a 25 basis point increase to the LIBOR pricing in the event that an equity offering of at least $100,000,000 had not been completed by February 1, 1999. On February 1, 1999 this increase went into effect. On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that was scheduled to mature on April 17, 1999. On March 10, 1999, Realty reached a second agreement with its bank group to further amend the Credit Agreement. The second amendment, which was subject to the successful completion of the sale of Cobblestone Golf Group, provided for a portion of the sale proceeds to be applied to settle a portion of the FEIT. The second amendment also provided for, among other things, deletion of limitations on certain healthcare investments and lowering the Tranche A loan commitments to $850,000,000. On March 31, 1999, the Companies completed the sale of Cobblestone Golf Group. On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and cancelled a $250,000,000 swap contract. Both were scheduled to mature in July 1999. On August 16, 1999, Realty repaid $12,500,000 of its notes payable which matured on that date and bore interest at 7.25%. Of the $850,000,000 revolving tranche commitment, approximately $283,745,000 was available at September 30, 1999, carrying interest at Realty's option of the base rate (10.25%) or LIBOR plus 2.875% (8.25% weighted average rate at September 30, 1999). 16 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. INDEBTEDNESS (CONTINUED) During July 1998, Realty entered into interest rate swap agreements to reduce the impact on interest expense of fluctuating interest rates on $1,250,000,000 of its Credit Agreement. Realty agreed with the counterparty to exchange, on a monthly basis, the difference between Realty's fixed pay rate and the counterparty's variable pay rate of one month LIBOR. During January and April 1999, Realty cancelled two $250,000,000 contracts from the interest rate swap agreement in connection with the repayments described above. At September 30, 1999, Realty was a fixed rate payor of approximately 5.7% and received a variable rate of approximately 5.3%. Differentials in the swapped amounts are recorded as adjustments to interest expense of Realty. 6. SHAREHOLDERS' EQUITY On March 10, 1999, the Companies entered into an agreement with Merrill Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc. (collectively with its agent and successor in interest, "MLI") and certain of its affiliates to use the proceeds from the sale of the Cobblestone Golf Group in excess of $300,000,000 to repurchase all or a portion of the remaining paired common shares outstanding under the FEIT. MLI agreed not to sell any shares of the remaining paired common shares until March 31, 1999, while the Companies completed the sale of Cobblestone Golf Group. On March 31, 1999, the Companies completed the sale of Cobblestone Golf Group and on April 1, 1999, the Companies settled the FEIT by paying MLI approximately $89,840,000. MLI returned approximately 6,865,000 paired common shares representing all of the remaining outstanding paired common shares under the FEIT on that date. As of September 30, 1999, the following classes of Preferred Stock, Excess Stock and Series Common Stock were authorized; no shares were issued or outstanding at either September 30, 1999 or December 31, 1998: Meditrust Operating Company Preferred Stock $.10 par value; 6,000,000 shares authorized; Meditrust Corporation Excess Stock $.10 par value; 25,000,000 shares authorized; Meditrust Operating Company Excess Stock $.10 par value; 25,000,000 shares authorized; Meditrust Corporation Series Common Stock $.10 par value; 30,000,000 shares authorized; Meditrust Operating Company Series Common Stock $.10 par value; 30,000,000 shares authorized. During January and August 1999, 200,000 and 30,000 restricted shares, respectively, 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"). During July, 1999, 50,000 of these restricted shares were forfeited and thus cancelled and retired. Under the Share Award Plan participants are entitled to cash dividends and voting rights on their respective restricted shares. Restrictions generally limit the sale or transfer of shares during a restricted period, not exceeding eight years. Participants vest in the restricted shares granted on the earliest of eight years after the date of issuance, upon achieving the performance goals as defined, or as the Boards of Directors may determine. Unearned compensation was charged for the market value of the restricted shares on the date of grant and is being amortized over the restricted period. The unamortized unearned compensation value is shown as a reduction of shareholders' equity in the accompanying consolidated and combined consolidated balance sheets. 7. COMPREHENSIVE INCOME AND OTHER ASSETS As of September 30, 1999, Realty had invested approximately $57,204,000 in Nursing Home Properties Plc ("NHP Plc"), a property investment group which specializes in the financing, through sale leaseback transactions, of nursing homes located in the United Kingdom. The investment includes approximately 26,606,000 shares of NHP Plc, representing an ownership interest in NHP Plc of 19.99% of which Realty has voting rights with respect to 9.99%. The difference between the current market value and the cost, $25,209,000 is included in shareholders' equity in the accompanying balance sheet. 17 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. COMPREHENSIVE INCOME AND OTHER ASSETS (CONTINUED) As of September 30, 1999, Realty owns 331,000 shares of stock and warrants to purchase 755,000 shares of stock in Balanced Care Corporation ("BCC"), a healthcare operator that leases properties from and has mortgages payable to Realty. The stock and warrants have a current market value of $1,221,000. The difference between current market value and the cost of the BCC investment, $116,000, is included in shareholders' equity in the accompanying balance sheet. The following is a summary of the Companies' comprehensive income:
NINE MONTHS ENDED SEPTEMBER 30, -------------------- -------------------- 1999 1998 -------------------- -------------------- (IN THOUSANDS) Net income (loss) $ 130,690 $ (94,767) Other comprehensive income: Changes in market value of equity securities in excess of cost 8,354 17,097 -------------------- -------------------- Comprehensive income (loss) $ 139,044 $ (77,670) -------------------- -------------------- -------------------- --------------------
Other assets includes investments in NHP Plc and BCC, as well as La Quinta intangible assets, furniture, fixtures and equipment, and other receivables. 8. DISTRIBUTIONS PAID TO SHAREHOLDERS On February 16, 1999, Realty paid a dividend of $.46 per share of common stock to shareholders of record on January 29, 1999. On March 31, 1999, Realty paid a dividend of $.5625 per depository share of preferred stock to shareholders of record on March 15, 1999 of its 9.00% Series A cumulative redeemable preferred stock. On May 14, 1999, Realty paid a dividend of $0.46 per share of common stock to shareholders of record on April 30, 1999. On June 30, 1999, Realty paid a dividend of $0.5625 per depository share of preferred stock to holders of record on June 15, 1999 of its 9.00% Series A cumulative redeemable preferred stock. On August 16, 1999, Realty paid a dividend of $.46 per share of common stock to shareholders of record on July 30, 1999. On September 30, 1999, Realty paid a dividend of $.5625 per depository share of preferred stock to shareholders of record on September 15, 1999 of its 9.00% Series A cumulative redeemable preferred stock. 9. OTHER EXPENSES During the nine months ended September 30, 1999, the Companies recorded approximately $40,228,000 in other expenses. On May 10, 1999, The Meditrust Companies entered into a separation agreement with Abraham D. Gosman, former Director and Chairman of the Companies and Chief Executive Officer and Treasurer of Operating Company. Under the terms of the separation agreement, Mr. Gosman received severance payments totaling $25,000,000 in cash and the continuation of certain life insurance benefits. The Meditrust Companies established a Special Committee of The Boards of Directors of Realty and Operating Company (the "Special Committee") to evaluate the applicability of Mr. Gosman's employment contract and whether such severance or other payments were appropriate. Based on the results of the evaluation and recommendation of the Special Committee, the Boards of Directors concluded that the separation agreement was in the long-term best interest of the shareholders of the Companies and approved the separation agreement. The Companies incurred approximately $11,230,000 of costs ($1,025,000 in the third quarter) associated with the development and implementation of the Plan as well as a reorganization of the lodging division. These costs primarily relate to the early repayment and modification of certain debt, employee severance, advisory fees related to the Plan, and other professional fees related to the separation agreement with Mr. Gosman. Also, in conjunction with the implementation of the Plan, which included a change in the focus of the lodging division to internal growth, La Quinta management performed a review of the front desk system under development for its lodging facilities, and made a decision to abandon the project. The decision was based primarily on management's intent to integrate the front desk system with new revenue management software, availability of more suitable and flexible externally developed software and a shift in information systems philosophy toward implementation of externally developed software and outsourcing of related support 18 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. OTHER EXPENSES (CONTINUED) services. A charge of approximately $3,998,000 to write-off certain internal and external software development costs related to the project was recorded during the nine months ended September 30, 1999. 10. LA QUINTA MERGER On July 17, 1998, Realty completed its merger with La Quinta whereby La Quinta merged with and into Realty, with Realty as the surviving corporation. In conjunction with this merger, management committed to relocate certain functions of La Quinta. A provision of $10,100,000 was included in the acquisition costs as liabilities assumed. As of September 30, 1999 approximately $6,900,000 of this amount has been paid and charged against the liability. The following unaudited pro forma condensed combined consolidated results of operations of Realty and Operating Company have been prepared as if the La Quinta Merger had occurred on January 1, 1998.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS ENDED, FOR THE NINE MONTHS ENDED, SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 --------------------------- -------------------------- Revenue $ 244,335 $ 725,135 Net income (loss) from continuing operations (15,033) 85,983 Basic earnings per paired common share from continuing operations (.08) $ .56 Weighted average paired common shares outstanding 183,594 154,079
The pro forma condensed combined consolidated results do not purport to be indicative of results that would have occurred had the La Quinta Merger been in effect for the periods presented, nor do they purport to be indicative of the results that will be obtained in the future. 11. EARNINGS PER SHARE COMBINED CONSOLIDATED EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS ENDED SEPTEMBER 30, ----------------- ----------------- 1999 1998 ----------------- ----------------- Income (loss) from continuing operations $ 46,659 $ (18,566) Preferred stock dividends (3,938) (3,893) ----------------- ----------------- Income (loss) from continuing operations available to common shareholders $ 42,721 $ (22,459) ----------------- ----------------- ----------------- ----------------- Average outstanding shares of paired common stock 141,100 140,314 Dilutive effect of: Contingently issuable shares - - Stock options - - ----------------- ----------------- Dilutive potential paired common stock 141,100 140,314 ----------------- ----------------- ----------------- ----------------- Earnings per share: Basic $ .30 $ (.16) ----------------- ----------------- ----------------- ----------------- Diluted $ .30 $ (.16) ----------------- ----------------- ----------------- -----------------
Options to purchase 4,768,000 and 3,851,000 paired common shares at prices ranging from $13.44 to $36.46 were outstanding during the three months ended September 30, 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the paired common shares. The options, which expire on dates ranging from December 1999 to December 2008, were still outstanding at September 30, 1999. Convertible debentures outstanding for the three months ended September 30, 1999 and 1998, representing 6,540,000 and 7,936,000, paired common shares, if converted, respectively, are not included in the computation of diluted EPS because the inclusion would result in an antidilutive effect. 19 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. EARNINGS PER SHARE (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ----------------- ----------------- 1999 1998 ----------------- ----------------- Income from continuing operations $ 109,177 $ 71,706 Preferred stock dividends (11,814) (4,506) ----------------- ----------------- Income from continuing operations available to common shareholders $ 97,363 $ 67,200 ================= ================= Average outstanding shares of paired common stock 143,379 110,799 Dilutive effect of: Contingently issuable shares - 4,982 Stock options - 186 ----------------- ----------------- Dilutive potential paired common stock 143,379 115,967 ================= ================= Earnings per share: Basic $ .68 $ .61 ================= ================= Diluted $ .68 $ .58 ================= =================
Options to purchase 4,768,000 and 3,738,000 paired common shares at prices ranging from $13.44 to $36.46 were outstanding during the nine months ended September 30, 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the paired common shares. The options, which expire on dates ranging from December 1999 to December 2008, were still outstanding at September 30, 1999. Convertible debentures outstanding for the nine months ended September 30, 1999 and 1998, representing 6,540,000 and 8,028,000, paired common shares, if converted, respectively, are not included in the computation of diluted EPS because the inclusion would result in an antidilutive effect. MEDITRUST CORPORATION EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS ENDED SEPTEMBER 30, --------------- ------------------ 1999 1998 --------------- ------------------ Income (loss) from continuing operations $ 46,938 $ (13,946) Preferred stock dividends (3,938) (3,893) --------------- ------------------ Income (loss) from continuing operations available to common shareholders $ 43,000 $ (17,839) =============== ================== Average outstanding shares of common stock 142,405 141,619 Dilutive effect of: Contingently issuable shares - - Stock options - - --------------- ------------------ Dilutive potential common stock 142,405 141,619 =============== ================== Earnings per share: Basic $ .30 $ (.13) =============== ================== Diluted $ .30 $ (.13) =============== ==================
