-----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, U9FUyH45J46a/c7dEsAHPwrm+lfw7PWP+0E5bbVqrx2xLGaLBoqHvWHtG3oo5flF lpd7jchqVy5O2DAwLjG7DA== 0000950135-96-000311.txt : 19960201 0000950135-96-000311.hdr.sgml : 19960201 ACCESSION NUMBER: 0000950135-96-000311 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960129 ITEM INFORMATION: Other events ITEM INFORMATION: Financial statements and exhibits FILED AS OF DATE: 19960131 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDITRUST CENTRAL INDEX KEY: 0000774350 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 046532031 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09582 FILM NUMBER: 96509126 BUSINESS ADDRESS: STREET 1: 197 FIRST AVENUE CITY: NEEDHAM STATE: MA ZIP: 02194 BUSINESS PHONE: 6174336000 MAIL ADDRESS: STREET 1: 197 FIRST AVENUE CITY: NEEDHAM STATE: MA ZIP: 02194 8-K 1 MEDITRUST FORM 8-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K Current Report Pursuant to Section 13 or 15(d) of THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): January 29, 1996 MEDITRUST --------------------------------------------------- (Exact name of registrant as specified in charter) Massachusetts 0-14022 04-6532031 ------------------------------------------------------------ (State of (Commission (I.R.S. Employer Incorporation) File No.) Identification No.) 197 First Avenue, Needham, Massachusetts 02194 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 433-6000 2 Item 5. OTHER EVENTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - --------------------- YEAR ENDED DECEMBER 31, 1995 VS. YEAR ENDED DECEMBER 31, 1994 Revenues for the year ended December 31, 1995 were $209,369,000 compared to $172,993,000 for the year ended December 31, 1994, an increase of $36,376,000 or 21%. Revenue growth resulted from increased interest income of $32,823,000 and increased rental income of $3,553,000, resulting primarily from additional real estate investments made during the past year. For the year ended December 31, 1995, total expenses decreased by $3,136,000. Interest expense decreased by $3,316,000 primarily due to lower interest rates on newly issued notes which were used to prepay senior unsecured notes payable and senior mortgage notes payable, which carried higher interest rates. Depreciation and amortization increased by $1,005,000, as a result of increased real estate investments. General and administrative expenses decreased by $825,000. YEAR ENDED DECEMBER 31, 1994 VS. YEAR ENDED DECEMBER 31, 1993 Revenues for the year ended December 31, 1994 were $172,993,000 compared to $150,375,000 for the year ended December 31, 1993, an increase of $22,618,000 or 15%. Revenue growth resulted from increased rental income of $2,059,000 and increased interest income of $20,559,000 resulting primarily from additional real estate investments made during the past year. For the year ended December 31, 1994, total expenses increased by $5,794,000. Interest expense increased by $5,286,000 and resulted from the issuance of convertible debentures in November 1993 and March 1994 and a higher level of short-term borrowings during 1994. The increase was partially offset by the prepayment of senior secured and unsecured debt totaling $23,300,000 and the conversion of convertible debentures totaling $59,002,000 during 1994. Depreciation and amortization expense increased by $894,000 and general and administrative expense decreased by $386,000. LIQUIDITY AND CAPITAL RESOURCES The Company provides funding for its investments through a combination of long-term and short-term financing including both debt and equity. The Company obtains long-term financing through the issuance of Shares, the issuance of long-term unsecured notes, the issuance of convertible debentures and the assumption of mortgage notes. The Company obtains short-term financing through the use of unsecured notes and bank lines of credit which are replaced with long-term financing as appropriate. From time to time, the Company may utilize interest rate 2 3 caps or swaps to hedge interest rate volatility. It is the Company's objective to match mortgage and lease terms with the terms of its borrowings. The Company seeks to maintain an appropriate spread between its borrowing costs and the rate of return on its investments. When development loans convert to sale/leaseback transactions or permanent mortgage loans, the base rent or interest rate, as appropriate, is fixed at the time of such conversion. In April 1995, the Company completed the sale of 9,250,000 Shares at $30.125 per Share. The net proceeds to the Company from this offering were used to repay short-term borrowings and for investments in additional health care facilities. On July 26, 1995, the Company completed the sale of $125 million of 7.375% Notes due July 15, 2000 and $80 million of 7.6% Notes due July 15, 2001. The 7.375% Notes were priced at 99.82% to yield 7.418% and the 7.6% Notes were priced at 99.948% to yield 7.61%. The Company used the net proceeds to repay higher cost indebtedness. On July 28, 1995, the Company completed the sale of $43,334,000 of 8.54% Series A convertible senior notes due July 1, 2000 and $51,666,000 of 8.56% Series B convertible senior notes due July 1, 2002. These notes are convertible into Shares of beneficial interest of the Company at $32.625 per Share. The Company used the net proceeds of the offering to repay higher cost indebtedness. In July and August 1995, the Company prepaid senior unsecured notes and senior mortgage notes payable of $296,800,000 which were due between 1995 and 2001, with interest rates ranging from 10.00% to 10.86%. The transaction resulted in prepayment penalties and acceleration of unamortized debt costs totaling $33,454,000, which is an extraordinary item reflected as a loss from prepayment of debt in the accompanying income statement. Net proceeds from the issuance of approximately $300 million of notes and convertible debentures with interest rates ranging from 7.375% to 8.56% were used for the prepayment. The Company will gain flexibility from the elimination of certain operational covenants and benefit from lower interest rates and improved interest coverage ratios. On August 10, 1995, the Company commenced a Medium-Term Note program, offering on a continuing basis, notes due from nine months to 30 years from date of issue, as selected by the purchaser and agreed to by the Company at an aggregate initial public offering price not to exceed $200 million. During August and September $98,500,000 of these notes were issued and in January 1996, an additional $40,000,000 were issued with maturity dates ranging from January 17, 1997 to August 17, 2015, bearing interest at rates between 6.35% to 8.625%. The net proceeds were utilized to reduce the outstanding balance of the Company's unsecured credit facilities. In November 1995, the Company completed the sale of 1,000,000 Shares at $33.00 per Share. The net proceeds to the Company from this offering were used to repay short-term borrowings and for investments in additional health care facilities. 