<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 9, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 4
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
----------------------
LTC HEALTHCARE, INC.
(Exact Name of Registrant as Specified in its Charter)
NEVADA 91-1895305
(State of Incorporation or Organization) (I.R.S. Employer Identification No.)
300 ESPLANADE DRIVE, SUITE 1860
OXNARD, CALIFORNIA 93030
(Address, Including Zip Code, of Principal Executive Offices)
(805) 981-8655
(Registrant's Telephone Number, Including Area Code)
-------------------
Securities to be registered pursuant to Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE PACIFIC EXCHANGE
-------------------------------------- -------------------------------
(Title of Class) (Name on each exchange on which
each class is to be registered)
Securities to be registered pursuant to Section 12(g) of the Act: None
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<PAGE>
INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
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<S> <C> <C>
1. Business . . . . . . . . "SUMMARY OF INFORMATION"; "THE
DISTRIBUTION-Background and Reasons for
the Distribution"; "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS";
"THE COMPANY" and "BUSINESS AND
PROPERTIES."
2. Financial Information. . "SUMMARY OF INFORMATION"; "RISK
FACTORS"; "PRO FORMA COMBINED
CAPITALIZATION"; "UNAUDITED PRO FORMA
FINANCIAL INFORMATION"; "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" and
"FINANCIAL STATEMENTS."
3. Properties . . . . . . . "BUSINESS AND PROPERTIES."
4. Security Ownership of
Certain Beneficial
Owners and Management. "MANAGEMENT" and "SECURITIES OWNERSHIP
OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT."
5. Directors and Executive
Officers . . . . . . . "SUMMARY OF INFORMATION"; "RISK
FACTORS"; "THE COMPANY" and
"MANAGEMENT."
6. Executive Compensation . "MANAGEMENT-Executive Officer
Compensation."
7. Certain Relationships and
Related Transactions . "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS."
8. Legal Proceedings. . . . "BUSINESS AND PROPERTIES-Legal
Proceedings."
9. Market Price of and
Dividends on the
Registrant's Common
Equity and Related
Stockholder Matters. . "SUMMARY OF INFORMATION"; "RISK
FACTORS-Dividend Policy" and "THE
DISTRIBUTION-Listing and Trading of
Company Common Stock; Dividend Policy."
10. Recent Sales of
Unregistered
Securities . . . . . . None.
11. Description of
Registrant's Securities
to be Registered . . . "HEALTHCARE ARTICLES OF INCORPORATION
AND BYLAWS" and "DESCRIPTION OF THE
COMPANY'S CAPITAL STOCK."
12. Indemnification of
Directors and Officers . "MANAGEMENT-Indemnification Agreements";
"HEALTHCARE ARTICLES OF INCORPORATION
AND BYLAWS-Indemnification and
Advancement of Expenses" and "LIABILITY
AND INDEMNIFICATION OF OFFICERS AND
DIRECTORS OF THE COMPANY."
</TABLE>
1
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<TABLE>
<CAPTION>
ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
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<S> <C> <C>
13. Financial Statements and
Supplementary Data . . "SUMMARY OF INFORMATION"; "PRO FORMA
COMBINED CAPITALIZATION"; "UNAUDITED PRO
FORMA FINANCIAL INFORMATION";
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "FINANCIAL STATEMENTS."
14. Changes in and
Disagreements with
Accountants on Accounting
and Financial Disclosure . None.
15. Financial Statements and
Exhibits . . . . . . . . .
(a) Financial Statements
and Schedules. . . .
(1) Financial
Statements:. . . "FINANCIAL STATEMENTS."
(b) Exhibits:
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
3.1 Form of Amended and Restated Articles of
Incorporation of LTC Healthcare, Inc.
(included as Annex I to Information
Sheet). (3)
3.2 Form of Amended and Restated Bylaws of
LTC Healthcare, Inc. (included as Annex
II to Information Statement). (3)
4.1 Form of Common Stock Certificate. (2)
10.1 Form of 1998 Equity Participation Plan
of LTC Healthcare, Inc. (included as
Annex III to Information Statement).
(2)
10.2 Form of Intercompany Agreement. (2)
10.3 Form of Distribution Agreement. (2)
10.4 Form of Administrative Services
Agreement. (2)
10.5 Form of Tax Sharing Agreement. (2)
10.6 Form of Indemnity Agreement. (2)
10.7 Amended and Restated Promissory Note,
dated as of May 19, 1998, between LTC
Healthcare, Inc. and LTC Properties,
Inc. (3)
10.8 Lease and Sublease Agreement, dated as
of April 21, 1998, between LTC-Ohio,
Inc., a Delaware corporation, as Lessor
and Sublessor and Karrington Operating
Company, Inc., an Ohio corporation, as
Lessee and Sublessee. (2)
10.9 Lease Agreement (Erie, Pennsylvania),
dated as of June 30, 1998, between
Missouri River Corporation, a Delaware
corporation, as Lessor and Karrington
Operating Company, Inc., an Ohio
corporation, as Lessee. (2)
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
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<S> <C>
10.10 Lease Agreement (Rocky River), dated as
of May 21, 1998, between LTC-Ohio, Inc.,
a Delaware corporation, doing business
in Ohio as LTC Properties-Ohio, Inc., as
Lessor and Karrington Operating Company,
Inc., an Ohio corporation, as Lessee.
(2)
10.11 Lease Agreement, dated as of December
18, 1987, by and between Phoenix Nursing
Home Partnership, an Illinois limited
partnership, and Horizon Healthcare
Corporation, a Delaware corporation.
(2)
10.12 Amendment to Lease Agreement, dated as
of August 30, 1991, by and between
Phoenix Nursing Home Limited
Partnership, an Illinois limited
partnership, and Horizon Healthcare
Corporation, a Delaware corporation and
Sunrise Healthcare Corporation, a New
Mexico corporation. (2)
10.13 Lease Agreement, dated as of August 30,
1991, by and between Phoenix Nursing
Home Limited Partnership II, an Illinois
limited partnership, and Sunrise
Healthcare Corporation, a New Mexico
corporation, and Andrew Turner and Nora
Turner. (2)
10.14 First Amendment to Lease Agreement,
dated as of February 1, 1993, by and
between Phoenix Nursing Home Limited
Partnership II, an Illinois limited
partnership, and Sunrise Healthcare
Corporation, a New Mexico corporation,
and Andrew Turner and Nora Turner. (2)
10.15 Convertible Subordinated Note Purchase
Agreement, dated as of March 30, 1998,
by and between Regent Assisted Living,
Inc. and LTC Healthcare, Inc. (formerly
known as LTC Equity Holding Company,
Inc.). (2)
10.16 Registration Rights Agreement, dated as
of March 30, 1998, by and between Regent
Assisted Living, Inc. and LTC
Healthcare, Inc. (formerly known as LTC
Equity Holding Company, Inc.). (2)
21.1 Subsidiaries of LTC Healthcare, Inc.
(2)
23.1 Consent of Ernst & Young LLP. (3)
27.1 Financial Data Schedule. (2)
27.2 Financial Data Schedule. (2)
</TABLE>
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(1) To be filed by amendment.