Options to purchase 3,097,000 and 3,472,000 paired common shares at prices ranging from $13.44 to $36.46 were outstanding during the three months ended September 30, 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options, which expire on dates ranging from October 2001 to December 2008, were still outstanding at September 30, 1999. 20 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. EARNINGS PER SHARE (CONTINUED) Convertible debentures outstanding for the three months ended September 30, 1999 and 1998, representing 6,540,000 and 7,936,000 paired common shares, if converted, respectively, are not included in the computation of diluted EPS because the inclusion would result in an antidilutive effect.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, --------------- --------------- 1999 1998 --------------- --------------- Income from continuing operations $ 135,899 $ 78,204 Preferred stock dividends (11,814) (4,506) --------------- --------------- Income from continuing operations available to common shareholders $ 124,085 $ 73,698 =============== =============== Average outstanding shares of common stock 144,684 112,104 Dilutive effect of: Contingently issuable shares - 4,982 Stock options - 186 --------------- --------------- Dilutive potential common stock 144,684 117,272 =============== =============== Earnings per share: Basic $ .86 $ .66 =============== =============== Diluted $ .86 $ .63 =============== ===============
Options to purchase 3,097,000 and 3,385,000 paired common shares at prices ranging from $13.44 to $36.46 were outstanding during the nine months ended September 30, 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options, which expire on dates ranging from October 2001 to December 2008, were still outstanding at September 30, 1999. Convertible debentures outstanding for the nine months ended September 30, 1999 and 1998, representing 6,540,000 and 8,028,000 paired common shares, if converted, respectively, are not included in the computation of diluted EPS because the inclusion would result in an antidilutive effect. MEDITRUST OPERATING COMPANY EARNINGS PER SHARE IS COMPUTED AS FOLLOWS:
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE THREE MONTHS ENDED SEPTEMBER 30, ------------------ ---------------- 1999 1998 ------------------ ---------------- Loss from continuing operations $ (279) $ (4,620) ================== ================ Average outstanding shares of common stock 141,100 140,314 Dilutive effect of: Contingently issuable shares - Stock options - ------------------ ---------------- Dilutive potential common stock 141,100 140,314 ================== ================ Earnings per share: Basic $ (.00) $ (.03) ================== ================ Diluted $ (.00) $ (.03) ================== ================
21 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. EARNINGS PER SHARE (CONTINUED) Options to purchase 1,671,000 and 379,000 paired common shares at prices ranging from $13.44 to $31.49 were outstanding during the three months ended September 30, 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. The options, which expire on dates ranging from December 1999 to December 2008, were still outstanding at September 30, 1999. Convertible debentures outstanding for the three months ended September 30, 1999 and 1998, representing 6,540,000 and 7,936,000 paired common shares, if converted, respectively, are not included in the computation of diluted EPS because the inclusion would result in an antidilutive effect.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) FOR THE NINE MONTHS ENDED SEPTEMBER 30, ------------------ ---------------- 1999 1998 ------------------ ---------------- Loss from continuing operations $ (26,722) $ (6,498) ================== ================ Average outstanding shares of common stock 143,379 110,799 Dilutive effect of: Contingently issuable shares - 4,982 Stock options - 186 ------------------ ---------------- Dilutive potential common stock 143,379 115,967 ================== ================ Earnings per share: Basic $ (.19) $ (.06) ================== ================ Diluted $ (.19) $ (.06) ================== ================
Options to purchase 1,671,000 and 353,000 paired common shares at prices ranging from $13.44 to $31.49 were outstanding during the nine months ended September 30, 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the paired common shares. The options, which expire on dates ranging from December 1999 to December 2008, were still outstanding at September 30, 1999. Convertible debentures outstanding for the nine months ended September 30, 1999 and 1998, representing 6,540,000 and 8,028,000 paired common shares, if converted, respectively, are not included in the computation of diluted EPS because the inclusion would result in an antidilutive effect. Operating Company holds common shares of Realty which are unpaired pursuant to a stock option plan approved by the shareholders. The common shares held totaled 1,305,377 as of September 30, 1999. These shares affect the calculations of Realty's net income per common share but are eliminated in the calculation of net income per paired common share for The Meditrust Companies. 12. TRANSACTIONS BETWEEN REALTY AND OPERATING COMPANY Operating Company leases hotel facilities from Realty and its subsidiaries. The hotel facility lease arrangements between Operating Company and Realty include base and additional rent provisions and require Realty to assume costs attributable to property taxes and insurance. In connection with certain acquisitions, Operating Company issued shares to Realty and recorded a receivable. Due to the affiliation of Realty and Operating Company, the receivable from Realty has been classified in Operating Company's shareholders' equity. Periodically, Realty and Operating Company issue shares under the Share Award Plan. Amounts due from Realty and Operating Company in connection with awards of shares under the Share Award Plan are shown as a reduction of shareholders' equity in the 22 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12. TRANSACTIONS BETWEEN REALTY AND OPERATING COMPANY (CONTINUED) accompanying consolidated balance sheets of Realty and Operating Company, respectively. Realty provides certain services to Operating Company primarily related to general tax preparation and consulting, legal, accounting, and certain aspects of human resources. In the opinion of management, the costs associated with these services were not material and have been excluded from the financial statements. 13. SEGMENT REPORTING MEASUREMENT OF SEGMENT PROFIT OR LOSS The Companies evaluate performance based on contribution from each reportable segment. Contribution is defined by the Companies as income from operations before interest expense, depreciation, amortization, gains and losses on sales of assets, provisions for losses on disposal or impairment of assets, income or loss from unconsolidated entities, income taxes and nonrecurring income and expenses. The measurement of each of these segments is made on a combined basis with revenue from external customers, and excludes lease income between Realty and Operating Company. The Companies account for Realty and Operating Company transactions as if the transactions were to third parties, that is, at current market prices. The lodging segment was acquired on July 17, 1998 and thus the segment contribution for the nine months ended September 30, 1998 includes results from this date only. 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. 23 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 13. SEGMENT REPORTING (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, -------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1999 1998 ------------------ ------------------ Healthcare: Rental income $ 125,719 $ 141,936 Interest income 104,166 118,179 Rental property operating costs (6,497) (4,642) General and administrative expenses (11,494) (14,072) ------------------ ------------------ Healthcare Contribution 211,894 241,401 ------------------ ------------------ Lodging: Room revenue 443,142 118,363 Guest services and other 27,963 7,929 Operating expenses (213,090) (55,029) General and administrative expenses (12,946) (4,580) Rental property operating costs (20,375) (5,199) ------------------ ------------------ Lodging Contribution 224,694 61,484 ------------------ ------------------ Combined Contribution 436,588 302,885 ------------------ ------------------ Reconciliation to Combined Consolidated Financial Statements: Other income (1,750) (26,000) Interest expense 184,599 107,835 Depreciation and amortization 101,359 51,327 Amortization of goodwill 15,946 7,670 Loss (gain) on sale of assets (12,463) 3,620 Income from unconsolidated joint venture - (691) Other expenses 40,228 88,482 ------------------ ------------------ 327,919 232,243 ------------------ ------------------ Income from continuing operations before benefit for income taxes 108,669 70,642 Income tax benefit (508) (1,064) ------------------ ------------------ Income from continuing operations 109,177 71,706 Discontinued operations: Income from discontinued operations - 10,721 Gain (loss adjustment) on disposal of discontinued operations 21,513 (177,194) ------------------ ------------------ Net income (loss) 130,690 (94,767) Preferred stock dividends (11,814) (4,506) ------------------ ------------------ Net income (loss) available to Paired Common shareholders $ 118,876 $ (99,273) ================== ==================
14. SUBSEQUENT EVENTS On October 14, 1999, Sun Healthcare Group, Inc. ("Sun") filed for protection under Chapter 11 of the U.S. Bankruptcy Code. As of September 30, 1999, Realty had a portfolio of 42 properties operated by Sun, which consisted of 38 owned properties with net assets of approximately $318,000,000 and four mortgages with net assets of approximately $31,000,000. During the nine months ended September 30, 1999, income derived from these properties included rental income of approximately $38,000,000 from owned properties and interest income of approximately $3,000,000 from mortgages. 24 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NOTES TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 14. SUBSEQUENT EVENTS (CONTINUED) Sun has not formally indicated whether they will accept or reject any of Realty's leases. However, Sun has indicated that they will continue to make lease payments to Realty unless and until such leases are rejected. In the event Sun rejects any of their leases, Realty will have to evaluate whether any of the related properties have been impaired. If necessary, Realty has a plan in place to transition and to continue operating any of Sun's properties. If Realty does not receive interest payments related to the mortgages, such mortgages will be put on non-accrual status. The ultimate outcome of the Sun bankruptcy is not 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' results of operations in a particular quarter or annual period. However, the Companies believe that even if the outcome of the bankruptcy is materially adverse to the Companies' results of operations, it should not have a material adverse effect on the Companies' financial position. On October 15, 1999, the Board of Directors of Realty declared a dividend of $.46 per share of common stock payable on November 15, 1999, to shareholders of record on October 29, 1999. 25 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CERTAIN MATTERS DISCUSSED HEREIN CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THE MEDITRUST COMPANIES (THE "COMPANIES"), CONSISTING OF MEDITRUST CORPORATION ("REALTY") AND MEDITRUST OPERATING COMPANY ("OPERATING"), INTEND SUCH FORWARD-LOOKING STATEMENTS TO BE COVERED BY THE SAFE HARBOR PROVISIONS FOR FORWARD-LOOKING STATEMENTS, AND ARE INCLUDING THIS STATEMENT FOR PURPOSES OF COMPLYING WITH THESE SAFE HARBOR PROVISIONS. ALTHOUGH THE COMPANIES BELIEVE THE FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, THE COMPANIES CAN GIVE NO ASSURANCE THAT THEIR EXPECTATIONS WILL BE ATTAINED. ACTUAL RESULTS AND TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN OR CONTEMPLATED BY THE FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND REAL ESTATE CONDITIONS, THE CONDITIONS OF THE CAPITAL MARKETS AT THE TIME OF THE PROPOSED SPIN-OFF OF THE HEALTHCARE DIVISION, THE IDENTIFICATION OF SATISFACTORY PROSPECTIVE BUYERS FOR THE NON-STRATEGIC ASSETS AND THE AVAILABILITY OF FINANCING FOR SUCH PROSPECTIVE BUYERS, THE AVAILABILITY OF EQUITY AND DEBT FINANCING FOR THE COMPANIES' CAPITAL INVESTMENT PROGRAM, INTEREST RATES, COMPETITION FOR HOTEL SERVICES IN A GIVEN MARKET, THE ENACTMENT OF LEGISLATION IMPACTING THE COMPANIES' STATUS AS A PAIRED SHARE REAL ESTATE INVESTMENT TRUST ("REIT") OR REALTY'S STATUS AS A REIT, THE FURTHER IMPLEMENTATION OF REGULATIONS GOVERNING PAYMENTS TO THE OPERATORS OF REALTY'S HEALTHCARE FACILITIES, UNANTICIPATED DELAYS OR EXPENSES ON THE PART OF THE COMPANIES AND THEIR SUPPLIERS IN ACHIEVING YEAR 2000 COMPLIANCE AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE FILINGS OF REALTY AND OPERATING WITH THE SECURITIES AND EXCHANGE COMMISSION ("SEC"), INCLUDING, WITHOUT LIMITATION, JOINT QUARTERLY REPORTS ON FORM 10-Q, JOINT CURRENT REPORTS ON FORM 8-K AND 8-K/A, AND JOINT ANNUAL REPORTS ON FORM 10-K AND 10-K/A. OVERVIEW The basis of presentation includes Management's Discussion and Analysis of Financial Condition and Results of Operations for the combined and separate SEC registrants. Management of the Companies believes that the combined presentation is most beneficial to the reader. On November 5, 1997, Meditrust, a Massachusetts Business Trust ("Meditrust's Predecessor") merged with Santa Anita Realty Enterprises, Inc., with Santa Anita Realty Enterprises, Inc. as the surviving corporation, and Meditrust Acquisition Company merged with Santa Anita Operating Company, with Santa Anita Operating Company as the surviving corporation (hereafter referred to as the "Santa Anita Merger" or "Santa Anita Mergers"). Upon completion of the Santa Anita Mergers, Santa Anita Realty Enterprises, Inc. changed its corporate name to "Meditrust Corporation" and Santa Anita Operating Company changed its corporate name to "Meditrust Operating Company." The Santa Anita Mergers were accounted for as reverse acquisitions whereby Meditrust's Predecessor and Meditrust Acquisition Company were treated as the acquirers for accounting purposes. Accordingly, the financial history is that of Meditrust's Predecessor and Meditrust Acquisition Company prior to the Santa Anita Mergers. After completing the Santa Anita Merger, the Companies began pursuing a strategy of diversifying into additional new businesses. Implementation of this strategy included the evaluation of numerous potential acquisition targets. On January 3, and January 11, 1998, Realty entered into definitive merger agreements to acquire La Quinta Inns, Inc. and its wholly owned subsidiaries and its unincorporated partnership and joint venture (collectively "La Quinta" and "La Quinta Merger") and Cobblestone Holdings, Inc. and its wholly owned subsidiary (collectively "Cobblestone" and "Cobblestone Merger"), respectively. In February 1998, legislation was proposed which limited the ability of the Companies to utilize the paired share structure. Accordingly, the Companies ceased any further evaluation of potential merger candidates and began a process of evaluating its healthcare portfolio. The Companies consummated the Cobblestone Merger and the La Quinta Merger on May 29, 1998 and July 17, 1998, respectively. On July 22, 1998, the President of the United States signed into law the Internal Revenue Service Restructuring and Reform Act of 1998 (the "Reform Act"), which limits the Companies' ability to continue to grow through use of the paired share structure. While the Companies' use of the paired share structure in connection with the Cobblestone Merger and the La Quinta Merger was "grandfathered" under the Reform Act, the ability to continue to use the paired share structure to acquire additional real estate and operating businesses conducted with the real estate assets (including the golf and lodging industries) was substantially limited. In addition, during the summer of 1998, the debt and equity capital markets available to REITs deteriorated, thus limiting the Companies' access to cost-efficient capital. The Companies began an analysis of the impact of the Reform Act, the Companies' limited ability to access the capital markets, and the operating strategy of the Companies' existing businesses. This analysis included advice from outside professional advisors and presentations by management on the different alternatives available to the Companies. The analysis culminated in the development of a comprehensive restructuring plan (the "Plan") designed to strengthen the Companies' financial position and clarify its investment and operating strategy by focusing on the healthcare and lodging business segments. 