3 4 As of December 31, 1995, the Company's gross real estate investments totaled approximately $1,855,000,000 consisting of 247 long-term care facilities, 24 rehabilitation hospitals, 14 medical office buildings, ten alcohol and substance abuse treatment facilities and psychiatric hospitals, seven retirement and assisted living facilities, and one acute care hospital campus. As of December 31, 1995, the Company's outstanding commitments for additional financing totaled approximately $102,701,000 for the completion of 17 facilities under construction and additions to permanent mortgages secured by five long-term care facilities. The Company had shareholders' equity of $1,061,755,000 and debt constituted 42% of the Company's total capitalization as of December 31, 1995. As of January 29, 1996, the Company has an unsecured revolving line of credit expiring June 30, 1997 in the amount of $205,000,000 bearing interest at the lender's prime rate (8.5%) or LIBOR plus 1.00% (6.5625% at January 22, 1996), and an unsecured short-term borrowing expiring April 1, 1996 in the amount of $25,000,000 bearing interest at LIBOR plus 1.25% (6.8125% at January 22, 1996). A total of approximately $69,000,000 was available at January 29, 1996. In addition, the Company has effective shelf registrations on file with the Securities and Exchange Commission under which the Company may issue up to approximately $394,000,000 of securities including debt, convertible debt and shares of beneficial interest. The Company believes that its various sources of capital are adequate to finance its operations as well as pending property acquisitions, mortgage financings and future dividends. For 1996, however, in the event that the Company identifies appropriate investment opportunities, the Company may raise additional capital through the sale of shares of beneficial interest or by the issuance of additional long-term debt. 4 5 Item 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits Exhibit No. Description ----------- ------------ 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule 99 Consolidated Financial Statements of Meditrust as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. MEDITRUST ------------------------------- January 29, 1996 /s/ Lisa P. McAlister ---------------- ------------------------------- Lisa P. McAlister Vice President and Treasurer 5 EX-23 2 CONSENT OF COOPERS & LYBRAND LLP 1 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We hereby consent to the incorporation by reference in the registration statements of Meditrust on Form S-8 (File Nos. 33-25072, 33-49218 and 33-57377) and on Form S-3 (File Nos. 33-40005, 33-40926, 33-42596, 33-43931, 33-45979, 33-48695, 33-59215 and 33-62293) of our reports dated January 29, 1996 on our audits of the consolidated financial statements of Meditrust as of December 31, 1995 and 1994, and for the years ended December 31, 1995, 1994 and 1993, which reports are included in this Current Report on Form 8-K. Boston, Massachusetts January 29, 1996 /s/ Coopers & Lybrand L.L.P. EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1995 and the Consolidated Statement of Income for the year ended December 31, 1995 of Meditrust and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 44248 0 20406 0 0 0 669,175 77,204 1,891,852 0 762,291 1,192,612 0 0 (130,857) 1,891,852 0 209,369 0 0 0 0 64,163 119,972 0 119,972 0 33,454 0 86,518 1.82 1.82
EX-99 4 CONSOLIDATED FINANCIAL STATEMENTS 1 EXHIBIT 99 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Trustees of Meditrust: We have audited the accompanying consolidated balance sheets of Meditrust as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Meditrust at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Boston, Massachusetts January 29, 1996 2 CONSOLIDATED BALANCE SHEETS
December 31, ----------------------- 1995 1994 -------- ------- (In thousands) ASSETS Real estate investments (Notes 1, 3, 4 and 7): Land........................................ $ 47,993 $ 42,060 Buildings and improvements, net of accumulated depreciation of $77,204 and $65,918, respectively................. 621,182 518,428 Real estate mortgages ...................... 1,108,623 923,741 ---------- ---------- Total real estate investments............. 1,777,798 1,484,229 Other assets, net............................. 49,400 54,246 Fees, interest and other receivables.......... 20,406 16,718 Cash and cash equivalents..................... 44,248 39,937 ---------- ---------- Total assets.............................. $1,891,852 $1,595,130 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Indebtedness (Notes 6 and 12): Notes payable, net.......................... $ 300,813 $ - Convertible debentures, net................. 295,209 231,277 Bank notes payable, net..................... 113,709 168,645 Bonds and mortgages payable, net............ 52,560 59,264 Senior unsecured notes, net................. - 285,360 Senior mortgage notes, net.................. - 21,206 ---------- ---------- Total indebtedness........................ 762,291 765,752 Deferred income............................... 9,222 12,559 Accrued expenses and other liabilities........ 58,584 46,672 ---------- ---------- Total liabilities......................... 830,097 824,983 ---------- ---------- Commitments and contingencies (Notes 3, 8 and 9) Shareholders' equity (Notes 5, 6, 10 and 12): Shares of beneficial interest without par value: Unlimited shares authorized; 51,177 and 39,619 shares issued and outstanding in 1995 and 1994, respectively 1,192,612 860,071 Distributions in excess of net income (130,857) (89,924) ---------- ---------- Total shareholders' equity.................. 1,061,755 770,147 ---------- ---------- Total liabilities and shareholders' equity 1,891,852 $1,595,130 ========== ========== The accompanying notes are an integral part of these financial statements.