(2) Previously filed.
(3) Filed herewith.
3
<PAGE>
[LTC Letterhead and Logo]
September 9, 1998
Dear Stockholder:
The Board of Directors of LTC Properties, Inc. ("LTC") has approved the
distribution (the "Distribution") to holders of LTC common stock, holders of LTC
Series C Preferred Stock and holders of LTC convertible subordinated debentures,
through a special dividend, of the common stock of LTC Healthcare, Inc.
("Healthcare"). Healthcare was recently organized to pursue opportunities that
are available to those investors that are not restricted by the tax laws
governing REITs or influenced by public market perception.
The Board of Directors of LTC believes that the Distribution is in the best
interests of LTC stockholders. The completion of the Distribution will permit
LTC to concentrate on its core business. The Board of Directors of LTC believes
that the Distribution also will allow financial markets to better understand and
recognize the merits of the two businesses. The common stock of LTC will
continue to be listed on the New York Stock Exchange. Healthcare has applied to
have the shares of Healthcare common stock approved for listing and trading on
the Pacific Exchange.
If you are a holder of LTC common stock or LTC Series C Preferred Stock of
record at the close of business on September 15, 1998, you will receive as a
dividend 1/10 of a share of Healthcare common stock for each share of LTC common
stock you hold or for each share of LTC common stock receivable upon conversion.
Only whole shares of Healthcare common stock will be issued. Stockholders who
would have otherwise received a fractional share of Healthcare common stock will
receive cash in lieu thereof. The Distribution will be a taxable transaction to
the stockholders of LTC. The Distribution is scheduled to occur on or about
September 30, 1998. We expect to mail the Healthcare common stock certificates
and checks for cash in lieu of fractional shares shortly thereafter.
Stockholders of LTC on the record date should retain their LTC share
certificates which will continue to represent shares of LTC common stock.
The enclosed Information Statement contains information about the
Distribution and about Healthcare. We urge you to read it carefully. Holders
of LTC common stock are not required to take any action to participate in the
Distribution. A stockholder vote is not required in connection with this matter
and, accordingly, your proxy is not being sought.
We are optimistic about the prospects for LTC and Healthcare and appreciate
your continued support.
Sincerely,
/s/ ANDRE C. DIMITRIADIS
-------------------------------------------------
Andre C. Dimitriadis
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
LTC PROPERTIES, INC.
<PAGE>
INFORMATION STATEMENT
LTC HEALTHCARE, INC.
COMMON STOCK
This Information Statement (the "Information Statement") is being furnished
in connection with the distribution (the "Distribution") to holders of common
stock, par value $.01 per share ("LTC Common Stock"), holders of 8.5% Series C
Cumulative Convertible Preferred Stock, $.01 par value per share ("Series C
Preferred Stock") and holders of convertible subordinated debentures of LTC
Properties, Inc., a Maryland corporation ("LTC"), of all of the outstanding
shares of common stock, par value $.01 per share ("Company Common Stock"), of
LTC Healthcare, Inc., a Nevada corporation ("Healthcare" or the "Company"), that
are held by LTC (approximately 99% of all outstanding shares of Company Common
Stock) pursuant to the terms of a Distribution Agreement to be entered into
between LTC and Healthcare (the "Distribution Agreement"). Healthcare was
organized to pursue opportunities that are available to those investors that are
not restricted by the tax laws governing REITs or influenced by public market
perception. See "RISK FACTORS"; "THE COMPANY" and "BUSINESS AND PROPERTIES."
Shares of Company Common Stock will be distributed to holders of record of
LTC Common Stock, holders of Series C Preferred Stock and holders of the
following series of LTC convertible subordinated debentures : 8.50% due January
2001, 8.25% due January 1999, 7.75% due January 2002 and 8.25% due July 2001
(the "Debentures") as of the close of business on September 15, 1998 (the
"Record Date"). Each such holder will receive 1/10 of a share of Company Common
Stock for each share of LTC Common Stock held and for each share of LTC Common
Stock into which such holder's shares of Series C Preferred Stock or Debentures
may be converted on the record date. Only whole shares of Healthcare common
stock will be issued. Stockholders and debenture holders who would have
otherwise received a fractional share of Healthcare common stock will receive
cash in lieu thereof. The Distribution will be a taxable event to the
stockholders and the debenture holders of LTC. See "THE DISTRIBUTION-Material
Federal Income Tax Consequences of the Distribution." The Distribution is
scheduled to occur on or about September 30, 1998 (the "Distribution Date").
No consideration will be paid by holders of LTC Common Stock, holders of Series
C Preferred Stock and the holders of Debentures for shares of Company Common
Stock. See "THE DISTRIBUTION-Manner of Effecting the Distribution."
There is no current trading market for the Company Common Stock, although a
"when issued" market may develop prior to the Distribution Date. The Company
has applied to have the shares of Company Common Stock approved for listing and
trading on the Pacific Exchange under the symbol "LTI." See "THE
DISTRIBUTION-Listing and Trading of Company Common Stock; Dividend Policy."
----------------------
NO STOCKHOLDER OR DEBENTUREHOLDER APPROVAL OF THE DISTRIBUTION IS
REQUIRED OR SOUGHT. WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND US A PROXY.
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS INFORMATION STATEMENT.
----------------------
THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
----------------------
Stockholders and debenture holders of LTC with inquiries related to the
Distribution should contact Pamela J. Privett, Esq., Senior Vice President,
General Counsel and Secretary, LTC Properties, Inc., 300 Esplanade Drive,
Suite 1860, Oxnard, California 93030, telephone: (805) 981-3611; or LTC's stock
transfer agent, Harris Trust and Savings Bank, 311 West Monroe Street, Chicago,
Illinois 60606, telephone: (312) 360-8655. Harris Trust and Savings Bank is
also acting as distribution agent for the Distribution.
THE DATE OF THIS INFORMATION STATEMENT IS SEPTEMBER 9, 1998.