26 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES The Plan was announced on November 12, 1998 and included the following components: - - Pursue the separation of the Companies' primary businesses, healthcare and lodging, by creating two separately traded publicly listed REITs. The Companies intend to spin off the healthcare financing business into a stand-alone REIT; - - Continue to operate the Companies' healthcare and lodging businesses using the existing paired share REIT structure until the healthcare spin-off takes place; - - Sell more than $1 billion of non-strategic assets, including the portfolio of golf-related real estate and operating properties ("Cobblestone Golf Group"), the Santa Anita Racetrack and approximately $550 million of non-strategic healthcare properties; - - Use the proceeds from these asset sales to achieve significant near-term debt reduction; - - Settle the Companies' forward equity issuance transaction ("FEIT") with Merrill Lynch; - - Reduce capital investments to reflect the current operating condition in each industry; - - Reset Realty's annual dividend to $1.84 per common share. Following the announcement of the Plan, the Companies classified the golf and horseracing activities as discontinued operations for financial reporting purposes. Accordingly, management's discussion and analysis of financial condition and results of operations is focused on the Companies' primary businesses, healthcare and lodging. The Companies' ability to complete the separation of the two primary businesses is dependent upon capital market conditions, which are beyond the control of the Companies. These conditions may materially impact the timing of the separation and the Companies' ability to successfully implement the separation. The Companies cannot be certain that the capital markets will be amenable to the separation and the creation of two distinct separately traded companies. Based on the current state of the capital markets, the Companies are unable to predict when the capital markets will permit the separation to occur. The joint annual report on Form 10-K, filed for the year ended December 31, 1998, and the joint quarterly reports on Form 10-Q, filed for the three months ended March 31, 1999 and June 30, 1999, summarized progress in implementing, and in some cases completing, significant components of the Plan during 1998 and in the first half of 1999. This joint quarterly report on Form 10-Q provides an update since those documents were filed. THE MEDITRUST COMPANIES--COMBINED RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998 Revenue for the three months ended September 30, 1999, was $235,722,000 compared to $216,202,000 for the three months ended September 30, 1998, an increase of $19,520,000. Revenue growth was primarily attributable to the increase in hotel operating revenues of $34,005,000, resulting from the inclusion of hotel operations for the three months ended September 30, 1999 compared to the post-acquisition period of July 17, 1998 through September 30, 1998. This was partially offset by a net decrease to rental and interest income of $15,379,000. The decrease primarily resulted from asset sales and mortgage repayments over the last year net of the effect of additions to real estate investments made during the same period. Other non-recurring revenue for the three months ended September 30, 1999 was $894,000 which represents prepayment fees and lease breakage fees received in conjunction with mortgage repayments and asset sales during the period. Hotel operating revenues generally are measured as a function of the average daily rate ("ADR") and occupancy. The ADR increased to $61.34 in 1999 from $60.48 in 1998, an increase of $.86 or 1.4%. Occupancy percentage decreased 3.1 percentage points to 69.4% in 1999 from 72.5% in 1998. Revenue per Available Room ("RevPAR"), which is the product of occupancy percentage and ADR, decreased 2.9% over 1998. The decrease in RevPAR is primarily due to a greater increase in the supply of available rooms than in demand in the southwest region. The relationship between supply and demand varies by region, however, it has impacted La Quinta to a greater extent than its competitors due to its concentration of hotels in the southwest. The revenue impact of the oversupply of available rooms was partially mitigated by revenue increases resulting from a higher proportion of room rental income from the Inn & Suites hotels as compared to the Inns during the comparable three-month periods. Inn & Suites hotels generally have higher room rental income per night than the Inns. For the three months ended September 30, 1999, total recurring operating expenses were $90,720,000 compared to $72,493,000 for the three months ended September 30, 1998, an increase of $18,227,000. This increase was primarily attributable to the increase in hotel expenses which consisted of an increase in operating expenses of $20,018,000 which was partially offset by a decrease in general and administrative expenses of $416,000. The decrease in general and administrative expenses includes increases of $105,000 in overhead for the lodging segment and a decrease of $521,000 for allocated expenses of the paired share structure. The increase in operating expenses and overhead for the lodging segment is attributable to the inclusion of three months of activity in 1999 compared to the post-acquisition period in 1998. The decrease in allocated expenses of the paired share structure is due to the reduction in corporate overhead resulting from the sale of the horseracing and golf businesses. 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 27 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES supplies as well as corporate expenses, such as the costs of general management, office rent, training and field supervision of hotel managers and other marketing and administrative expenses. Rental property operating expenses related to the hotels increased by $1,751,000 due to the inclusion of three months of activity in 1999 compared to the post-acquisition period in 1998. Rental property operating expenses primarily consist of property taxes. For the three months ended September 30, 1999, rental property operating expenses attributable to the healthcare business were $2,201,000 compared to $1,920,000 for the three months ended September 30, 1998, an increase of $281,000 due to the acquisition of an additional medical office building within the last year. Rental property operating expenses attributed to the healthcare business principally consist of expenses for the management and operation of medical office buildings. General and administrative expenses related to healthcare decreased by $3,407,000, primarily due to state tax savings associated with the legal reformation of certain healthcare subsidiaries in preparation for the separation of the companies. The Companies consider contribution from each primary business in evaluating performance. Contribution includes revenue from each business, excluding non-recurring or unusual income, less operating expenses, rental property operating expenses and general and administrative expenses. The combined contribution of the healthcare and lodging businesses was $144,108,000 for the three months ended September 30, 1999, of which $69,972,000 related to healthcare and $74,136,000 related to lodging. The contribution of the healthcare business decreased $12,264,000 from $82,236,000 for the comparative three months ended September 30, 1998. 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 state tax savings associated with the legal reformation of certain healthcare subsidiaries. The lodging contribution was $74,136,000 or 46% of lodging revenues during the three months ended September 30, 1999, compared to $61,484,000 or 49% for the same period in 1998. This deterioration is reflective of a decrease in RevPAR due to the oversupply of available rooms while fixed operating costs remained relatively constant. Interest expense increased by $1,533,000 due to increases in the borrowing rate. Depreciation and amortization increased by $3,078,000 which was primarily a result of increased real estate investments and amortization of goodwill from the La Quinta acquisition completed on July 17, 1998. ASSET SALES During the three months ended September 30, 1999, Realty realized gains on the sale of three assisted living facilities of $179,000. Sales of healthcare properties were completed pursuant to the Plan. Realty also sold land held for development on which there was no gain or loss realized. Proceeds of asset sales were used to repay debt prior to maturity and de-lever the balance sheet. During the three months ended September 30, 1998, a loss of $3,620,000 was recorded on securities held for sale. OTHER EXPENSES During the third quarter of 1999, the Companies recorded approximately $1,025,000 in other expenses. These are costs associated with the reorganization of the lodging division including employee severance and other expenses. DISCONTINUED OPERATIONS Pursuant to the Plan, the Companies have classified golf and horseracing activities as discontinued operations for financial reporting purposes. During the three months ended September 30, 1999, a final adjustment was made to reduce the loss on disposal of discontinued operations by $16,644,000 which was the result of working capital purchase price adjustments, costs of sale adjustments and a revision of the estimated income tax provision for the disposal. For the three months ended September 30, 1998, the Companies have presented income from discontinued operations of $969,000 and a provision for loss on disposal of discontinued operations of $177,194,000 which were related to the horseracing and golf segments. NET INCOME The resulting net income available for common shareholders, after deducting preferred share dividends, for the three months ended September 30, 1999, was $59,365,000 compared to a net loss of $198,684,000 for the three months ended September 30, 1998. The net income per paired common share (diluted) for the three months ended September 30, 1999 was $.42 compared to a net loss per paired common share (diluted) of $1.42 for the three months ended September 30, 1998. The per paired common share amount increased primarily due to the provisions recorded in the third quarter of 1998 for the loss on disposal of discontinued operations as well as to adjust the carrying value of certain healthcare assets and to record a valuation reserve related to the mortgage portfolio. 28 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998 Revenue for the nine months ended September 30, 1999, was $702,740,000 compared to $412,407,000 for the nine months ended September 30, 1998, an increase of $290,333,000. Revenue growth was primarily attributable to the increase in hotel operating revenues of $344,813,000, resulting from the inclusion of hotel operations for the nine months ended September 30, 1999 compared to the post-acquisition period of July 17, 1998 through September 30, 1998. This was partially offset by a net decrease to rental and interest income of $30,230,000. The decrease primarily resulted from asset sales and mortgage repayments over the last year net of the effect of additions to real estate investments made during the same period. Other non-recurring revenue for the nine months ended September 30, 1999 was $1,750,000, compared to $26,000,000 for the same period in 1998, which arose from lease breakage fees and prepayment and make-whole gains received from the sale of healthcare-owned properties and the repayment of mortgages. Hotel operating revenues generally are measured as a function of the ADR and occupancy. The ADR increased to $61.15 in 1999 from $60.86 in 1998, an increase of $.29 or .5%. Occupancy percentage decreased .7 percentage points to 69.9% in 1999 from 70.6% in 1998. RevPAR, which is the product of occupancy percentage and ADR, decreased .6% over 1998. The decrease in RevPAR is primarily due to a greater increase in the supply of available rooms than in demand in the southwest region. The relationship between supply and demand varies by region, however, it has impacted La Quinta to a greater extent than its competitors due to its concentration of hotels in the southwest. The revenue impact of the oversupply of available rooms was partially mitigated by revenue increases resulting from a higher proportion of room rental income from the Inn & Suites hotels as compared to the Inns during the comparable nine month periods. Inns & Suites hotels generally have higher room rental income per night then the Inns. For the nine months ended September 30, 1999, total recurring operating expenses were $264,402,000 compared to $83,522,000 for the nine months ended September 30, 1998, an increase of $180,880,000. This increase was primarily attributable to the increase in hotel expenses including increases in operating expenses of $158,061,000 and general and administrative expenses of $8,366,000 The increase in general and administrative expenses includes increases of $8,399,000 in overhead for the lodging segment and a decrease of $33,000 for allocated expenses of the paired share structure. The increase in operating expenses and overhead for the lodging segment is attributable to the inclusion of nine months of activity in 1999 compared to the post-acquisition period in 1998. The decrease in allocated expenses of the paired share structure is due to the reduction in corporate overhead resulting from the sale of the horseracing and golf businesses. Hotel operating and general and administrative expenses include costs associated with the operation such as salaries, wages, utilities, repair and maintenance, credit card discounts and room supplies as well as corporate expenses, such as the costs of general management, office rent, training and field supervision of hotel managers and other marketing and administrative expenses. Rental property operating expenses related to the hotels increased by $15,176,000 due to the inclusion of nine months of activity in 1999 compared to the post-acquisition period in 1998. Rental property operating expenses primarily consist of property taxes. For the nine months ended September 30, 1999, rental property operating expenses attributable to the healthcare business were $6,497,000 compared to $4,642,000 for the nine months ended September 30, 1998, an increase of $1,855,000. The increase was due to the management of more medical office buildings in 1999 compared to 1998. Rental property operating expenses attributed to the healthcare business principally consist of expenses for the management and operation of medical office buildings. General and administrative expenses related to healthcare decreased by $2,578,000 primarily due to state tax savings associated with the legal reformation of certain healthcare subsidiaries in preparation for the separation of the companies. The Companies consider contribution from each primary business in evaluating performance. Contribution includes revenue from each business, excluding non-recurring or unusual income, less operating expenses, rental property operating expenses and general and administrative expenses. The combined contribution of the healthcare and lodging businesses was $436,588,000 for the nine months ended September 30, 1999, of which $211,894,000 related to healthcare and $224,694,000 related to lodging. The contribution of the healthcare business decreased $29,507,000 from $241,401,000 for the comparative nine months ended September 30, 1998. 