2 3 CONSOLIDATED STATEMENTS OF INCOME
For The Year Ended December 31, ------------------------------------ 1995 1994 1993 (In thousands except per Share data) Revenues: Rental income................. $ 85,616 $ 82,063 $ 80,004 Interest income............... 123,753 90,930 70,371 -------- -------- -------- Total revenues............ 209,369 172,993 150,375 -------- -------- -------- Expenses: Interest...................... 64,163 67,479 62,193 Depreciation and amortization. 18,176 17,171 16,277 General and administrative.... 7,058 7,883 8,269 -------- -------- -------- Total expenses............ 89,397 92,533 86,739 -------- -------- -------- Net income before extraordinary item.. $119,972 $ 80,460 $ 63,636 Extraordinary item: Loss on prepayment of debt (Note 6) ......................... 33,454 - - -------- -------- -------- Net income............................ $ 86,518 $ 80,460 $ 63,636 ======== ======== ======== Per Share: Net income before extraordinary item.. $ 2.52 $ 2.28 $ 2.03 Extraordinary item: Loss on prepayment of debt....... 0.70 - - -------- -------- -------- Net income............................ $ 1.82 $ 2.28 $ 2.03 ======== ======== ======== Weighted average Shares outstanding... 47,563 35,314 31,310 ======== ======== ========
The accompanying notes are an integral part of these financial statements. -3- 4 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Shares Amount -------- -------- (In thousands except per Share data) Balance, December 31, 1992. . . . . . . . . . . . . . . . . . 26,767 $ 431,483 Proceeds from issuance of shares of beneficial interest, net of offering costs of $5,135. . . . . . . . . 3,277 95,239 Issuance of shares of beneficial interest associated with: Conversion of debentures, net of unamortized issue costs of $2,414 . . . . . . . . . . . . . . . . . . 2,508 67,263 Exercise of warrants . . . . . . . . . . . . . . . . . . . 182 3,646 Employee compensation and stock options. . . . . . . . . . 102 2,851 Distributions paid ($2.54 per Share). . . . . . . . . . . . . - (78,323) Net income for the year ended December 31, 1993 . . . . . . . - 63,636 ------ ---------- Balance, December 31, 1993. . . . . . . . . . . . . . . . . . 32,836 585,795 Proceeds from issuance of shares of beneficial interest, net of offering costs of $8,371. . . . . . . . . 4,500 130,566 Issuance of shares of beneficial interest associated with: Conversion of debentures, net of unamortized issue costs of $1,632. . . . . . . . . . . . . . . . . . . 2,037 57,370 Exercise of warrants . . . . . . . . . . . . . . . . . . . 122 2,431 Employee compensation and stock options. . . . . . . . . . 124 3,485 Distributions paid ($2.62 per Share). . . . . . . . . . . . . - (89,960) Net income for the year ended December 31, 1994 . . . . . . . - 80,460 ------ ---------- Balance, December 31, 1994. . . . . . . . . . . . . . . . . . 39,619 770,147 Proceeds from issuance of shares of beneficial interest, net of offering costs of $16,703. . . . . . . . . 10,250 294,953 Issuance of shares of beneficial interest associated with: Conversion of debentures, net of unamortized issue costs of $628. . . . . . . . . . . . . . . . . . . . 1,067 30,670 Employee compensation and stock options . . . . . . . . . . . 241 6,918 Distributions paid ($2.70 per Share). . . . . . . . . . . . . - (127,451) Net income for the year ended December 31, 1995 . . . . . . . - 86,518 ------ ---------- Balance, December 31, 1995. . . . . . . . . . . . . . . . . . . 51,177 $1,061,755 ====== ========== The accompanying notes are an integral part of these financial statements.