<PAGE>
INFORMATION STATEMENT
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
AVAILABLE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
SUMMARY OF INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Recently Formed Entity; Lack of Independent Operating History. . . . . . . . . . . . . . . . .9
Anticipated Operating Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
Possible Conflicts with LTC After the Distribution . . . . . . . . . . . . . . . . . . . . . .9
Failure of LTC to Qualify as a REIT Would Allow LTC to Compete with the Company. . . . . . . 10
Related Party Transactions On or Prior to the Distribution . . . . . . . . . . . . . . . . . 11
Reliance on Major Operators. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Tax Consequences of the Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Absence of Prior Trading Market for Company Common Stock; Potential Volatility . . . . . . . 15
Shares Eligible for Future Sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Potential Adverse Effects on LTC Common Stock of the Distribution. . . . . . . . . . . . . . 16
Difficulty of Locating Suitable Investments; Competition . . . . . . . . . . . . . . . . . . 16
Acquisition, Development, Construction and Renovation Activities . . . . . . . . . . . . . . 16
Acquired Properties May Fail to Perform as Expected and Capital Expenditures May Exceed
Estimates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Uncertainty of Cash Flow from Development, Construction and Renovation Activities. . . . . 16
Operating Risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Potential Increases in Operating Costs . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Dependence on Rental Income from Real Property . . . . . . . . . . . . . . . . . . . . . . . 17
Potential Adverse Consequences of Debt Financing . . . . . . . . . . . . . . . . . . . . . . 17
Use of Leverage Could Adversely Affect the Company . . . . . . . . . . . . . . . . . . . . 17
Inability to Repay or Refinance Indebtedness at Maturity; Foreclosures . . . . . . . . . . 17
Rising Interest Rates Could Increase the Company's Interest Expense. . . . . . . . . . . . 18
Restrictive Covenants Could Adversely Affect the Company's Borrowings. . . . . . . . . . . 18
No Limitation on Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Equity Investments in and with Third Parties . . . . . . . . . . . . . . . . . . . . . . . . 18
Dependence on Third Parties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Potential Lack of Control of Management. . . . . . . . . . . . . . . . . . . . . . . . . . 18
Potential Conflicts and Increased Bankruptcy, Liability and Other Risks. . . . . . . . . . 18
Illiquidity of Real Estate Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Disadvantages of Investments in Debt Instruments . . . . . . . . . . . . . . . . . . . . . . 19
Dependence on Borrowers to Preserve Value of Collateral; Possibility of Nonpayment . . . . 19
Unrated Debt Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Limited Remedies Upon Default of Mortgage Loans. . . . . . . . . . . . . . . . . . . . . . . 19
Disadvantages of Investments in Commercial Mortgage-Backed Securities. . . . . . . . . . . . 20
Investments in Commercial Mortgage-Backed Securities Subject to Real Estate Risks
Applicable to Underlying Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Investment in Commercial Mortgage-Backed Securities Subject to Risks Associated with
Prepayment of Underlying Mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Credit Support for Commercial Mortgage-Backed Securities May Prove Inadequate. . . . . . . 20
i
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Subordinated Securities May Not be Repaid Upon Default . . . . . . . . . . . . . . . . . . 20
Limitations on Remedies Upon Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Third-Party Bankruptcy Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Costs of Compliance with the Investment Company Act. . . . . . . . . . . . . . . . . . . . . 21
Uninsured Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Potential Environmental Liability Related to the Properties. . . . . . . . . . . . . . . . . 21
Hedging Policies/Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Dividend Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Certain Anti-Takeover Features Affecting a Change in Control of the Company. . . . . . . . . 23
Dependence on Key Personnel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
THE DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Background and Reasons for the Distribution. . . . . . . . . . . . . . . . . . . . . . . . . 25
Distribution Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Manner of Effecting the Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Results of the Distribution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Material Federal Income Tax Consequences of the Distribution . . . . . . . . . . . . . . . . 27
Listing and Trading of Company Common Stock; Dividend Policy . . . . . . . . . . . . . . . . 34
Conditions; Termination. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Reasons for Furnishing the Information Statement . . . . . . . . . . . . . . . . . . . . . . 35
RELATIONSHIP BETWEEN HEALTHCARE AND LTC AFTER THE DISTRIBUTION . . . . . . . . . . . . . . . . 36
Distribution Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Administrative Services Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Tax Sharing Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Intercompany Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Policies and Procedures for Addressing Conflicts . . . . . . . . . . . . . . . . . . . . . . 37
REGULATORY APPROVALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
PRO FORMA COMBINED CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
LTC HEALTHCARE, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION . . . . . . . . . . . . . . . . 40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Nature of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Liquidity and Capital Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Operating Results. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Year 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Statement Regarding Forward Looking Disclosure . . . . . . . . . . . . . . . . . . . . . . . 47
THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Intercompany Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
BUSINESS AND PROPERTIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Initial Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Properties to Be Transferred to Healthcare Prior to the Distribution . . . . . . . . . . . . 53
Equity Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Environmental Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Corporate Headquarters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Committees of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Compensation of the Board of Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
ii
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Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Executive Officer Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Healthcare 1998 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
Indemnification Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . 72
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . 73
Authorized Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Directors. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Liability for Monetary Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Anti-Takeover Effect of Authorized But Undesignated Preferred Stock. . . . . . . . . . . . . 75
Indemnification and Advancement of Expenses. . . . . . . . . . . . . . . . . . . . . . . . . 75
Amendment of the Company Articles and Bylaws . . . . . . . . . . . . . . . . . . . . . . . . 77
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . 78
General. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Nevada Anti-Takeover Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS OF THE COMPANY . . . . . . . . . . . . 81
Indemnification for Director's and Officer's Liability . . . . . . . . . . . . . . . . . . . 81
Restrictions on Interested Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . 81
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
ANNEX I - AMENDED AND RESTATED ARTICLES OF INCORPORATION OF LTC
HEALTHCARE, INC.
ANNEX II - AMENDED AND RESTATED BYLAWS OF LTC HEALTHCARE, INC.
ANNEX III - THE 1998 EQUITY PARTICIPATION PLAN OF LTC HEALTHCARE,
INC.
iii
<PAGE>
AVAILABLE INFORMATION
Healthcare has filed a Registration Statement on Form 10 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to the Company Common Stock. This Information Statement does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information, reference is made
hereby to the Registration Statement and such exhibits and schedules.