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 state tax savings associated with the legal reformation of certain healthcare subsidiaries. The lodging contribution was $224,694,000 or 48% of lodging revenues during the nine months ended September 30, 1999, compared to 61,484,000 and 49% for the same period in 1998. This deterioration is reflective of a decrease in RevPAR due to the oversupply of available rooms while fixed operating costs remained relatively constant. Interest expense increased by $76,764,000 due to increases in the borrowing rate and in debt outstanding as a result of a new bank facility added in 1998, the acquisitions of La Quinta and Cobblestone, net of amounts repaid from various asset sales made over the past year. Depreciation and amortization increased by $58,308,000 which was primarily a result of increased real estate investments and amortization of goodwill from the La Quinta acquisition completed on July 17, 1998. 29 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES ASSET SALES During the nine months ended September 30, 1999, Realty realized gains on the sale of healthcare real estate assets of $12,463,000. Sales of healthcare properties were completed pursuant to the Plan and included one rehabilitation facility, one long-term care facility, and 20 assisted living facilities. Realty also sold a hotel and land held for development on which there was no gain or loss realized. During the nine months ended September 30, 1998, a loss of $3,620,000 was recorded on securities held for sale. OTHER EXPENSES During the nine months ended September 30, 1999, the Companies recorded approximately $40,228,000 in other expenses. On May 10, 1999, the Companies entered into a separation agreement with Abraham D. Gosman, former Director and Chairman of the Companies and Chief Executive Officer and Treasurer of Operating. Under the terms of the separation agreement, Mr. Gosman received severance payments totaling $25,000,000 in cash and the continuation of certain life insurance benefits. The Companies established a Special Committee of The Boards of Directors of Realty and Operating (the "Special Committee") to evaluate the applicability of Mr. Gosman's employment contract and whether such severance or other payments were appropriate. Based on the results of the evaluation and recommendation of the Special Committee, the Boards of Directors concluded that the separation agreement was in the long-term best interest of the shareholders of the Companies and approved the separation agreement. The Companies incurred approximately $11,230,000 of costs associated with the development and implementation of the Plan as well as a reorganization of the lodging division. These costs primarily relate to the early repayment and modification of certain debt, employee severance, advisory fees related to the Plan, and other professional fees related to the separation agreement with Mr. Gosman. Also, in conjunction with the implementation of the Plan, which included a change in the focus of the lodging division to internal growth, La Quinta management performed a review of the front desk system under development for its lodging facilities, and made a decision to abandon the project. The decision was based primarily on management's intent to integrate the front desk system with new revenue management software, availability of more suitable and flexible externally developed software and a shift in information systems philosophy toward implementation of externally developed software and outsourcing of related support services. A charge of approximately $3,998,000 to write-off certain internal and external software development costs related to the project was recorded during the nine months ended September 30, 1999. DISCONTINUED OPERATIONS As part of the Plan, the Companies sold the Santa Anita Racetrack during the fourth quarter of 1998 and sold the Cobblestone Golf Group during the first quarter of 1999. The Companies have reflected the financial results for 1999 and 1998 of Santa Anita and Cobblestone as discontinued operations. During the first nine months of 1999, the Companies adjusted the provision for loss on disposal of the Cobblestone Golf Group by recording a gain of approximately $18,552,000 which includes the final working capital purchase price adjustment, cost of sale adjustments, and a revision of the estimated income tax provision for the disposal. In addition, the Companies recorded $2,961,000 as final working capital purchase price adjustments and differences to estimated costs of sale of the Santa Anita Racetrack. For the nine months ended September 30, 1998, the Companies have presented income from discontinued operations of $10,721,000 and a provision for loss on disposal of discontinued operations of $177,194,00 which were related to the horseracing and golf segments. NET INCOME The resulting net income available for the common shareholders, after deducting preferred share dividends, for the nine months ended September 30, 1999, was $118,876,000 compared to a net loss of $99,273,000 for the nine months ended September 30, 1998. The net income per paired common share (diluted) for the nine months ended September 30, 1999 was $.83 compared to a net loss per paired common share (diluted) of $.86 for the nine months ended September 30, 1998. The per paired common share amount increased primarily due to the provisions recorded in 1998 for the loss on disposal of discontinued operations as well as to adjust the carrying value of certain healthcare assets and to record a valuation reserve related to the mortgage portfolio. THE MEDITRUST COMPANIES - COMBINED LIQUIDITY AND CAPITAL RESOURCES The Companies earn revenue by (i) leasing its 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) owning and operating 232 La Quinta Inns and 70 La Quinta Inn and Suites. Approximately $1,300,000,000 of the Companies debt obligations are floating rate obligations in which interest rate and related cash 30 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES flows vary with the movement 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. As of September 30, 1999, the Companies have $750,000,000 of interest rate swaps outstanding in which the Companies pay a fixed rate of 5.70% to the counterparty and receive LIBOR from the counterparty. Accordingly at September 30, 1999, the Companies have approximately $525,000,000 of variable debt outstanding which interest rates fluctuates 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 will be cash flow provided by operating activities. The Companies anticipate that cash flow provided by operating activities will provide the necessary funds on a short and long-term basis to meet operating cash requirements including all distributions to shareholders. CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES The Companies provide funding for new investments, debt repayments and costs associated with the restructuring through a combination of long-term and short-term financing including, both debt and equity, as well as the previously announced sale of assets. The Companies may decide to sell additional assets to meet their commitments and to provide them with additional liquidity. The Companies obtain long-term financing through the issuance of shares, long-term unsecured notes, convertible debentures and the assumption of mortgage notes. The Companies obtain short- term financing through the use of bank lines of credit, which are replaced with long-term financing as appropriate. From time to time, the Companies may utilize interest rate caps or swaps to attempt to hedge interest rate volatility. It is the Companies' objective to match mortgage and lease terms with the terms of their borrowings. The Companies attempt to maintain an appropriate spread between their borrowing costs and the rate of return on their investments. When development loans convert to sale/leaseback transactions or permanent mortgage loans, the base rent or interest rate, as appropriate, is fixed at the time of such conversion. There is, however, no assurance that the Companies will satisfactorily achieve, if at all, the objectives set forth in this paragraph. On July 17, 1998, Realty entered into a credit agreement (the "Credit Agreement") which provided Realty with up to $2,250,000,000 in credit facilities, replacing Realty's then existing $365,000,000 revolving credit facilities. The Credit Agreement provided for borrowings in four separate tranches (each a "Tranche"): Tranche A, a $1,000,000,000 revolving loan, amounts of which if repaid may be reborrowed, which matures July 17, 2001; Tranche B, a term loan in the amount of $500,000,000, amounts of which if repaid may not be reborrowed, which 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. On November 23, 1998, Realty amended its Credit Agreement to provide for Realty's cash repayment of a portion of its FEIT, the amendment of certain financial covenants to accommodate asset sales, to exclude the impact of non-recurring charges in certain covenant calculations, and to provide for future operating flexibility. The amendment also provided for an increase to the LIBOR pricing of the credit facility by approximately 125 basis points, and the pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock also extended on a pro rata basis to entitled bondholders. Realty also agreed to a 25 basis point increase to the LIBOR pricing in the event that an equity offering of at least $100,000,000 had not been completed by February 1, 1999. On February 1, 1999 this increase went into effect. On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that was scheduled to mature on April 17, 1999. On March 10, 1999, Realty reached a second agreement with its bank group to further amend the Credit Agreement. The second amendment became effective upon the successful completion of the sale of Cobblestone Golf Group and provided for a portion of the sale proceeds to be applied to the FEIT. The second amendment also provided for, among other things, upon the sale of Cobblestone Golf Group, elimination of limitations on certain healthcare investments and a lowering of the commitment on the revolving tranche to $850,000,000. On March 10, 1999, the Companies entered into an agreement with Merrill Lynch International, a UK-based broker/dealer subsidiary of Merrill Lynch & Co., Inc. (collectively with its agent and successor in interest, "MLI") and certain of its affiliates to use the proceeds 31 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES from the sale of the Cobblestone Golf Group in excess of $300,000,000 to repurchase all or a portion of the remaining paired common shares outstanding under the FEIT. MLI agreed not to sell any of the remaining paired common shares outstanding under the FEIT until March 31, 1999, while the Companies completed the sale of Cobblestone Golf Group. On March 31, 1999, the Companies completed the sale of Cobblestone Golf Group and on April 1, 1999, the Companies settled the FEIT by paying MLI $89,840,000 for the repurchase of 6,865,000 paired common shares. On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and cancelled a $250,000,000 swap contract. Both were scheduled to mature on July 17, 1999. On August 16, 1999, Realty repaid $12,500,000 of its notes payable which matured on that date and bore interest at 7.25%, At September 30, 1999, the Companies had approximately $283,745,000 in available borrowings under its revolving tranche commitment. During the calendar year 2000, the Companies have approximately $461,000,000 of debt maturing (comprised principally of $250,000,000 maturing in January and $207,000,000 maturing in July 2000). The Companies expect to obtain the necessary proceeds 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 November 5, 1999, the Companies had outstanding borrowings under its revolving tranche commitment of $525,000,000 (8.3% weighted average rate at November 5, 1999) and capacity for additional borrowing of approximately $268,745,000. As of September 30, 1999, approximately $993,000 in charges related to the Plan remained unpaid. Payments made during the quarter included professional and advisory fees and severance paid to former employees. As of September 30, 1999, the Companies' gross real estate investments totaled approximately $5,233,753,000 consisting of 208 long-term care facilities, 137 retirement and assisted living facilities, 34 medical office buildings, one acute care hospital campus, 7 other healthcare facilities and 302 hotel facilities in service. At September 30, 1999, Realty was committed to provide additional financing of approximately $50,000,000 relating to one long-term care facility and three assisted living facilities as well as additions to existing facilities in the portfolio. The Companies had shareholders' equity of $2,779,176,000 and debt constituted 49% of the Companies' total capitalization as of September 30, 1999. On October 15, 1999, Realty announced the board of directors voted to declare a quarterly dividend of $0.46 cents per share to shareholders of record on October 29, 1999. This is the fourth dividend payment in 1999 and will be paid on November 15, 1999. The tax status of the 1999 dividends will be determined in January 2000 and will be distributed to shareholders in a 1099-DIV form at that time. A number of factors will impact Realty's cash flow and taxable income for the year 2000. All of these factors will be considered in establishing Realty's dividend policy for the year 2000. Taking a preliminary look at taxable income for the year 2000, it appears that to maintain Realty's REIT status the current dividend could be reduced by as much as 50%. Consistent with the past practices, in January 2000 the Board will evaluate Realty's dividend policy. The Companies have an effective shelf registration statement on file with the SEC under which the Companies may issue $1,825,000,000 of securities including shares, preferred stock, debt, series common stock, convertible debt and warrants to purchase shares, preferred shares, debt, series common stock and convertible debt. The Companies