-4- 5 CONSOLIDATED STATEMENTS OF CASH FLOWS For The Year Ended December 31, ------------------------------------------ 1995 1994 1993 -------- -------- -------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Net income . . . . . . . . . . . . . . . . . . . . . $ 86,518 $ 80,460 $ 63,636 Loss on prepayment of debt . . . . . . . . . . . . . 33,454 - - Depreciation of real estate. . . . . . . . . . . . . 16,582 15,209 14,548 Goodwill amortization. . . . . . . . . . . . . . . . 1,557 1,557 1,557 Shares issued for compensation . . . . . . . . . . . 959 863 826 Other depreciation, amortization and provision for losses (Note 4) . . . . . . . . . . 2,764 6,916 12,317 Gain on sale of real estate and mortgage prepayments, net (Note 4) . . . . . . . . . . . . - (3,726) (8,005) Other items, net . . . . . . . . . . . . . . . . . . (284) (766) (48) -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES AVAILABLE FOR DISTRIBUTION. . . . . . . . . . . . . . . . . 141,550 100,513 84,831 Net change in other assets and liabilities (Note 2). 8,447 306 (5,540) -------- -------- -------- Net cash provided by operating activities . . . . . 149,997 100,819 79,291 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from equity offerings . . . . . . . . . . . 311,656 138,937 100,374 Proceeds from debt issuance. . . . . . . . . . . . . 835,700 460,004 278,370 Repayment of bank notes payable. . . . . . . . . . . (492,200) (270,595) (130,000) Repayment of senior unsecured and mortgage notes payable . . . . . . . . . . . . . . (309,300) (23,300) (43,800) Debt prepayment charges. . . . . . . . . . . . . . . (31,228) - - Equity offering and debt issuance costs. . . . . . . (21,962) (11,484) (10,618) Principal payments on bonds and mortgages payable. . (6,727) (847) (868) Distributions to shareholders. . . . . . . . . . . . (127,451) (89,960) (78,323) Proceeds from warrant conversions and stock options. 5,961 5,053 5,671 -------- -------- -------- Net cash provided by financing activities. . . . . 164,449 207,808 120,806 -------- -------- --------
The accompanying notes are an integral part of these financial statements. -5- 6 CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Year Ended December 31, --------------------------------------- 1995 1994 1993 -------- -------- -------- (In thousands) CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of real estate. . . . . . . . . . . . . . . $(94,187) $(20,210) $(18,272) Investment in real estate mortgages and development funding. . . . . . . . . . . . . . . . . (259,162) (291,027) (210,295) Prepayment proceeds and principal payments on real estate mortgages . . . . . . . . . . . . . . 49,847 23,470 42,045 Proceeds from sale of real estate 7,800 4,000 5,194 Working capital advances and acquisition of receivables. . . . . . . . . . . . . . . . . . . . . (45,026) (44,297) (47,153) Collection of receivables and repayment of working capital advances . . . . . . . . . . . . . . . . . . 30,593 43,068 19,832 -------- -------- -------- Net cash used in investing activities (310,135) (284,996) (208,649) -------- -------- -------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . 4,311 23,631 (8,552) Cash and cash equivalents at: Beginning of year . . . . . . . . . . . . . . . . . . 39,937 16,306 24,858 -------- -------- -------- End of year . . . . . . . . . . . . . . . . . . . . . $ 44,248 $ 39,937 $ 16,306 ======== ======== ======== Supplemental disclosure of cash flow information: Interest paid during the period . . . . . . . . . . . . . . . . $ 55,544 $ 63,323 $ 59,746 Non-cash investing and financing transactions: Acquisition and lease of real estate (Notes 3 and 4): Value of real estate (sold) acquired: Land and buildings. . . . . . . . . . . . . . . . . (34,386) (94,000) 106,566 Accumulated depreciation. . . . . . . . . . . . . . 3,486 22,463 - Increase (reduction) of real estate mortgages net of participation reduction. . . . . . 37,872 85,000 (88,493) Issuance of demand note payable related to participation reduction. . . . . . . . . - - (18,073) Value of Shares issued for conversion of debentures. . 31,298 59,002 69,677
The accompanying notes are an integral part of these financial statements. -6- 7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Meditrust (the "Company"), a real estate investment trust, invests primarily in health care facilities, including nursing homes, assisted living facilities, medical office buildings, rehabilitation hospitals and other health care related facilities. These facilities are located throughout the United States and are operated by regional and national health care providers. The Company's more significant accounting policies follow: PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its majority-owned partnerships after the elimination of all significant intercompany accounts and transactions. REAL ESTATE INVESTMENTS Land, buildings and improvements are stated at cost. Depreciation is provided for on a straight-line basis over 40 years, the expected useful lives of the buildings and major improvements. Financial statements prepared in conformity with generally accepted accounting principles require management to make estimates and assumptions affecting reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from those estimates. The Company provides reserves for potential losses based upon management's periodic review of its assets and classifies these reserves as appropriate reductions to the related assets or includes such reserves in accrued expenses and other liabilities. CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST The Company capitalizes interest costs associated with funds used to finance the construction of facilities. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest which approximates the Company's cost of financing. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of certificates of deposit and other investments with less than 90-day maturities at the time of purchase and are stated at cost which approximates fair market value. OTHER ASSETS Other assets include cash restricted for specified disbursement in accordance with certain facility acquisitions and mortgage financings and the corresponding liabilities are reflected in accrued expenses and other liabilities. Other assets also include facilities' operating receivables, working capital advances and goodwill associated with the acquisition of the Company's previous investment advisor which is being amortized on a straight-line basis over a ten-year period. DEBT ISSUANCE COSTS Debt issuance costs have been deferred and are being amortized using primarily the effective interest method over the term of the related borrowings. -7- 8 REVENUE RECOGNITION Rental income from operating leases is recognized as earned over the life of the lease agreements. Interest income on real estate mortgages is recognized on the accrual basis. Deferred income consists principally of fees which are being amortized over the term of the lease, the mortgage or the construction period related to such facilities. NET INCOME PER SHARE Net income per share of beneficial interest ("Shares") is computed using the weighted average number of Shares outstanding during the year of computation. The effect of common stock equivalents is immaterial. INCOME TAXES The Company has elected to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, and believes it has met all the requirements for qualification as such. Accordingly, the Company will not be subject to federal income taxes on amounts distributed to shareholders, provided it distributes annually at least 95% of its real estate investment trust taxable income and meets certain other requirements for qualifying as a real estate investment trust. Therefore, no provision for federal income taxes is believed necessary in the financial statements. RECLASSIFICATIONS Certain reclassifications have been made in the prior years' consolidated financial statements to conform with the current year's presentation. 2. SUPPLEMENTAL CASH FLOW INFORMATION Details of net change in other assets and liabilities (excluding noncash items, deferred income recognized in excess of cash received and changes in restricted cash and related liabilities) follow:
For The Year Ended December 31, --------------------------------------- 1995 1994 1993 ------- ------- ------- (In thousands) Increase in fees, interest and other receivables. . . . . . . $(3,360) $(4,392) $(1,705) Increase in other assets . . . . . . . . . . . . . . . . . . (3,838) (434) (1,630) (Decrease) increase in deferred income. . . . . . . . . . . . 4,331 (176) 2 Increase (decrease) in accrued expenses . . . . . . . . . . . and other liabilities. . . . . . . . . . . . . . . . . . . 11,314 5,308 (2,207) ------- ------- ------- $ 8,447 $ 306 $(5,540) ======= ======= =======
3. REAL ESTATE INVESTMENTS During 1995, the Company provided permanent mortgage financing of $100,376,000 for -8- 9 six long-term care facilities located in Arizona, Massachusetts, Michigan, Tennessee and Washington, three medical office buildings in Florida and Tennessee, one assisted living facility in Michigan, two retirement living centers located in Nevada and Utah, two alcohol and substance abuse facilities and one psychiatric facility located in New York. The New York facilities were previously financed for $72,397,000 with a previous borrower. The previous borrower prepaid this loan with the proceeds from the sale to the Company of four long-term care facilities in Maryland, Massachusetts and New Jersey and one rehabilitation hospital in New Jersey. The Company also provided $51,840,000 in additional permanent mortgage financing secured by 18 long-term care facilities located in Kansas, Kentucky, Massachusetts, Missouri, Nevada, Pennsylvania, Tennessee, Texas, Washington and Wyoming, and two retirement facilities located in Nebraska and Wyoming. In addition, the Company provided development financing of $106,946,000 for ten long-term care facilities, eleven medical office buildings and one assisted living facility. During the year ended December 31, 1995 the Company received annual principal payments on real estate mortgages of $6,615,000 and received $43,232,000 in mortgage prepayments for seven long-term care facilities and one rehabilitation facility. During 1995, the Company acquired for $88,700,000 an acute care hospital campus located in Arizona, and five long-term care facilities located in Ohio and West Virginia. The Company also provided $2,487,000 for additions to three facilities, and $3,000,000 for land at one facility that are currently owned by the Company. In addition, the Company received proceeds of $7,800,000 from the sale of a long-term care facility in Illinois. From time to time, the Company enters into transactions with related parties. As of December 31, 1995, the Company had total commitments of $160,383,000 of which $83,348,000 was funded, to entities in which the Company's Chairman and Chief Executive Officer owned or was expected to own a controlling equity interest. During 1995, the Company recognized interest income of $2,593,000 from investments with these entities. The Company expects, from time to time, to enter into additional transactions with related parties in the future. All of the terms and conditions of such transactions are subject to approval by the independent Trustees of the Company. Minority interest in partnerships relating to the Company's investments in seven rehabilitation