Statements contained herein concerning any documents are not necessarily
complete and, in each instance, reference is made to the copies of such
documents filed as exhibits to the Registration Statement. Each such statement
is qualified in its entirety by such reference. Copies of these documents may be
inspected without charge at the principal office of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048 and
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies of
all or any part thereof may be obtained from the Commission upon payment of the
charges prescribed by the Commission. Copies of this material also should be
available through the Internet by using "Quick Forms Lookup" at the SEC EDGAR
Archive, the address of which is http://www.sec.gov.
Following the Distribution, the Company will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. The Company also will be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
audited financial statements to its stockholders in connection with its annual
meetings of stockholders.
NO PERSON IS AUTHORIZED BY LTC OR THE COMPANY TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED.
1
<PAGE>
SUMMARY OF INFORMATION
THIS SUMMARY IS QUALIFIED BY THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS SET FORTH ELSEWHERE IN THIS INFORMATION STATEMENT. CAPITALIZED TERMS
USED BUT NOT DEFINED IN THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS INFORMATION
STATEMENT. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES IN THIS
INFORMATION STATEMENT TO THE COMPANY OR HEALTHCARE PRIOR TO CONSUMMATION OF THE
DISTRIBUTION INCLUDE THE ASSETS TO BE TRANSFERRED TO HEALTHCARE PURSUANT TO THE
DISTRIBUTION AGREEMENT, AND REFERENCES IN THIS INFORMATION STATEMENT TO LTC
INCLUDE ITS CONSOLIDATED SUBSIDIARIES.
THE DISTRIBUTION
<TABLE>
<S> <C>
Distributing Company . . . . . . . . . . LTC Properties, Inc., a Maryland corporation ("LTC").
Prior to the Distribution, LTC will transfer to the
Company certain equity investments, real properties and
related assets and liabilities currently held by LTC.
See "BUSINESS AND PROPERTIES."
Distributed Company. . . . . . . . . . . LTC Healthcare, Inc., a recently-formed Nevada
corporation ("Healthcare" or the "Company"). See "THE
COMPANY" and "BUSINESS AND PROPERTIES."
Distribution Ratio . . . . . . . . . . . 1/10 of a share of Company Common Stock for each share
of LTC Common Stock held and for each share of LTC
Common Stock into which shares of Series C Preferred
Stock and Debentures may be converted on the Record
Date, plus cash in lieu of fractional shares, if any.
Shares to be Outstanding Following
the Distribution . . . . . . . . . . . Based on 27,657,900 shares of LTC Common Stock outstanding,
2,000,000 shares of LTC Common Stock into which the Series
C Preferred Stock may be converted and 3,700,919 shares of
LTC Common Stock into which Debentures may be converted less
96,800 shares of LTC Common Stock owned by the Company as of
the date of this filing, in each case multiplied by the
distribution ratio of 1/10, approximately 3,326,202 shares of
Company Common Stock.
Record Date. . . . . . . . . . . . . . . September 15, 1998 (5:00 p.m. Eastern Daylight Time).
Distribution Date. . . . . . . . . . . . September 30, 1998.
Mailing Date . . . . . . . . . . . . . . Certificates representing the shares of Company Common
Stock to be distributed pursuant to the Distribution
will be delivered to the Distribution Agent on the
Distribution Date. The Distribution Agent will mail
certificates representing the shares of Company Common
Stock to holders of LTC Common Stock, holders of Series
C Preferred Stock and holders of Debentures as soon as
practicable thereafter. Holders of LTC Common Stock
and Series C Preferred Stock should not send stock
certificates to LTC, the Company or the Distribution
Agent. Holders of Debentures should retain their
Debenture certificates which will continue to be
convertible into the same number of shares of LTC
Common Stock as such Debentures were convertible prior
to the Distribution Date. See "THE DISTRIBUTION-Manner
of Effecting the Distribution."
Conditions to the Distribution . . . . . The Distribution is subject to a number of conditions.
The Board of Directors of LTC (the "LTC Board") has
reserved the right to waive any conditions to the
Distribution or, even if the conditions to the Distribution
are satisfied, to abandon, defer or modify the Distribution
at any time prior to the Distribution Date. See "THE
2
<PAGE>
DISTRIBUTION-Conditions; Termination."
Reasons for the Distribution . . . . . . LTC is a self-administered, self-managed real estate
investment trust ("REIT"). Because investors are
seeking a consistent and growing income stream from
their REIT investments, REITs are encouraged to
(i) grow recurring cash flow, known as funds from
operations ("FFO"), an indicator of performance in the
REIT industry, (ii) maintain a low leverage ratio (debt
to total capitalization is one measure used to
determine the relative risk of that cash flow stream,
as rising interest rates can diminish FFO and impact
dividends) and (iii) make conservative investments as
evidenced by positive debt service coverages or low per
bed or per unit investments in health care facilities.
As a result, REITs have generally been hesitant to
participate in long-term, higher-risk projects or to
bring their leverage ratios to above 40.0%. In
addition, the tax laws governing REITs include
limitations on (i) the types of assets that REITs may
own and the time period that real estate may be held,
restricting REITs from investing in operating
companies, equity securities, debt securities and
participating in short-term trading opportunities, and
(ii) the ability of REITs to retain earnings, requiring
REITs to distribute 95.0% of net taxable income,
excluding capital gains, each year. Further, because
gains on the sales of real estate are not included in
the calculation of FFO, REITs are not given value for
buying properties that have substantial long-term
appreciation. The LTC Board believes that significant
opportunities are available to those investors that are
not restricted by the tax laws governing REITs or
influenced by public market perception. Thus, the LTC
Board determined that it is in the best interests of
LTC and its stockholders to organize the Company to
pursue such opportunities, to transfer to the Company
certain equity investments, real properties and related
assets and liabilities currently held by LTC, and to
spin-off the Company to the LTC stockholders. The
Distribution will enable investors who own both LTC
Common Stock and Company Common Stock to participate in
the benefits of the REIT operations of LTC and the
non-REIT operations of the Company. See "THE
DISTRIBUTION-Background and Reasons for the
Distribution."
The Company and LTC will enter into the Intercompany
Agreement (as defined below) on or prior to the
Distribution Date to provide each other with rights to
participate in certain transactions. See "RISK
FACTORS-Possible Conflicts with LTC After the
Distribution"; "RELATIONSHIP BETWEEN HEALTHCARE AND LTC
AFTER THE DISTRIBUTION-Policies and Procedures for
Addressing Conflicts" and "THE COMPANY-Intercompany
Agreement."
Assets to be Transferred to the Company. . . The Company's investments as of the date of this
Information Statement consist of convertible
subordinated debentures of Regent Assisted Living, Inc.