believe that their various sources of capital are adequate to finance their operations as well as their existing commitments, including the acquisition and/or mortgage financing of certain healthcare facilities and repayment of debt maturing within the next twelve months. INFORMATION REGARDING OPERATORS OF HEALTHCARE ASSETS As of September 30, 1999, healthcare facilities comprised approximately 49% of the Companies total real estate investments (the "healthcare portfolio"). A private healthcare company and Sun Healthcare Group, Inc. ("Sun"), currently operate approximately 20% of the total real estate investments, or 40% of the healthcare portfolio. Approximately 30% of the Companies' total real estate investments (approximately 58% of the healthcare portfolio) are operated by companies in the long-term care sector of the healthcare industry and 10% of the Companies' total real estate investments (approximately 22% of the healthcare portfolio) are operated by 32 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES companies in the assisted living sector of the healthcare industry. The Companies monitor 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 the Companies. The financial condition and ability of these healthcare operators to meet their rental and other obligations will among other things, have an impact on the Companies' revenues, net income (loss), funds available from operations and its ability to make distributions to its shareholders. The operations of the long-term care 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 pre announced 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 September 30, 1999, the Companies had a portfolio of 42 properties operated by Sun, which consisted of 38 owned properties with net assets of approximately $318,000,000 and four mortgages with net assets of approximately $31,000,000. During the nine months ended September 30, 1999, income derived from these properties included rental income of $38,000,000 from owned properties and interest income of $3 million from mortgages. Sun has not formally indicated whether they will accept or reject any of the Companies' leases. However, Sun has indicated that they will continue to make lease payments to the Companies unless and until such leases are rejected. In the event Sun rejects any of their leases, the Companies will have to evaluate whether any of the rejected leases have been impaired. If necessary, the Companies have a plan in place to transition and to continue operating any of Sun's properties. If the Companies do not receive interest payments related to the mortgages, such mortgages will be put on non-accrual status. The ultimate outcome of the Sun bankruptcy 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' results of operations in a particular quarter or annual period. However, the Companies believe that even if the outcome of the bankruptcy is materially adverse to the Companies' results of operations, it should not have a material adverse effect on the Companies financial position. COMBINED FUNDS FROM OPERATIONS Combined Funds from Operations of the Companies was $75,027,000 and $88,487,000 for the three months ended and $233,592,000 and $209,847,000 for the nine months ended September 30, 1999 and 1998, respectively. Management considers Funds from Operations to be a key external measurement of REIT performance. Funds from Operations represents net income or loss available to common shareholders (computed in accordance with generally accepted accounting principles), excluding real estate related depreciation, amortization of goodwill and certain intangible assets, gains and losses from the sale of assets and non-recurring income and expenses. For 1999 and 1998, non-recurring income primarily consists of gains attributable to the prepayment of loans and lease breakage fees. Non-recurring expenses include charges related to a separation agreement, comprehensive restructuring costs, write-off of other capitalized costs related to terminated projects, asset impairments and provisions on other assets and receivables unrelated to primary businesses. Funds from Operations should not be considered an alternative to net income or other measurements under generally accepted accounting principles as an indicator of operating performance or to cash flows from operating, investing, or financing activities as a measure of liquidity. Funds from Operations does not reflect working capital changes, cash expenditures for capital improvements or principal payments on indebtedness. The following reconciliation of net income and loss available to common shareholders to Funds from Operations illustrates the difference between the two measures of operating performance for the three and nine months ended September 30, 1999 and 1998. Certain reconciling items include amounts reclassified from income from operations or gain on disposal of discontinued operations and, accordingly, do not necessarily agree to revenue and expense captions in the Companies' financial statements. 33 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES
(IN THOUSANDS) Three months ended September 30, 1999 1998 ------------------- --------------------- Net income (loss) available to paired common shareholders $ 59,365 $ (198,684) Depreciation of real estate and intangible amortization 35,124 39,416 Gains on sales of assets (25,423) Provision for loss on disposal of discontinued operations - 177,194 Other income (894) - Other expenses 6,855 70,561 ------------------- --------------------- Funds from Operations $ 75,027 $ 88,487 ------------------- --------------------- ------------------- --------------------- Weighted average paired common shares outstanding: Basic 141,100 140,314 Diluted 141,100 146,683 (IN THOUSANDS) Nine months ended September 30, 1999 1998 ------------------- --------------------- Net income (loss) available to paired common shareholders $ 118,876 $ (99,273) Depreciation of real estate and intangible amortization 110,008 65,824 Gains on sales of assets (40,030) Provision for loss on disposal of discontinued operations - 177,194 Other income (1,750) (26,000) Other expenses 46,488 92,102 ------------------- --------------------- Funds from Operations $ 233,592 $ 209,847 ------------------- --------------------- ------------------- --------------------- Weighted average paired common shares outstanding: Basic 143,379 110,799 Diluted 143,379 115,967
REALTY--RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998 Revenue for the three months ended September 30, 1999 was $155,676,000 compared to $159,404,000 for the three months ended September 30, 1998, a decrease of $3,728,000. The decrease was primarily attributable to the decrease in rental and interest income of $15,211,000. The decrease resulted primarily from asset sales and mortgage repayments over the last year net of the affect of additions to real estate investments made during the same period. This decrease was partially offset by the net increase in rent, royalty and interest income of $10,373,000 from Operating, related to hotel facilities acquired in the La Quinta Merger and the increase in revenue of $216,000 from hotels operated by Realty. These increases are attributable to the inclusion of hotel operations for the three months ended September 30, 1999 compared to the post-acquisition period of July 17, 1998 through September 30, 1998. Other non-recurring revenue for the three months ended September 30, 1999 was $894,000 and represents prepayment fees and lease breakage fees received in conjunction with mortgage repayments and asset sales during the period. For the three months ended September 30, 1999, total recurring expenses increased by $3,937,000 from $104,973,000 in 1998 to $108,910,000 in 1999. Interest expense increased $1,777,000 due to increases in the borrowing rate. Depreciation and amortization increased by $3,171,000 which was primarily a result of increased real estate investments and amortization of goodwill from the La Quinta Merger completed on July 17, 1998. General and administrative expenses decreased by $3,442,000 primarily due to state tax savings associated with the legal reformation of certain healthcare subsidiaries in preparation for the separation of the companies. Rental and hotel property operating expenses increased by $2,431,000 primarily due to the inclusion of three months of hotel activity in 1999 compared to the post-acquisition period in 1998 and the acquisition of a medical office building within the last twelve months. ASSET SALES During the three months ended September 30, 1999, Realty realized gains on the sale of healthcare real estate assets of $179,000. Sales of healthcare properties were completed pursuant to the Plan and included three assisted living facilities. Realty also sold land held for development on which there was no gain or loss realized. Proceeds of asset sales were used to repay debt prior to maturity and de-lever the balance sheet. During the three months ended September 30, 1998, a loss of $3,620,000 was recorded on securities held for sale. 34 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES OTHER EXPENSES During the three months ended September 30, 1999, other expenses of $7,000 were incurred which related to the Plan. These expenses consisted of professional fees that were incurred. DISCONTINUED OPERATIONS Pursuant to the Plan, Realty has classified golf and horseracing activities as discontinued operations for financial reporting purposes. During the three months ended September 30, 1999, a final adjustment was made to reduce the loss on disposal of discontinued operations by $16,282,000. For the three months ended September 30, 1998, Realty has presented income from discontinued operations of $3,535,000 and a provision for loss on disposal of discontinued operations of $172,694,000, which were related to the horseracing and golf segments. NET INCOME The resulting net income available for common shareholders, after deducting preferred share dividends, for the three months ended September 30, 1999, was $59,282,000 compared to a net loss of $186,998,000 for the three months ended September 30, 1998. The net income per common share (diluted) for the three months ended September 30, 1999 was $.42 compared to a net loss per common share (diluted) of $1.32 for the three months ended September 30, 1998. The per common share amount increased primarily due to the provisions recorded in the third quarter of 1998 for the loss on disposal of discontinued operations as well as to adjust the carrying value of certain healthcare assets and to record a valuation reserve related to the mortgage portfolio. NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998 Revenue for the nine months ended September 30, 1999 was $471,341,000 compared to $355,845,000 for the nine months ended September 30, 1998, an increase of $115,496,000. Revenue growth was primarily attributable to the net increase in rent, royalty and interest income of $163,044,000 from Operating, related to hotel facilities acquired in the La Quinta Merger and the increase in revenue of $6,573,000 from hotels operated by Realty. These increases are attributable to the inclusion of hotel operations for the nine months ended September 30, 1999 compared to the post-acquisition period of July 17, 1998 through September 30, 1998. These increases were partially offset by the decrease in rental and interest income of $29,871,000. The decrease resulted primarily from asset sales and mortgage repayments over the last year net of the affect of additions to real estate investments made during the same period. Other non-recurring income was $1,750,000 for the nine months ended September 30, 1999 compared to $26,000,000 for the same period in 1998, which arose from lease breakage fees and prepayment and make-whole gains received from the sale of healthcare-owned properties and the repayment of mortgages. For the nine months ended September 30, 1999, total recurring expenses increased by $151,022,000 from $188,171,000 in 1998 to $339,193,000 in 1999. Interest expense increased $78,455,000 due to increases in the borrowing rate and in debt outstanding as a result of a new bank facility added in 1998, the acquisitions of La Quinta and Cobblestone, net of amounts repaid from various asset sales made over the past year. Depreciation and amortization increased by $54,548,000 which was primarily a result of increased real estate investments and amortization of goodwill from the La Quinta Merger completed on July 17, 1998. General and administrative expenses decreased by $1,361,000 primarily due to state tax savings associated with the legal reformation of certain healthcare subsidiaries in preparation for the separation of the companies. Rental and hotel property operating expenses increased by $19,380,000 primarily due to the inclusion of nine months of hotel activity in 1999 compared to the post-acquisition period in 1998 and the management of more medical office buildings in 1999 compared to 1998. ASSET SALES During the nine months ended September 30, 1999, Realty realized gains on the sale of healthcare real estate assets of $12,463,000. Sales of healthcare properties were completed pursuant to the Plan and included one rehabilitation facility, one long-term care facility, and 20 assisted living facilities. Realty also sold a hotel and land held for development on which there was no gain or loss realized. Proceeds of asset sales were used to repay debt prior to maturity and de-lever the balance sheet. During the nine months ended September 30, 1998, a loss of $3,620,000 was recorded on securities held for sale. 35 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES OTHER EXPENSES During the nine months ended September 30, 1999, other expenses of $8,712,000 were incurred which related to the Plan. These expenses consisted of approximately $4,907,000 of capitalized debt costs and $1,119,000 of breakage fees associated with swap contracts on repaid debt and approximately $2,686,000 in professional and advisory fees that were incurred. DISCONTINUED OPERATIONS Pursuant to the Plan, Realty has classified golf and horseracing activities as discontinued operations for financial reporting purposes. Accordingly, Realty has presented as discontinued operations approximately $32,376,000 of gains on disposal of the golf and horseracing segments during the nine months ended September 30, 1999. Realty has recorded a gain of $25,721,000 related to the sale of the Cobblestone Golf Group, which was sold on March 31, 1999. The horseracing segment was sold on December 10, 1998. During the nine months ended September 30, 1999, a gain of $6,655,000 was recorded which related to an adjustment of the selling price between Realty and Operating. For the nine months ended September 30, 1998, Realty has presented income from discontinued operations of $14,635,000 and a provision for loss on disposal of discontinued operations of $172,694,000, which were related to the horseracing and golf segments. NET INCOME The resulting net income available for common shareholders, after deducting preferred share dividends, for the nine months ended September 30, 1999, was $156,461,000 compared to a net loss of $84,361,000 for the nine months ended September 30, 1998. The net income per common share (diluted) for the nine months ended September 30, 1999 was $1.08 compared to a net loss per common share (diluted) of $.72 for the nine months ended September 30, 1998. The per common share amount increased