facilities is $2,204,000 and $2,562,000 as of December 31, 1995 and 1994 and is included in accrued expenses and other liabilities in the consolidated financial statements. The Company has a 94% equity interest in these partnerships. At December 31, 1995, the Company was committed to providing additional financing of approximately $102,701,000 relating to six long-term care facilities, ten medical office buildings, and one assisted living facility currently under construction and additions to permanent mortgages secured by five long-term care facilities. As of December 31, 1995, 42% of the Company's gross real estate portfolio was invested with two operators. Each operator represents 21% of the Company's portfolio. -9- 10 4. MERGER BETWEEN SUN HEALTHCARE AND MEDIPLEX In June 1994, Sun Healthcare Group, Inc. ("Sun") merged with The Mediplex Group, Inc. ("Mediplex"). The merged entities comprise approximately 21% of the Company's portfolio of gross real estate investments as of December 31, 1995. A condition of the Company's consent to this merger was the extension of all existing Mediplex lease and mortgage terms to between 2004 and 2008 and the addition of annual rate escalators. In connection with this transaction, the Company (a) terminated its leases with Mediplex on three properties (two alcohol and substance abuse treatment facilities and one psychiatric hospital located in New York) with a net book value of $101,537,000 and replaced these leases with mortgages from Sun totaling $74,000,000, (b) loaned $11,000,000 to Sun which was collateralized by a mortgage on a rehabilitation facility located in Colorado and (c) entered into sale/leaseback transactions with Sun totaling $30,000,000 for two rehabilitation facilities located in Kentucky and Massachusetts and for a long-term care facility located in Connecticut. This transaction resulted in a deferred gain of $13,463,000 at December 31, 1994. During 1995, these facilities were sold by Sun, and the Company recognized the previously deferred gain. This gain was offset by an addition to the valuation allowance for approximately the same amount. During 1995, approximately $17,733,000 of receivables purchased by the Company were charged off against the valuation allowance. At December 31, 1995 the valuation allowance aggregated $13,947,000. 5. SHARES OF BENEFICIAL INTEREST Distributions paid to shareholders are determined by the Company's Board of Trustees based on an analysis of cash flows from operating activities. Cash flows from operating activities available for distribution differ from net income primarily due to the extraordinary loss on prepayment of debt; and depreciation and amortization expense, a noncash item. Distributions in excess of net income as reflected on the Company's consolidated balance sheets are primarily a result of an accumulation of this difference. All Shares participate equally in distributions and in net assets available for distribution to shareholders on liquidation or termination of the Company. The Trustees of the Company have the authority to effect certain Share redemptions or prohibit the transfer of Shares under certain circumstances. Total distributions to shareholders during the years ended December 31, 1995, 1994 and 1993 included a return of capital per Share of $.8292, $.3306, and $.3797, respectively. The 1995 and 1993 distribution also includes long-term capital gain distributions of $.2851 and $.1351 per Share, respectively. -10- 11 6. INDEBTEDNESS Indebtedness of the Company at December 31, 1995 and 1994 is as follows:
1995 1994 -------- -------- (In thousands) Notes payable, net: Principal payments of $125,000,000 due in July 2000, and $80,000,000 due in July 2001, interest ranging from 7.375% to 7.6% . . . . . . . . . . . . . . . . . . . . . . $203,115 $ - Principal payments of $98,500,000 due from August 1999 to August 2015, bearing interest at rates between 7.25% and 8.625% . . . . . . . . . . . . . . . . . . . . . . . . 97,698 - -------- -------- 300,813 - -------- -------- Convertible debentures, net: 9% interest, convertible at $27.00 per Share, due January 2002. . . . . . . . . . . . . . . . . . . . . . . 8,188 18,158 7% interest, convertible at $30.625 per Share, due March 1998 . . . . . . . . . . . . . . . . . . . . . . . 20,379 40,789 6 7/8% interest, convertible at $37.125 per Share, due November 1998 . . . . . . . . . . . . . . . . . . . . . . 84,935 84,471 7 1/2% interest, convertible at $36.18 per Share, due March 2001. . . . . . . . . . . . . . . . . . . . . . . . 88,356 87,859 8.54% interest, convertible at $32.625 per Share, due July 2000 . . . . . . . . . . . . . . . . . . . . . . . . 42,582 - 8.56% interest, convertible at $32.625 per Share due July 2002 . . . . . . . . . . . . . . . . . . . . . . . . 50,769 - -------- -------- 295,209 231,277 -------- -------- Bank notes payable, net: Revolving credit agreement expiring June 30, 1997. . 113,709 168,645 -------- --------
-11- 12 6. INDEBTEDNESS, continued
1995 1994 ------ ------- (In thousands) Bonds and mortgages payable, net: Mortgage notes, interest ranging from 3.8% to 12.2%, monthly principal and interest payments ranging from $36,000 to $78,000 and maturing from January 1998 through March 2001, collateralized by eight facilities . . . 49,085 55,739 Manatee County, Florida Industrial Revenue Bonds, Series 1983, serial payments ranging from $45,000 to $90,000 due in 1995 through 2000 and $345,000 due in December 2003 and $2,770,000 due in December 2013, interest ranging from 12.0% to 13.5%, collateralized by one facility . . . . . . . 3,475 3,525 ------ -------- 52,560 59,264 ------ -------- Senior unsecured notes, net: Principal payments of $20,000,000 and $16,000,000 with interest ranging from 10.00% to 10.57%; repaid in July and August 1995. . . . . . . . . . . . . . . . . . . - 99,711 Principal payments of $20,000,000 with interest at 10.22%; repaid in July and August 1995 . . . . . . . . . . . . . . . - 99,145 Principal payments of $12,500,000 with interest at 10.86%; repaid in July and August 1995 . . . . . . . . . . . . . . . - 86,504 -------- -------- - 285,360 -------- -------- Senior mortgage notes, net: Principal payments of $10,800,000 and $200,000 with interest at 10.75%; repaid in July and August 1995. . . . . . . . . . - 21,206 -------- -------- Total indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . $762,291 $765,752 ======== ========