("Regent") and shares of LTC Common Stock. Prior to
the Distribution Date, LTC will transfer to the Company
a total of 13 properties and certain equity
investments. The properties to be transferred to the
Company represent an aggregate of 909 beds in skilled
nursing facilities, an aggregate of 293 assisted living
facility units and 26 units in an Alzheimer facility.
Based on leases in effect as of the date of this
Information Statement, the Company presently expects
that the properties will generate approximately $6.9
million in annual base rental income for the next 12
months. Each of these
3
<PAGE>
properties is subject to a long-term, triple net lease,
the earliest of which expires in 2001. The aggregate
principal amount of Regent debentures owned by the
Company totals $6.5 million, and the aggregate fair
market value of equity investments owned by the Company
or to be transferred to the Company by LTC prior to the
Distribution Date totaled approximately $2.7 million on
June 30, 1998. Based on leases in effect as of the
date of this Information Statement, the Company
presently expects that Karrington Health, Inc., Sun
Healthcare Group, Inc. and Integrated Health Services,
Inc. will be the Company's largest operators for next
12 months, representing approximately 52%, 31% and 11%,
respectively, of the Company's total expected annual
lease revenue for the next 12 months. See "BUSINESS
AND PROPERTIES." See "THE COMPANY-Business Strategy."
Federal Income Tax Consequences
to LTC Stockholders and holders
of Debentures. . . . . . . . . . . . . The Distribution will be a taxable event to LTC's
stockholders for Federal income tax purposes. The
amount of the Distribution received by each LTC
stockholder will be treated as a dividend (i.e., as
ordinary income unless designated as a capital gain
dividend) to such stockholder to the extent of such
stockholder's pro rata share of LTC's current and
accumulated earnings and profits. The amount of the
Distribution received by each LTC stockholder that is
not treated as a dividend will first be treated as a
nontaxable return of capital to the extent of such
stockholder's basis in his LTC Common Stock, and then
generally as capital gain. The amount of the
Distribution received by each holder of Debentures will
be treated as a distribution of ordinary income, and
will further be treated as neither a dividend or
interest. The amount of the Distribution received by
each LTC stockholder for Federal income tax purposes
will be the fair market value of the Company Common
Stock received by such stockholder as of the
Distribution Date. LTC will make a determination of
the fair market value of the Company Common Stock as of
the Distribution Date. LTC will report the amount of
the Distribution received by each stockholder to such
stockholder and to the Internal Revenue Service (the
"IRS") on IRS Form 1099-DIV and the amount of the
Distribution to each holder of Debentures, to such
holder and to the IRS on IRS Form 1099-MISC. There can
be no assurance that the IRS or the courts will agree
with the amount determined by LTC. LTC stockholders
are urged to consult their own tax advisors as to the
specific tax consequences to them of the Distribution.
See "THE DISTRIBUTION-Material Federal Income Tax
Consequences of the Distribution."
Federal Income Tax Consequences to LTC . LTC will recognize taxable gain as a result of the
transfer of certain properties and assets to the
Company in exchange for additional shares of Company
Common Stock. Such gain will be in an amount equal to
the excess of the fair market value of such Company
Common Stock plus any liabilities assumed by the
Company in the exchange (as well as liabilities to
which any transferred assets are subject) over LTC's
adjusted tax basis in the properties and assets
transferred. LTC will recognize gain upon the
Distribution equal to the excess, if any, of the fair
market value of the Company Common Stock on the
Distribution Date over LTC's tax basis in such stock
(which will be equal to the fair market value of the
Company Common Stock received on the transfer of
properties and assets described above). See "THE
4
<PAGE>
DISTRIBUTION-Material Federal Income Tax Consequences
of the Distribution."
Qualification of LTC as a REIT . . . . . LTC has made an election to be treated as a REIT under
Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended (the "Code"), commencing with its
taxable year ended December 31, 1992. If LTC qualifies
as a REIT, under the Code it will generally not be
subject to federal income tax on income distributed to
shareholders provided it distributes at least 95% of
its REIT taxable income annually and satisfies other
organizational and operational requirements. If LTC
fails to qualify as a REIT in any taxable year, LTC
will be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable
income at prevailing corporate rates, which effectively
would impose on LTC's stockholders the "double
taxation" generally applicable to investment in a
corporation. LTC believes that it was organized and
has operated in such a manner so as to qualify as a
REIT, and LTC intends to continue to operate in such a
manner, but no assurance can be given that it has
operated in a manner so as to qualify, or will operate
in a manner so as to continue to qualify, as a REIT.
Trading Market . . . . . . . . . . . . . There is currently no public market for the Company
Common Stock. The Company has applied to have the
Company Common Stock approved for listing and trading
on the Pacific Exchange under the symbol "LTI." See
"RISK FACTORS-Absence of Prior Trading Market for
Company Common Stock; Potential Volatility" and "THE
DISTRIBUTION-Listing and Trading of the Company Common
Stock; Dividend Policy."
Distribution Agent and Transfer
Agent for the Company Common
Stock. . . . . . . . . . . . . . . . . Harris Trust and Savings Bank
Dividends. . . . . . . . . . . . . . . . The Company's dividend policy will be established by
the Board of Directors of the Company (the "Company
Board") from time to time based on the results of
operations and financial condition of the Company and
such other business considerations as the Company Board
considers relevant. The Company presently intends to
retain future earnings to finance the growth and
development of its business; and, therefore, the
Company does not currently anticipate paying any cash
dividends. Any future determination relating to
dividend policy will be made at the discretion of the
Company Board. See "RISK FACTORS-Dividend Policy" and
"THE DISTRIBUTION-Listing and Trading of Company Common
Stock; Dividend Policy."
Anti-Takeover Provisions . . . . . . . . The Amended and Restated Articles of Incorporation of
the Company (the "Company Articles") and the Amended
and Restated Bylaws of the Company (the "Company
Bylaws"), as well as Nevada statutory law, contain
provisions that may have the effect of discouraging an
acquisition of control of the Company not approved by
the Company Board. Such provisions include Article II
of the Company Articles which authorizes the Company
Board to issue shares of preferred stock of the
Company, in one or more series, without further action
by Company stockholders, and to establish the rights
and preferences (including the convertibility of such
shares of preferred stock into Company Common Stock) of
any series of preferred stock so issued. The Company's
stockholders have no right to take action by written
consent and, except as otherwise required by law, are
not permitted to call special meetings of stockholders.