primarily due to the provisions recorded in 1998 for the loss on disposal of discontinued operations as well as to adjust the carrying value of certain healthcare assets and to record a valuation reserve related to the mortgage portfolio. REALTY -LIQUIDITY AND CAPITAL RESOURCES Realty earns revenue by (i) leasing its 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 70 La Quinta Inn and Suites to Operating. Approximately $1,300,000,000 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 their floating rate debt obligations to fixed rate debt obligations. Interest rate swaps generally involved the exchange of fixed and floating rate interest payments on an underlying notional amount. As of September 30, 1999, Realty has $750,000,000 of interest rate swaps outstanding in which Realty pays a fixed rate of 5.70% to the counterparty and receives LIBOR from the counterparty. Accordingly at September 30, 1999, Realty has approximately $525,000,000 of variable debt outstanding which interest rates fluctuates 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 will be cash flow provided by operating activities. Realty anticipates that cash flow provided by operating activities will provide the necessary funds on a short and long-term basis to meet operating cash requirements including all distributions to shareholders. CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES Realty provides funding for new investments, debt repayments and costs associated with the restructuring through a combination of long-term and short-term financing including, both debt and equity, as well as the previously announced sale of assets. Realty may decide to sell additional assets to meet its commitments and to provide it with additional liquidity. Realty obtains long-term financing through the issuance of shares, long-term unsecured notes, convertible debentures and the assumption of mortgage notes. Realty obtains short-term financing through the use of bank lines of credit, which are replaced with long-term financing as appropriate. From time to time, Realty may utilize interest rate caps or swaps to attempt to hedge interest rate volatility. It is Realty's objective to match mortgage and lease terms with the terms of its borrowings. Realty attempts to maintain an appropriate spread between its borrowing costs and the rate of return on its investments. When development loans convert to sale/leaseback transactions or permanent mortgage loans, the base 36 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES rent or interest rate, as appropriate, is fixed at the time of such conversion. There is, however, no assurance that Realty will satisfactorily achieve, if at all, the objectives set forth in this paragraph. On July 17, 1998, Realty entered into a Credit Agreement which provided Realty with up to $2,250,000,000 in credit facilities, replacing Realty's then existing $365,000,000 revolving credit facilities. The Credit Agreement provided for borrowings in four separate Tranches: Tranche A, a $1,000,000,000 revolving loan, amounts of which if repaid may be reborrowed, which matures 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. On November 23, 1998, Realty amended its Credit Agreement to provide for Realty's cash repayment of a portion of its FEIT, the amendment of certain financial covenants to accommodate asset sales, to exclude the impact of non-recurring charges in certain covenant calculations, and to provide for future operating flexibility. The amendment also provided for an increase to the LIBOR pricing of the credit facility by approximately 125 basis points, and the pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock also extended on a pro rata basis to entitled bondholders. Realty also agreed to a 25 basis point increase to the LIBOR pricing in the event that an equity offering of at least $100,000,000 had not been completed by February 1, 1999. On February 1, 1999 this increase went into effect. On January 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan that was scheduled to mature on April 17, 1999. On March 10, 1999, Realty reached a second agreement with its bank group to further amend the Credit Agreement. The second amendment became effective upon the successful completion of the sale of Cobblestone Golf Group and provided for a portion of the sale proceeds to be applied to the FEIT. The second amendment also provided for, among other things, upon the sale of Cobblestone Golf Group, elimination of limitations on certain healthcare investments and a lowering of the commitment on the revolving tranche to $850,000,000. On March 10, 1999, the Companies entered into an agreement with MLI and certain of its affiliates to use the proceeds from the sale of the Cobblestone Golf Group in excess of $300,000,000 to repurchase all or a portion of the remaining paired common shares outstanding under the FEIT. MLI agreed not to sell any shares of the remaining paired common shares until March 31, 1999, while the Companies completed the sale of Cobblestone Golf Group. On March 31, 1999, the Companies completed the sale of Cobblestone Golf Group and on April 1, 1999, the Companies settled the FEIT by paying MLI $89,840,000 for the repurchase of 6,865,000 paired common shares. On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and cancelled a $250,000,000 swap contract. Both were scheduled to mature on July 17, 1999. On August 16, 1999, Realty repaid $12,500,000 of its notes payable which matured on that date and bore interest at 7.25%. At September 30, 1999, Realty had approximately $238,745,000 in available borrowings under its revolving tranche commitment. During the calendar year 2000, Realty has approximately $461,000,000 of debt maturing (comprised principally of $250,000,000 maturing in January and $207,000,000 maturing in July 2000). Realty expects to obtain the necessary proceeds 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 November 5, 1999, Realty had outstanding borrowings under its revolving tranche commitment of $525,000,000 (8.3% wieghted average rate at November 5, 1999) and capacity for additional borrowing of approximately $268,745,000. As of September 30, 1999, there were no charges related to the Plan which remained unpaid. Payments made during the quarter included professional and advisory fees and severance paid to former employees. As of September 30, 1999, Realty's gross real estate investments totaled approximately $5,212,938,000 consisting of 208 long-term care facilities, 137 retirement and assisted living facilities, 34 medical office buildings, one acute care hospital campus, seven other healthcare facilities and 300 hotel facilities in service. At September 30, 1999, Realty was committed to provide additional financing of approximately $50,000,000 relating to one long-term care facility and three assisted living facilities as well as additions to existing facilities in the portfolio. Realty had shareholders' equity of $2,740,904,000 and debt constituted 50% of Realty's total capitalization as of September 30, 1999. 37 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES On October 15, 1999, Realty announced the board of directors voted to declare a quarterly dividend of $0.46 cents per share to shareholders of record on October 29, 1999. This is the fourth dividend payment in 1999 and will be paid on November 15, 1999. The tax status of the 1999 dividends will be determined in January 2000 and will be distributed to shareholders in a 1099-DIV form at that time. A number of factors will impact Realty's cash flow and taxable income for the year 2000. All of these factors will be considered in establishing Realty's dividend policy for the year 2000. Taking a preliminary look at taxable income for the year 2000, it appears that to maintain Realty's REIT status the current dividend could be reduced by as much as 50%. Consistent with the past practices, in January 2000 the Board will evaluate Realty's dividend policy. The Companies have an effective shelf registration statement on file with the SEC under which the Companies may issue $1,825,000,000 of securities including shares, preferred stock, debt, series common stock, convertible debt and warrants to purchase shares, preferred shares, debt, series common stock and convertible debt. Realty believes that various sources of capital, including proceeds from the sale of assets, are adequate to finance operations as well as existing commitments, including the acquisition and/or mortgage financing of certain healthcare facilities, and repayment of the debt maturing within the next twelve months. INFORMATION REGARDING OPERATORS OF HEALTHCARE ASSETS As of September 30, 1999, healthcare facilities comprised approximately 49% of Realty's total real estate investments (the "healthcare portfolio"). A private healthcare company and Sun, currently operate approximately 20% of the total real estate investments, or 40% of the healthcare portfolio. Approximately 30% of Realty's total real estate investments (approximately 58% of the healthcare portfolio) are operated by companies in the long-term care sector of the healthcare industry and 10% of Realty's total real estate investments (approximately 22% of the healthcare portfolio) are operated by companies in the assisted living sector of the healthcare industry. 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 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 pre announced 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 September 30, 1999, Realty had a portfolio of 42 properties operated by Sun, which consisted of 38 owned properties with net assets of approximately $318,000,000 and four mortgages with net assets of approximately $31,000,000. During the nine months ended September 30, 1999, income derived from these properties included rental income of $38,000,000 from owned properties and interest income of $3,000,000 from mortgages. Sun has not formally indicated whether they will accept or reject any of Realty's leases. However, Sun has indicated that they will continue to make lease payments to Realty unless and until such leases are rejected. In the event Sun rejects any of their leases, Realty will have to evaluate whether any of the rejected leases have been impaired. If necessary, Realty has a plan in place to transition and to continue operating any of Sun's properties. If Realty does not receive interest payments related to the mortgages, such mortgages will be put on non-accrual status. The ultimate outcome of the Sun bankruptcy 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 38 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES have a material adverse effect on Realty's results of operations in a particular quarter or annual period. However, Realty believes that even if the outcome of the bankruptcy is materially adverse to Realty's results of operations, it should not have a material adverse effect on Realty's financial position. OPERATING--RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 VS. THREE MONTHS ENDED SEPTEMBER 30, 1998 Operating has derived its revenue primarily from hotel operations since the consummation of the La Quinta Merger on July 17, 1998. Hotel revenues for the three months ended September 30, 1999 were $157,219,000 compared to $123,430,000 for the three months ended September 30, 1998, an increase of $33,789,000 due to the inclusion of hotel operations for the three months ended September 30, 1999 compared to the post-acquisition period of July 17, 1998 through September 30, 1998. Approximately $151,414,000 or 96% of hotel revenues were derived from room rentals during the three months ended September 30, 1999 compared to $118,363,000 and 96% during the three months ended September 30, 1998. Hotel operating revenues generally are measured as a function of the ADR and occupancy percentage. The ADR for the three months ended September 30, 1999 was $61.34 compared to ADR for the three months ended September 30, 1998 of $60.48, an increase of $.86 or 1.4%. Occupancy percentage decreased to 69.4% from 72.5%, a decrease of 3.1 percentage points. RevPAR, which is a product of the occupancy percentage and ADR, decreased 2.9% in the three months ended September 30, 1999 compared to the three months ended September 30,1998. The decrease in RevPAR is primarily due to a greater increase in the supply of available rooms than in demand in the southwest region. The relationship between supply and demand varies by region, however, it has impacted La Quinta to a greater extent than its competitors due to its concentration of hotels in the southwest. The revenue impact of the oversupply of available rooms was partially mitigated by revenue increases resulting from a higher proportion of room rental income from the Inn & Suites hotels as compared to the Inns during the comparable three-month periods. Inn & Suites hotels generally have higher room rental income per night than the Inns. Other sources of hotel revenues during the three months ended September 30, 1999 include: guest services revenue of approximately $3,373,000, which is derived from charges to guests for long distance service, fax use and laundry service; and approximately $2,031,000 related to meeting and banquet rentals, restaurant rental and management services. Commission revenue of approximately $401,000 was earned on phone, movie and vending services. Interest and other income was $247,000 for the three months ended September 30, 1999 compared to $191,000 for the same period in 1998. For the three months ended September 30, 1999, total recurring expenses were $156,862,000 compared to $127,364,000 for the three months ended September 30, 1998, an increase of $29,498,000. This increase was primarily attributable to the increase in hotel expenses including an increase in operating expenses of $19,619,000 and a net increase in rent, royalty and interest due to Realty of $10,373,000. This was partially offset by a decrease to general and administrative expenses of $381,000. The decrease in general and administrative expenses includes an increase of $140,000 in overhead for the lodging segment and a decrease of $521,000 in allocated expenses of the paired share structure. The increase in operating expenses, net rent, royalty and interest due to Realty as well as overhead for the lodging segment is attributable to the inclusion of three months of activity in 1999 compared to the post-acquisition period in 1998. The decrease in allocated expenses of the paired share structure is due to the reduction in corporate overhead resulting from the sale of the horseracing and golf businesses. Hotel operating expenses and overhead includes 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 expense for the three months ended September 30, 1999 was $1,962,000 compared to $2,055,000 for the same period in 1998. Interest due to third parties of $11,000 was incurred during the three months ended September 30, 1999 compared to $31,000 for the same period in 1998. At September 30, 1999, La Quinta operated 302 hotels (including 232 Inns and 70 Inn & Suites) with approximately 39,000 rooms, compared to 280 hotels (including 233 Inns and 47 Inn & Suites) with approximately 36,000 rooms at the merger date of July 17, 1998. OTHER EXPENSES During the three months ended September 30, 1999, Operating recorded $1,018,000 in other expenses. These are costs associated with the reorganization of the lodging division including employee severance and other expenses. DISCONTINUED OPERATIONS Pursuant to the