Convertible Debentures The 9% convertible debentures issued in April 1992 are subject to redemption by the Company on or after April 23, 1995 at 100% of the principal amount plus accrued interest. During the year ended December 31, 1995, $10,287,000 of debentures were converted into 380,977 Shares. During the year ended December 31, 1994, $25,210,000 of debentures were converted into 933,684 Shares. The 7% debentures issued in February 1993 are subject to redemption by the Company on or after March 1, 1996 at 100% of the principal amount plus accrued interest. During the year ended December 31, 1995, $21,011,000 of debentures were converted into 686,062 Shares. During the year ended December 31, 1994, $33,792,000 of debentures were converted into 1,103,404 Shares. The 6 7/8% debentures issued in November 1993, the 7 1/2 % debentures issued in March 1994, and the 8.54% and 8.56% debentures issued in July 1995 are subject to redemption by the Company at 100% of the principal amount plus accrued interest to the extent necessary to preserve the Company's status as a real estate investment trust. -12- 13 Bank Notes Payable The Company has unsecured revolving lines of credit expiring June 30, 1997 in the amount of $205,000,000 bearing interest at the lender's prime rate (8.5%) or LIBOR plus 1.00% (6.6875%) at December 31, 1995. Bonds and Mortgages Payable The notes payable, convertible debentures, bank notes payable, bonds and mortgages payable, senior unsecured notes and senior mortgage notes are presented net of unamortized debt issuance costs of $8,174,000 and $8,537,000 at December 31, 1995 and 1994, respectively. Amortization expense associated with the debt issuance costs amounted to $4,994,000, $3,028,000 and $2,961,000 for the years ended December 31, 1995, 1994 and 1993, respectively, and is reflected in interest expense. All debt instruments contain certain covenants, the most restrictive of which limits the ratio of total liabilities to consolidated tangible shareholders' equity. The aggregate maturities of notes payable, convertible debentures, and bonds and mortgages payable, excluding the bank notes payable, for the five years subsequent to December 31, 1995, are as follows: 1996...................... $ 818,000 1997...................... 967,000 1998...................... 122,432,000 1999...................... 31,912,000 2000...................... 174,046,000
7. FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are subjective in nature and are dependent on a number of significant assumptions associated with each financial instrument or group of financial instruments. Because of a variety of permitted calculations and assumptions regarding estimates of future cash flows, risks, discount rates and relevant comparable market information, reasonable comparisons of the Company's fair value information with other companies cannot necessarily be made. The following methods and assumptions were used to estimate the fair value of financial instruments for which it is practicable to estimate that value: Real Estate Mortgages The fair value of real estate mortgages have been estimated by discounting future cash flows using current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. As of December 31, 1995, the fair value of real estate mortgages amounted to approximately $1,114,000,000. The quoted market price for the Company's publicly traded convertible debentures and rates currently available to the Company for debt with similar terms and remaining maturities were used to estimate fair value of existing debt. As of December 31, 1995, the fair value of -13- 14 the Company's indebtedness amounted to approximately $774,000,000. 8. LEASE COMMITMENTS The Company's land and facilities are generally leased pursuant to noncancelable, fixed-term operating leases expiring from 1996 to 2008. The leases also generally provide multiple, five-year renewal options and the option to purchase the facilities at fair market value at the end of the initial term of the lease or at various times during the lease. The lessees are required to pay aggregate base rent during the lease term and applicable debt service payments as well as percentage, supplemental and additional rent (as defined in the lease agreements). For the years ended December 31, 1995, 1994 and 1993, additional rent from the leases and additional interest from the mortgages amounted to $9,106,000, $8,156,000 and $8,657,000 respectively. In addition, the lessees pay all taxes, insurance, maintenance and other operating costs of the land and facilities. Future minimum lease payments, including debt service payments (as defined in the lease agreements) which are based on interest rates in effect at December 31, 1995, expected to be received by the Company during the initial term of the leases for the years subsequent to December 31, 1995, are as follows: 1996 $ 80,207,000 1997 79,493,000 1998 72,651,000 1999 63,665,000 2000 58,754,000 Thereafter 288,906,000