Any
5
<PAGE>
amendment of the Company Bylaws by the stockholders or
certain provisions of the Company Articles requires the
affirmative vote of at least 66 2/3% of the shares of
voting stock then outstanding. These provisions have
been designed to enable the Company to develop its
business and foster its long-term growth without
disruptions caused by the threat of a takeover not
deemed by the Company Board to be in the best interests
of the Company and its stockholders. Such provisions
also may inhibit fluctuations in the market price of
the Company Common Stock that could result from
takeover attempts and may also have the effect of
discouraging third parties from making proposals
involving an acquisition or change of control of the
Company, although such proposals, if made, might be
considered desirable by a majority of the Company's
stockholders. Such provisions could further have the
effect of making it more difficult for third parties to
cause the replacement of the current management of the
Company without the concurrence of the Company Board.
See "RISK FACTORS-Certain Anti-Takeover Features
Affecting a Change in Control of the Company";
"HEALTHCARE ARTICLES OF INCORPORATION AND BYLAWS" and
"DESCRIPTION OF THE COMPANY'S CAPITAL STOCK."
Risk Factors . . . . . . . . . . . . . . See "RISK FACTORS" for a discussion of factors that
should be considered in connection with the Company
Common Stock received in the Distribution.
Relationship with LTC after the
Distribution . . . . . . . . . . . . . LTC will have no stock ownership in the Company upon
consummation of the Distribution. For purposes of
governing certain ongoing relationships between the
Company and LTC after the Distribution and to provide
for an orderly transition, the Company and LTC have
entered into or will enter into certain agreements.
Such agreements include: (i) the Distribution Agreement
providing for, among other things, the Distribution and
the division between the Company and LTC of certain
assets and liabilities; (ii) an Administrative Services
Agreement, providing for certain allocations of
responsibilities with respect to employee compensation,
benefits and labor matters; (iii) a Tax Sharing
Agreement pursuant to which the Company and LTC will
agree to allocate tax liabilities that relate to
periods prior to the Distribution Date; and (iv) an
Intercompany Agreement providing the Company and LTC
with rights to participate in certain transactions.
See "RELATIONSHIP BETWEEN HEALTHCARE AND LTC AFTER THE
DISTRIBUTION."
Policies and Procedures for
Addressing Conflicts . . . . . . . . . The Company and LTC intend to pursue separate and
distinct business strategies to minimize potential
conflicts of interest between the two companies.
Nonetheless, the on-going relationships between the
Company and LTC may present conflict situations for
certain officers and directors. Certain persons will
serve as officers and/or directors of both the Company
and LTC, and also will own (or have options or other
rights to acquire) a significant number of shares of
common stock in both companies. The Company and LTC
will adopt appropriate policies and procedures on or
prior to the Distribution Date to be followed by the
Board of Directors of each company to address potential
conflicts. Such procedures will include requiring the
persons serving as directors of both companies to
abstain from voting as directors with respect to
matters that present a significant conflict of
6
<PAGE>
interest between the companies and require approval of
the disinterested directors of both companies with
respect to the Intercompany Agreement and the
Administrative Services Agreement. It is anticipated
that the members of the Board of Directors of each
company that do not have any potentially significant
conflict of interest between the companies will
determine whether a matter presents such a significant
conflict. In addition, the Intercompany Agreement to
be entered into by and between the Company and LTC
immediately prior to the Distribution Date, will
prohibit the Company from developing a direct or
indirect opportunity to invest in real estate through
mortgage loans, facility lease transactions and other
investments unless LTC was first offered the
opportunity and declined to pursue such activities or
investments. See "RISK FACTORS-Possible Conflicts with
LTC After the Distribution"; "RELATIONSHIP BETWEEN
HEALTHCARE AND LTC AFTER THE DISTRIBUTION-Policies and
Procedures for Addressing Conflicts" and "THE
COMPANY-Intercompany Agreement."
Interests of Certain Persons in the
Distribution . . . . . . . . . . . . . As of the Distribution Date and continuing thereafter
for a period of time until the next annual stockholders
meeting or until his or her successor is elected and is
duly qualified, the Company Board will consist of Andre
C. Dimitriadis, who is currently Chairman of the Board
and Chief Executive Officer of LTC and who currently
serves in the same positions with the Company, James J.
Pieczynski, who is currently President and Chief
Financial Officer of LTC and who currently serves in
the same positions with the Company, and Steven Stuart
and Bary G. Bailey, who are not affiliated with LTC.
As of the Distribution Date and continuing thereafter
for a period of time until the next annual board
meeting or until his or her successor is chosen and is
duly qualified, the executive officers of the Company
will include Mr. Dimitriadis, Mr. Pieczynski,
Christopher T. Ishikawa, who is currently Senior Vice
President and Chief Investment Officer of LTC and
currently serves in the same positions with the Company
and Pamela J. Privett, who is currently Senior Vice
President, General Counsel and Secretary of LTC and
currently serves in the same positions with the
Company. See "MANAGEMENT."