Plan, Operating has classified golf and horseracing activities as discontinued operations for financial reporting purposes. During the three months ended September 30, 1999, a final adjustment was made to reduce the loss on disposal of discontinued operations by $362,000, which consisted of a gain on the sale of the Santa Anita Racetrack of $1,086,000 and a loss on the sale of Cobblestone Golf Group of $724,000. For the three months ended September 30, 1998, Operating has presented a loss from 39 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES discontinued operations of $2,566,000 and a provision for loss on disposal of discontinued operations of $4,500,000, which were related to the horseracing and golf segments. NET LOSS The resulting net income for the three months ended September 30, 1999, was $83,000 compared to a net loss of $11,686,000 for the three months ended September 30, 1998. The net income per common share for the three months ended September 30, 1999 was $.00 compared to a net loss of $.08 for the three months ended September 30, 1998. The per common share amount increased primarily due to the increase in net income related to the hotel operations resulting from the inclusion of three months of activity in 1999 compared to the post-acquisition period in 1998. NINE MONTHS ENDED SEPTEMBER 30, 1999 VS. NINE MONTHS ENDED SEPTEMBER 30, 1998 Operating has derived its revenue primarily from hotel operations since the consummation of the La Quinta Merger on July 17, 1998. Hotel revenues for the nine months ended September 30, 1999 were $461,670,000 compared to $123,430,000 for the nine months ended September 30, 1999, an increase of $338,240,000, due to the inclusion of hotel operations for the nine months ended September 30, 1999 compared to the post-acquisition period of July 17, 1998 through September 30, 1998. Approximately $443,142,000 or 96% of hotel revenues were derived from room rentals during the nine months ended September 30, 1999 compared to $118,363,000 and 96% during the nine months ended September 30, 1998. Hotel operating revenues generally are measured as a function of the ADR and occupancy percentage. The ADR for the nine months ended September 30, 1999 was $61.15 compared to ADR for the nine months ended September 30, 1998 of $60.86, an increase of $.29 or .5%. Occupancy percentage decreased to 69.9% from 70.6%, a decrease of .7 percentage points. RevPAR, which is a product of the occupancy percentage and ADR, decreased .6% in the nine months ended September 30, 1999 compared to the nine months ended September 30, 1998. The decrease in RevPAR is primarily due to a greater increase in the supply of available rooms than in demand in the southwest region. The relationship between supply and demand varies by region, however, it has impacted La Quinta to a greater extent than its competitors due to its concentration of hotels in the southwest. The revenue impact of the oversupply of available rooms was partially mitigated by revenue increases resulting from a higher proportion of room rental income from the Inn & Suites hotels as compared to the Inns during the comparable nine month periods. Inn & Suites hotels generally have higher room rental income per night than the Inns. Other sources of hotel revenues during the nine months ended September 30, 1999 include: guest services revenue of approximately $10,625,000, which is derived from charges to guests for long distance service, fax use and laundry service; and approximately $6,268,000 related to meeting and banquet rentals, restaurant rental and management services. Commission revenue of approximately $1,635,000 was earned on phone, movie and vending services. Interest and other income was $1,898,000 for the nine months ended September 30, 1999 compared to $444,000 for the same period in 1998. For the nine months ended September 30, 1999, total recurring expenses were $459,282,000 compared to $129,495,000 for the nine months ended September 30, 1998, an increase of $329,787,000. This increase was primarily attributable to the increase in hotel expenses including an increase in operating expenses of $155,712,000, a net increase in rent, royalty and interest due to Realty of $163,044,000 and an increase to general and administrative expenses of the lodging segment of $8,388,000. The increase in general and administrative expenses includes an increase of $8,421,000 in overhead for the lodging segment and a decrease of $33,000 in allocated expenses of the paired share structure. The increase in operating expenses, net rent, royalty and interest due to Realty as well as overhead for the lodging segment is attributable to the inclusion of nine months of activity in 1999 compared to the post-acquisition period in 1998. The decrease in allocated expenses of the paired share structure is due to the reduction in corporate overhead resulting from the sale of the horseracing and golf businesses. Hotel operating expenses and overhead includes 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. General and administrative expense in the nine months ended September 30, 1998 also includes $1,239,000 of expenses of the paired share structure which were not allocated to the lodging segment as they were incurred prior to the acquisition of La Quinta on July 17, 1998. Depreciation and amortization expense for the nine months ended September 30, 1999 was $6,218,000 compared to $2,458,000 for the same period in 1998. The increase is due to the depreciation and amortization associated with furniture and fixtures and intangible assets acquired in the La Quinta Merger. Interest due to third parties of $153,000 was incurred during the nine months ended September 30, 1999 compared to $31,000 for the same period in 1998. At September 30, 1999, La Quinta operated 302 hotels (including 232 Inns and 70 Inn & Suites) with approximately 39,000 rooms, compared to 280 hotels (including 233 Inns and 47 Inn & Suites) with approximately 36,000 rooms at the merger date of July 17, 1998. 40 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES OTHER EXPENSES During the first nine months of 1999, Operating recorded approximately $31,516,000 in other expenses. On May 10, 1999, the Companies entered into a separation agreement with Abraham D. Gosman, former Director and Chairman of the Companies and Chief Executive Officer and Treasurer of Operating. Under the terms of the separation agreement, Mr. Gosman received severance payments totaling $25,000,000 in cash and the continuation of certain life insurance benefits. The Companies established a Special Committee to evaluate the applicability of Mr. Gosman's employment contract and whether such severance or other payments were appropriate. Based on the results of the evaluation and recommendation of the Special Committee, the Boards of Directors concluded that the separation agreement was in the long-term best interest of the shareholders of the Companies and approved the separation agreement. In conjunction with the implementation of the Plan, which included a change in the focus of the lodging division to internal growth, La Quinta management performed a review of the front desk system under development for its lodging facilities, and made a decision to abandon the project. The decision was based primarily on management's intent to integrate the front desk system with new revenue management software, availability of more suitable and flexible externally developed software and a shift in information systems philosophy toward implementation of externally developed software and outsourcing of related support services. A charge of approximately $3,998,000 to write-off certain internal and external software development costs related to the project was recorded in the first quarter of 1999. Operating also incurred approximately $1,500,000 of costs associated with advisory fees related to the separation agreement with Mr. Gosman and $1,018,000 associated with the reorganization of the lodging division including employee severance and other expenses. DISCONTINUED OPERATIONS Pursuant to the Plan, Operating has classified golf and horseracing activities as discontinued operations for financial reporting purposes. Accordingly, Operating has presented as discontinued operations approximately $10,863,000 of losses on disposal from the golf and horseracing segments during the nine months ended September 30, 1999. Operating has recorded a loss of $7,169,000 related to the sale of the Cobblestone Golf Group, which was sold on March 31, 1999. The loss includes a final accounting of working capital balances at the sale date. The horseracing segment was sold on December 10, 1998. During the nine months ended September 30, 1999, a loss of $6,655,000 was recorded which related to an adjustment of the selling price between Realty and Operating. This loss was partially offset by a gain of $2,961,000 arising from a final adjustment relating to working capital balances at the sale date. For the nine months ended September 30, 1998, Realty has presented a loss from discontinued operations of $3,914,000 and a provision for loss on disposal of discontinued operations of $4,500,000, which was related to the horseracing and golf segments. NET LOSS The resulting net loss for the nine months ended September 30, 1999, was $37,585,000 compared to $14,912,000 for the nine months ended September 30, 1998. The net loss per common share for the nine months ended September 30, 1999 was $.26 compared to $.13 for the nine months ended September 30, 1998. The per common share amount decreased primarily due to other non-recurring expenses incurred in 1999, related to the separation agreement with Mr. Gosman, the write-off of software development costs and the reorganization of the lodging division. OPERATING - LIQUIDITY AND CAPITAL RESOURCES CASH FLOWS FROM OPERATING ACTIVITIES The principal source of cash to be used to fund Operating's future operating expenses and recurring capital expenditures will be cash flow provided by operating activities. Operating anticipates that cash flow provided by operating activities will provide the necessary funds on a short and long-term basis to meet operating cash requirements. CASH FLOWS FROM INVESTING AND FINANCING ACTIVITIES Operating provides funding for costs associated with the restructuring through a combination of long-term and short-term financing including, both debt and equity, as well as the sale of assets. Operating obtains long-term financing through the issuance of common shares and unsecured notes. Operating obtains short-term financing through borrowings from Realty. There is, however, no assurance that the Companies will satisfactorily achieve, if at all, the objectives set forth in this paragraph. On July 17, 1998, Realty entered into a Credit Agreement which provided Realty with up to $2,250,000,000 in credit facilities, replacing Realty's then existing $365,000,000 revolving credit facilities. The Credit Agreement provided for borrowings in four 41 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES 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. On November 23, 1998, Realty amended its Credit Agreement to provide for Realty's cash repayment of a portion of its FEIT, the amendment of certain financial covenants to accommodate asset sales, to exclude the impact of non-recurring charges in certain covenant calculations, and to provide for future operating flexibility. The amendment also provided for an increase to the LIBOR pricing of the credit facility by approximately 125 basis points, and the pledge of stock of the Companies' subsidiaries. This pledge of subsidiary stock also extended on a pro rata basis to entitled bondholders. Realty also agreed to a 25 basis point increase to the LIBOR pricing in the event that an equity offering of at least $100,000,000 had not been completed by February 1, 1999. On February 1, 1999 this increase went into effect. On March 10, 1999, Realty reached a second agreement with its bank group to further amend the Credit Agreement. The second amendment became effective upon the successful completion of the sale of Cobblestone Golf Group and provided for a portion of the sale proceeds to be applied to the FEIT. The second amendment also provided for, among other things, upon the sale of Cobblestone Golf Group, elimination of limitations on certain healthcare investments and a lowering of the commitment on the revolving tranche to $850,000,000. On March 10, 1999, the Companies entered into an agreement with MLI and certain of its affiliates to use the proceeds from the sale of the Cobblestone Golf Group in excess of $300,000,000 to repurchase all or a portion of the remaining paired common shares outstanding under the FEIT. MLI agreed not to sell any shares of the remaining paired common shares until March 31, 1999, while the Companies completed the sale of Cobblestone Golf Group. On March 31, 1999, the Companies completed the sale of Cobblestone Golf Group and on April 1, 1999, the Companies settled the FEIT by paying MLI $89,840,000 for the repurchase of 6,865,000 paired common shares. On April 8, 1999, Realty repaid $250,000,000 of its Tranche B term loan and cancelled a $250,000,000 swap contract. Both were scheduled to mature on July 17, 1999. On August 16, 1999, Realty repaid $12,500,000 of its notes payable which matured on that date and bore interest at 7.25%. As of September 30, 1999, approximately $993,000 in charges related to the Plan remained unpaid. Payments made during the quarter included professional and advisory fees and severance paid to former employees. Operating had shareholders' equity of $36,958,000 as of September 30, 1999. The Companies have an effective shelf registration statement on file with the SEC under which the Companies may issue $1,825,000,000 of securities including shares, preferred stock, debt, series common stock, convertible debt and warrants to purchase shares, preferred shares, debt, series common stock and convertible debt. Operating believes that various sources of capital available over the next twelve months are adequate to finance operations as well as pending acquisitions. Over the next twelve months, as Operating identifies appropriate operating or investment opportunities, Operating may raise additional capital through the sale of shares, series common stock or preferred stock, or through the issuance of long-term debt. YEAR 2000 The statements in the following section include "Year 2000 readiness disclosure" within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. This "Year 2000 problem" is due to the fact that many existing computer programs and embedded chip technology systems were developed using only the last two digits to indicate a year. Thus, such systems may not have the capability of recognizing a year that begins with "20" as opposed to "19." As a consequence, these systems could fail altogether, or produce erroneous results. THE COMPANIES' STATE OF READINESS. The Companies have developed a five-phase plan to address their Year 2000 issues (their "Year 2000 Plan"). The five phases are: (i) Awareness, (ii) Assessment, (iii) Remediation, (iv) Testing and (v) Implementation. 