9. LEGAL PROCEEDINGS In December 1993, the Chapter 11 Trustee of Towers Financial Corporation commenced an action in the Suffolk County Superior Court for the Commonwealth of Massachusetts against one of the Company's lessees and in January, 1994 two subsidiaries of the Company were named as additional defendants. The plaintiff alleges that it holds a prior security interest in the accounts receivable of seven health care facilities, one of which is owned by the Company. The plaintiff demands payment of all such receivables including those collected by the Company in an amount up to $17,000,000. The Company is vigorously defending this action. It has filed an answer and counterclaim denying any liability to the plaintiff and asserting that the plaintiff does not have a valid prior security interest in any assets of the Company or its borrowers. The trial on this matter has commenced and is ongoing. The Company is a party to a number of other claims and lawsuits arising out of the normal course of business; the Company believes that none of these claims or pending lawsuits, either individually or in the aggregate, will have a material adverse affect on the Company's business or on its consolidated financial position. 10. STOCK OPTION PLANS Incentive awards under the Company's stock option plans (the "Plans") which may be granted by the Board of Trustees include nonqualified or nonstatutory options to purchase Company shares and incentive stock options (collectively, "options"). The number of Shares -14- 15 available for issuance under the Plans is 5% of the number of outstanding Shares. Up to 500,000 Shares available under each Plan may be issued pursuant to incentive stock options. Trustees, officers and key employees of the Company or any other entity providing similar services to the Company and its officers, directors and key employees, and all persons retained by the Company solely as consultants are eligible to participate in the Plans. Such options expire 10 years after the date granted. One third of all options granted become exercisable at the end of each year following the date of issuance. Options to purchase 303,000 Shares were exercisable as of December 31, 1995. Information concerning option activity for the years 1995, 1994 and 1993 is as follows:
Shares Option Price --------- -------------------- Outstanding at December 31, 1992 598,000 $16.625 to $29.00 Granted . . . . . . . . . . . . . . 126,000 $26.375 to $34.00 Exercised . . . . . . . . . . . . . 83,000 $16.625 to $27.625 Expired . . . . . . . . . . . . . . 23,000 $26.375 to $27.625 --------- Outstanding at December 31, 1993 618,000 $16.625 to $34.00 Granted . . . . . . . . . . . . . . 61,000 $32.375 to $33.00 Exercised . . . . . . . . . . . . . 97,000 $18.750 to $33.125 Expired . . . . . . . . . . . . . . 44,000 $33.00 to $33.625 --------- Outstanding at December 31, 1994 538,000 $16.625 to $34.00 Granted . . . . . . . . . . . . . . 1,054,000 $30.125 to $30.25 Exercised . . . . . . . . . . . . . 211,000 $16.625 to $33.00 Expired . . . . . . . . . . . . . . 55,000 $30.125 to $34.00 --------- Outstanding at December 31, 1995 1,326,000 $16.625 to $34.00 =========
Financial Accounting Standards Board Statement No. 123 "Accounting for Stock Based Compensation" is effective for years beginning after December 15, 1995. The Company intends to adopt the disclosure requirements of this pronouncement during 1996 and is in the process of performing an analysis of the impact that its adoption will have on the financial statements. The Company does not believe the impact of this pronouncement on its financial position or results of operations will be material. The Company entered into a Split-Dollar Life Insurance Agreement with a trust established by the Chairman and Chief Executive Officer, pursuant to which the Company has agreed to advance policy premiums on life insurance policies paying a death benefit to the trust. The Company is entitled to reimbursement of the amounts advanced, without interest, which right is secured by an assignment of the life insurance policies and a promissory note of the Chairman in the amount of the excess, if any, of the premiums paid by the Company over the cash surrender value of the insurance policies. -15- 16 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following quarterly financial data summarizes the unaudited quarterly results for the years ended December 31, 1995 and 1994:
Quarter Ended ------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 1995 (In thousands, except per Share amounts) - ---- Revenues............................ $48,933 $52,437 $52,753 $55,246 Net income before extraordinary item.............................. 24,183 30,929 31,702 33,158 Extraordinary item: Loss on prepayment of debt........ - - 33,454 - Net income (loss)................... 24,183 30,929 (1,752) 33,158 Per Share: Net income before extraordinary item.................. .60 .63 .64 .65 Extraordinary item: Loss on prepayment of debt..................... - - .68 - Net income (loss)................... .60 .63 (.04) .65
Quarter Ended ------------------------------------------------------------- 1994 March 31 June 30 September 30 December 31 - ---- -------- ------- ------------ ----------- (In thousands, except per Share amounts) Revenues............................ $40,995 $42,378 $43,158 $46,462 Net income.......................... 17,705 19,008 19,817 23,930 Net income per Share................ .53 .56 .57 .62
12. SUBSEQUENT EVENTS On January 10, 1996, the Board of Trustees of the Company declared a distribution of $.6875 per Share payable February 15, 1996, to shareholders of record on January 31, 1996. The distribution related to the period October 1, 1995 through December 31, 1995. -16- -----END PRIVACY-ENHANCED MESSAGE-----