Based solely on their ownership of LTC Common Stock and
options to acquire LTC Common Stock as of June 30,
1998, the executive officers and directors of the
Company will beneficially own an aggregate of 106,882
shares, or approximately 3.2% of the outstanding
Company Common Stock immediately following the
Distribution. In addition, the executive officers and
directors of the Company will be granted options to
acquire 140,000 shares of Company Common Stock under
the 1998 Equity Participation Plan of LTC Healthcare,
Inc. (the "Healthcare 1998 Plan") upon consummation of
the Distribution. See "RISK FACTORS-Control by
Executive Officers and Directors"; "MANAGEMENT-Healthcare
1998 Plan"; and "SECURITIES OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
</TABLE>
7
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the planned
real estate assets to be transferred from LTC to Healthcare (the "Healthcare
Asset Group") and selected pro forma financial data for the Company and
should be read in conjunction with the Combined Financial Statements of the
Healthcare Asset Group and the LTC Healthcare, Inc. Unaudited Pro Forma
Financial Information included elsewhere in this document. The financial
data of the Healthcare Asset Group as of and for the six months ended June
30, 1998 and 1997, in the opinion of management, includes all normal
recurring adjustments for a fair statement of the results for the interim
periods. The financial data for the each of the three years ended December
31, 1997, 1996 and 1995 and as of December 31, 1997 and 1996 is derived from
the Healthcare Asset Group's financial statements for similar periods, which
are included elsewhere in this Information Statement and have been audited by
Ernst & Young LLP. The pro forma financial data and all of the other
financial data is unaudited.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------- -------------------------------------------------
1998 1997 1997 1996 1995
-------------- ---------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenues $ 1,225,800 $ 1,171,000 $ 2,350,400 $ 2,348,900 $ 2,342,800
Interest expense 833,900 663,400 1,323,000 1,113,700 -
Depreciation 316,500 316,000 632,000 632,000 632,000
Other expenses 45,100 36,900 86,800 80,900 83,100
-------------- ---------------- --------------- ---------------- --------------
Total expenses 1,195,500 1,016,300 2,041,800 1,826,600 715,100
-------------- ---------------- --------------- ---------------- --------------
Income before taxes 30,300 154,700 308,600 522,300 1,627,700
Income taxes 11,800 60,200 120,000 203,200 633,200
-------------- ---------------- --------------- ---------------- --------------
Net income $ 18,500 $ 94,500 $ 188,600 $ 319,100 $ 994,500
-------------- ---------------- --------------- ---------------- --------------
-------------- ---------------- --------------- ---------------- --------------
BALANCE SHEET DATA
(AT END OF PERIOD):
Real estate, net of depreciation $ 15,119,600 N/A $ 15,383,000 $ 16,015,000 N/A
Total assets 15,340,100 N/A 15,561,500 16,240,100 N/A
Mortgage loans payable 23,039,900 N/A 14,223,400 14,389,800 N/A
Total liabilities 23,669,500 N/A 14,759,500 14,865,400 N/A
Investment by LTC Properties, Inc. (8,329,400) N/A 802,000 1,374,700 N/A
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------------------------- ----------------------------------------------------
1998 (1) 1997 1997 (1) 1996 1995
-------------- ---------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
PRO FORMA OPERATING DATA:
Revenues $ 3,193,700 N/A $ 6,278,600 N/A N/A
Interest expense 2,455,000 N/A 4,921,200 N/A N/A
Depreciation 792,500 N/A 1,584,000 N/A N/A
Other expenses 621,600 N/A 1,243,200 N/A N/A
-------------- ---------------
Total expenses 3,869,100 N/A 7,748,400 N/A N/A
-------------- ---------------
Income before taxes (675,400) N/A (1,469,800) N/A N/A
Income taxes - N/A - N/A N/A
-------------- ---------------
Net loss $ (675,400) N/A $ (1,469,800) N/A N/A
-------------- ---------------
-------------- ---------------
Net loss per share:
Basic $ (0.20) N/A $ (0.44) N/A N/A
Diluted $ (0.20) N/A $ (0.44) N/A N/A
Pro forma shares outstanding 3,326,202 N/A 3,326,202 N/A N/A
PRO FORMA BALANCE SHEET DATA
(AT END OF PERIOD):
Real estate, net of depreciation $ 61,890,500 N/A N/A N/A N/A
Total assets 74,920,400 N/A N/A N/A N/A
Mortgage loans payable 46,731,100 N/A N/A N/A N/A
Total liabilities 58,694,000 N/A N/A N/A N/A
Minority interest 3,469,100 N/A N/A N/A N/A
Stockholders' equity 12,757,300 N/A N/A N/A N/A
</TABLE>
(1) The pro forma results of operations do not include base rental income
($1,484,600 annually) and related depreciation ($522,100 annually) for
two properties that were not available for occupancy during the year
ended December 31, 1997 and the six months ended June 30, 1998.
Construction was completed in May and June 1998 on these two assisted
living facilities which are leased to a wholly owned subsidiary of
Karrington Health, Inc.
8
<PAGE>
RISK FACTORS
All statements, other than statements of historical facts, included in this
Information Statement that address activities, events or developments that the
Company expects, believes or anticipates will or may occur in the future, are
forward looking statements. Discussions containing such forward looking
statements may be found throughout this Information Statement, including without
limitation in the materials set forth under "SUMMARY OF INFORMATION";
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS"; "THE COMPANY" and "BUSINESS AND PROPERTIES." Actual events or
results may differ materially from those discussed in the forward looking
statements as a result of various factors, including without limitation the risk
factors set forth below and the matters set forth in this Information Statement
generally.
RECENTLY FORMED ENTITY; LACK OF INDEPENDENT OPERATING HISTORY
The Company is a recently-formed entity with no prior operating history.
There can be no assurance that the Company will not encounter financial,
managerial or other difficulties as a result of its lack of operating history or
inability to rely on the financial and other resources of LTC. Currently the
Company has no external source of financing and the Company has not received any
commitment with respect to any funds needed in the future. The Company expects
to be able to access capital markets or to seek other financing, but there can
be no assurance that it will be able to do so at all or in amounts or on terms
acceptable to the Company.
ANTICIPATED OPERATING LOSSES
Because the Company is recently formed and owns a significant amount of
real estate that is highly leveraged, it is anticipated that the Company will
incur operating losses. Due to the anticipated operating losses, the Company may
not be in a position to utilize tax benefits associated with net operating loss
carryforwards. On a pro forma basis, the Company would have incurred net losses
of $1,469,800 and $675,400 for the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively. See "LTC HEALTHCARE, INC. PRO FORMA
FINANCIAL INFORMATION."
POSSIBLE CONFLICTS WITH LTC AFTER THE DISTRIBUTION
As of the Distribution Date and continuing thereafter for a period of time
until the next annual stockholders meeting or until his or her successor is
elected and is duly qualified, the Company Board will consist of Andre C.
Dimitriadis, who is currently Chairman and Chief Executive Officer of LTC and
who serves in the same positions with the Company, James J. Pieczynski, who is
currently President and Chief Financial Officer of LTC and who serves in the
same positions with the Company, and Steven Stuart and Bary G. Bailey, who are
not affiliated with LTC. As of the Distribution Date and continuing thereafter
for a period of time until the next annual board meeting or until his or her
successor is chosen and is duly qualified, the executive officers of the Company
will include Mr. Dimitriadis, Mr. Pieczynski, Christopher T. Ishikawa, who is
currently Senior Vice President and Chief Investment Officer of LTC and
currently serves in the same positions with the Company and Pamela J. Privett,
who is currently Senior Vice President, General Counsel and Secretary of LTC and
currently serves in the same positions with the Company. See "MANAGEMENT."
None of the members of management of the Company is committed to spending a
particular amount of time on the Company's affairs, nor will any of them devote
his or her full time to the Company. The Company anticipates that each of the
members of management of the Company will spend approximately 25% of his or her
time on the Company's affairs. As such, pursuant to the Administrative Services
Agreement, the Company will pay 25% of the aggregate amount of the wages,
salaries and bonuses of LTC's employees (which includes the members of
management of the Company) to LTC and LTC will pay the remaining 75% of such
amount.