42 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES AWARENESS. The Companies have implemented a program to insure that the relevant employees are aware of the Year 2000 issue and have collected information from such employees regarding systems that might be affected. Management of each company has assembled Year 2000 Steering Committees to determine and assess the risks of the Year 2000 issue, plan and implement necessary upgrades or changes to make the Companies Year 2000 compliant or institute mitigating actions to minimize those risks and oversee the Companies' progress with respect to the implementation of their Year 2000 Plan. ASSESSMENT. The Companies have completed an assessment of their internally and externally developed computer information systems. Operating has obtained written verification from significant vendors to the effect that externally developed computer information systems acquired from such vendors correctly distinguish dates before the Year 2000. In addition, the Companies have engaged outside consultants to review the plan and assessment. Realty has verified to the best of its knowledge that all of its internal systems and material vendors are Year 2000 compliant and has obtained written verification from most of its healthcare operators. The Companies have completed their evaluation and assessment of their other electronic systems that include embedded technology, such as telecommunications, security, HVAC, elevator, fire and safety systems. The Companies are aware that such systems contain embedded chips that are often difficult to identify and test and may require complete replacement because they cannot be repaired. Failure of the Companies to identify or remediate any embedded chips (either on an individual or aggregate basis) on which significant business operations depend, such as phone systems, could have a material adverse impact on the Companies' business, financial condition and results of operations. The Companies have funded capital expenditures for upgraded equipment and software as necessary. In addition to the Companies' systems and those of its vendors and suppliers, there exist others that could have a material impact on the Companies' businesses if not Year 2000 compliant. Such systems could affect airline operations and other segments of the lodging and travel industries. These systems are outside of the Companies' control and their compliance is not verifiable by the Companies. The Companies' primary financial service providers are its primary bank, credit card and payroll processors, many of which have provided written verification to the Companies that they will be Year 2000 compliant. For the foregoing reasons, the Companies do not believe that there is a significant risk related to the failure of vendors or third-party service providers to prepare for the Year 2000; however, the costs and timing of third-party Year 2000 compliance is not within the Companies' control and no assurances can be given with respect to the cost or timing of such efforts or the potential effects of any failure to comply. REMEDIATION. Operating's primary uses of software systems are the hotel reservation and front desk system, accounting, payroll and human resources software. Upgrades to the hotel reservation system to address Year 2000 compliance issues were installed and implemented during the fourth quarter of 1997 through the second quarter of 1998. Testing of various airline interfaces with the hotel reservation system was completed by December 1998. Operating has implemented a new hotel front desk system for which it has obtained assurance that the system is Year 2000 compliant. Operating anticipates completion of implementation of this system at all of its hotels by mid-November 1999. Operating has written and tested a manual hotel operating contingency plan to be used in the event a Year 2000 compliance issue arises with respect to the new front desk system. The use of this contingency plan at a small number of hotels is not anticipated to create material disruption to the Companies. Operating has engaged outside consultants to assist in this process with respect to certain Year 2000 compliance efforts. Operating has implemented Year 2000 compliant upgrades to the existing accounting, payroll and human resource systems. TESTING. To attempt to confirm that their computer systems are Year 2000 compliant, the Companies performed limited testing of their computer information systems and their other computer systems that do not relate to information technology but include embedded technology. These tests did not produce Year 2000 compliance problems. The Companies will also rely on the written verification received from each vendor of their computer systems that the relevant system is Year 2000 compliant. Nevertheless, there can be no assurance that the computer systems on which the Companies' business relies will correctly distinguish dates before the Year 2000 from dates in and after the Year 2000. Any such failures could have a material adverse effect on the Companies' business, financial condition and results of operations. IMPLEMENTATION. The Companies have completed implementation of Year 2000 compliant software and software upgrades. COSTS TO ADDRESS THE COMPANIES' YEAR 2000 ISSUES. The Companies budgeted $1,650,000 for the cost of repairing, updating and replacing their standard computer information systems. The Companies currently expect that the installation of above mentioned upgrades and software will cost approximately $1,300,000 and as of October 20, 1999, the Companies have spent approximately $600,000 in connection therewith. In addition, the Companies expect that they will spend approximately $300,000 to address other Year 2000 related issues, including upgrades of certain systems with embedded technology. Because the Companies' Year 2000 assessment is ongoing and additional funds may be required as a result of future findings, the Companies are not currently able to estimate the final aggregate cost of addressing the Year 2000 issue. While these efforts will involve additional costs, the Companies believe, based on available information, that these costs will not have a material adverse effect on their business, financial condition or 43 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES results of operations. The Companies expect to fund the costs of addressing the Year 2000 issue from cash flows resulting from operations. RISKS PRESENTED BY YEAR 2000 ISSUES. At this time the Companies have not identified any specific business functions that will suffer material disruption as a result of Year 2000 related events. It is possible, however, that the Companies may identify business functions in the future that are specifically at risk of Year 2000 disruption. The absence of any such determination at this point represents only the Companies' current status of evaluating potential Year 2000 related problems and facts presently known to the Companies, and should not be construed to mean that there is no risk of Year 2000 related disruption. Moreover, due to the unique and pervasive nature of the Year 2000 issue, it is impracticable to anticipate each of the wide variety of Year 2000 events, particularly outside of the Companies, that might arise in a worst case scenario which might have a material adverse impact on the Companies' business, financial condition and results of operations. THE COMPANIES' CONTINGENCY PLANS. The Companies have not identified any specific business function that will be materially at risk of significant Year 2000 related disruptions. However, the Companies have developed detailed contingency plans specific to Year 2000 problems. As a part of their contingency planning, the Companies have analyzed the most reasonably likely worst-case scenario that could result from Year 2000-related failures. Failures by third parties to achieve Year 2000 compliance might result in short-term disruptions in travel patterns, and potential temporary disruptions in the supply of utility, telecommunications and financial services, most likely regional or local in scope. These events could cause temporary disruptions in the operations of hotel properties, and/or lead travelers to postpone travel, or to cancel travel plans, thereby affecting lodging patterns and occupancy. The preceding "Year 2000 readiness disclosure" contains various forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent the Companies' beliefs or expectations regarding future events. All forward-looking statements involve a number of risks and uncertainties that could cause the actual results to differ materially from the projected results. Factors that may cause these differences include, but are not limited to, the availability of qualified personnel and other information technology resources; the ability to identify and remediate all date sensitive lines of computer code or to replace embedded computer chips in affected systems or equipment; and the actions of governmental agencies or other third parties with respect to Year 2000 problems. SEASONALITY The lodging industry is seasonal in nature. Generally, hotel revenues are greater in the second and third quarters than in the first and fourth quarters. This seasonality can be expected to cause quarterly fluctuations in revenue, profit margins and net earnings. In addition, opening of new construction hotels and/or timing of hotel acquisitions may cause variation of revenue from quarter to quarter. 44 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES PART II: OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. On October 7, 1999, Realty acquired, through a merger of one of its subsidiaries, all of the ourstanding common stock, par value $1.00 per share, of TeleMatrix, Inc., a Florida corporation ("TeleMatrix"). As the merger consideration, Realty issued, pursuant to Regulation D under the Securities Act of 1933, as amended, 1,000 shares of 9% Series B Cumulative Redeemable Convertible Preferred Stock, par value $.10 per share (the "Series B Preferred Stock"), to the sole shareholder of TeleMatrix. Each share of Series B Preferred Stock has a liquidation preference of $25,000 and may be converted at the option of the holder thereof into 2,680 Paired Shares (subject, if applicable, to adjustment in the event of stock splits, stock dividends, recapitalizations and similar changes in Realty's capital stock) on or after the earlier of (i) October 7, 2004 or (ii) the first day that dividends on any shares of Series B Preferred Stock shall be in arrears for six or more quarters, whether or not consecutive. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS At the Annual Meeting of Shareholders of Meditrust Corporation and Meditrust Operating Company held on July 8, 1999, the recorded vote for each of the following matters submitted to the shareholders of the Companies was as follows: 1. Election of Directors of Meditrust Corporation: James P. Conn, Stephen E. Merrill and Thomas M. Taylor were nominated and duly elected to hold office as Directors of Meditrust Corporation, each to serve a term of three years and until their successors are duly elected and qualified, by the number of votes set forth opposite each person's name as follows: James P. Conn 124,359,450 Stephen E. Merrill 124,302,541 Thomas M. Taylor 124,193,931 The following persons continued as Directors of Meditrust Corporation following the meeting: David F. Benson Nancy G. Brinker Edward W. Brooke John C. Cushman, III C. Gerald Goldsmith Thomas J. Magovern 2. Election of Directors of Meditrust Operating Company: Stephen E. Merrill and Thomas M. Taylor were nominated and duly elected to hold office as Directors of Meditrust Operating Company, each to serve a term of three years and until their successors are duly elected and qualified, by the number of votes set forth opposite each person's name as follows: Stephen E. Merrill 124,315,288 Thomas M. Taylor 124,222,682 The persons listed below continued as Directors of Meditrust Operating Company following the meeting: William C. Baker David F. Benson Nancy G. Brinker William G. Byrnes C. Gerald Goldsmith Thomas J. Magovern 45 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description - ------- ----------- 3.1 Restated Certificate of Incorporation of Meditrust Corporation (incorporated by reference to Exhibit 3.2 to Joint Registration Statement on Form S-4 of Meditrust Corporation and Meditrust Operating Company (File Nos. 333-47737 and 333-47737-01)); 3.2 Amended and Restated By-laws of Meditrust Corporation (incorporated by reference to Exhibit 3.5 to Joint Registration Statement on Form S-4 of Meditrust Corporation and Meditrust Operating Company (File Nos. 333-47737 and 333-47737-01)); 3.3 Restated Certificate of Incorporation of Meditrust Operating Company filed with the Secretary of State of Delaware on March 2, 1998 (incorporated by reference to Exhibit 3.4 to Joint Registration Statement on Form S-4 of Meditrust Corporation and Meditrust Operating Company (File Nos. 33-47737 and 333-47737-01)); 3.4 Amended and Restated By-laws of Meditrust Operating Company (incorporated by reference to Exhibit 3.6 to Joint Registration Statement on Form S-4 of Meditrust Corporation and Meditrust Operating company (File Nos. 333-47737 and 333-47737-01)); 3.5 Certificate of Amendment of Restated Certificate of Incorporation of Meditrust Corporation filed with the Secretary of State of Delaware on July 17, 1998 (incorporated by reference to exhibit 3.8 to the Joint Quarterly Report on Form 10-Q for the quarter ended September 30, 1998); 3.6 Certificate of Amendment of Restated Certificate of Incorporation of Meditrust Operating Company filed with the Secretary of State of Delaware on July 17, 1998 (incorporated by reference to exhibit 3.9 to the Joint Quarterly Report on Form 10-Q for the quarter ended September 30, 1998); 4.1 Certificate of Designation for the 9% Series A Cumulative Redeemable Preferred Stock of Meditrust Corporation filed with the Secretary of State of Delaware on June 12, 1998 4.2 Certificate of Designation for the 9% Series A Cumulative Redeemable Preferred Stock of Meditrust Corporation filed with the Secretary of State of Delaware on June 12, 1998 (incorporated by reference to Joint Current Report on Form 8-K of the Companies, event date June 10, 1998); (incorporated by reference to Joint Current Report on Form 8-K of the Companies, event date June 10,1998); 46 MEDITRUST CORPORATION AND MEDITRUST OPERATING COMPANY AND SUBSIDIARIES 27 Financial Data Schedule; (b) Reports on Form 8-K. During the quarter ended September 30, 1999, the Companies filed the following Current Reports on Form 8-K: None 47 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 November 12, 1999 /s/ Laurie T. Gerber -------------------- Laurie T. Gerber Chief Financial Officer Meditrust Operating Company November 12, 1999 /s/ William C. Baker -------------------- William C. Baker Interim President and Interim Treasurer 48 EX-27 2 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 OF MEDITRUST CORPORATION AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000314661 MEDITRUST CORPORATION 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 11,099 0 37,045 0 0 0 4,064,364 306,575 5,569,615 0 2,707,884 0 70 3,577,672 (821,502) 5,569,615 0 471,341 0 0 0 0 184,446 135,899 0 135,899 32,376 0 0 168,275 1.08 1.08
EX-27.1 3 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 OF MEDITRUST OPERATING COMPANY AND ITS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000313749 MEDITRUST OPERATING COMPANY 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 1,275 0 21,694 0 0 32,808 47,083 2,344 153,482 98,750 0 0 0 118,944 (58,427) 153,482 0 463,568 0 222,555 0 0 153 (27,230) (508) (26,722) (10,863) 0 0 (37,585) (.26) (.26)
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