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<PAGE>
The Company and LTC have entered into certain agreements providing for
(i) the orderly separation of the Company and LTC and the making of the
Distribution, (ii) the sharing of certain facilities and services, and (iii) the
allocation of certain tax and other liabilities. Because the management of both
the Company and LTC will be largely the same following the Distribution,
conflicts may arise with respect to the operation and effect of these agreements
and relationships which could have an adverse effect on the Company if not
properly resolved. More specifically, members of the Board and senior
management of the Company and LTC may be presented with conflicts of interest
with respect to certain matters affecting the Company and LTC, such as the
determination of which company may take advantage of potential business
opportunities, decisions concerning the business focus of each company
(including decisions concerning the types of properties and geographic locations
in which such companies make investments), potential competition between the
business activities conducted, or sought to be conducted, by such companies
(including competition for properties and tenants), possible corporate
transactions (such as acquisitions), and other strategic decisions affecting the
future of such companies. Conflicts also may arise with respect to the
restriction on the Company's right to engage in certain activities or make
certain investments unless LTC was first offered the opportunity and declined to
pursue such activities or investments (as described below). In this regard, the
Company and LTC will adopt appropriate policies and procedures on or prior to
the Distribution Date to be followed by the Board of Directors of each company
to address potential conflicts. Such procedures will include requiring the
persons serving as directors of both companies to abstain from voting as
directors with respect to matters that present a significant conflict of
interest between the companies and will require approval of the disinterested
directors of both companies with respect to the Intercompany Agreement and the
Administrative Services Agreement. It is anticipated that the members of the
Board of Directors of each company that do not have any potentially significant
conflict of interest between the companies will determine whether a matter
presents such a significant conflict. The Intercompany Agreement prohibits the
Company from developing a direct or indirect opportunity to invest in real
estate through mortgage loans, facility lease transactions and other investments
unless LTC was first offered the opportunity and declined to pursue such
activities or investments. The Intercompany Agreement also prohibits the Company
from prepaying or causing to be prepaid any of its mortgage loans provided by
LTC which are securitized in REMIC transactions. See "RELATIONSHIP BETWEEN
HEALTHCARE AND LTC AFTER THE DISTRIBUTION-Policies and Procedures for Addressing
Conflicts" and "THE COMPANY-Intercompany Agreement."
FAILURE OF LTC TO QUALIFY AS A REIT WOULD ALLOW LTC TO COMPETE WITH THE
COMPANY
The Company and LTC will enter into the Intercompany Agreement on or prior
to the Distribution Date to provide each other with rights to participate in
certain transactions. See "THE COMPANY-Intercompany Agreement." The
Intercompany Agreement prohibits the Company from developing a direct or
indirect opportunity to invest in real estate through mortgage loans, facility
lease transactions and other investments unless LTC was first offered the
opportunity and declined to pursue such activities and investments. As a REIT,
LTC is required to focus principally on investment in certain real estate assets
and is prevented from owning certain assets and conducting certain activities
that would be inconsistent with its status as a REIT. Additionally, the Clinton
Administration's 1999 budget proposals contain several provisions imposing
certain restrictions and limitations on a REIT's ownership of stock in another
corporation, on ownership of the REIT's stock by its stockholders, and on the
use of "paired" share arrangements between REITs and non-REITs which, if enacted
in their proposed form, may adversely affect LTC's qualification as a REIT. See
"THE DISTRIBUTION-Material Federal Income Tax Consequences of the
Distribution-Clinton Administration 1999 Budget Proposals." Furthermore,
because of the nature of the assets being transferred to the Company by LTC
prior to and in connection with the Distribution, and the uncertainty of the
value of the Company Common Stock, the amount of gain recognized by LTC in
connection with the Distribution (including in connection with such transfer)
could cause LTC to fail to satisfy the 75% gross income test applicable to REITs
for LTC's current taxable year. If LTC fails to satisfy such gross income test,
it will nonetheless be deemed to satisfy such test (and therefore will continue
to qualify as a REIT for such taxable year) if certain
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<PAGE>
disclosure requirements are met and the failure to meet such test is due to
reasonable cause and not willful neglect. The Company believes that it has
exercised ordinary business care and prudence in connection with the transfer of
assets to the Company and the Distribution in attempting to satisfy the 75%
gross income test, and that it will continue to exercise such ordinary business
care and prudence in attempting to satisfy the 75% gross income test. LTC has
engaged an independent valuation firm of nationally-recognized standing to
render an opinion as to the value of the Company
RELATED PARTY TRANSACTIONS ON OR PRIOR TO THE DISTRIBUTION
The Company and LTC will enter into the Intercompany Agreement and the
Administrative Services Agreement on or prior to the Distribution Date. Because
LTC owns nonvoting common stock of the Company (representing approximately 99%
of the outstanding shares of Company Common Stock), such agreements were not
negotiated at arms-length and may include terms which are not as favorable as
would have been derived from arms-length negotiations
In addition, although the Intercompany Agreement and Administrative
Services Agreement each have a stated term of 10 years, both of these agreements
shall terminate sooner upon a change of control of LTC. A change of control of
LTC shall occur upon the occurrence of any of the following: (i) any person or
related group of persons directly or indirectly acquires beneficial ownership of
more than 50% of the voting power of LTC, (ii) there is a change in the
composition of the LTC Board over a period of 36 consecutive months (or less)
such that a majority of the LTC Board ceases to be comprised of individuals who
either (A) have been board members continuously since the beginning of such
period or (B) have been elected or nominated for election as board members
during such period by at least a majority of the board members described in
clause (A) who were still in office at the time such election or nomination was
approved by the LTC Board; or (iii) there is a change in the composition of
LTC's senior executive management such that both Andre C. Dimitriadis and James
J. Pieczynski cease to be employed by LTC. In addition, the Administrative
Services Agreement may be terminated by either LTC or the Company upon 30 days'
prior written notice to the other party. See "THE COMPANY-Intercompany
Agreement" and "RELATIONSHIP BETWEEN HEALTHCARE AND LTC AFTER THE
DISTRIBUTION-Administrative Services Agreement."
RELIANCE ON MAJOR OPERATORS
Based on leases in effect as of the date of this Information Statement, the
Company presently expects that Karrington Health, Inc., Sun Healthcare Group,
Inc. (through its wholly owned subsidiary Sunrise Healthcare Corporation) and
Integrated Health Services, Inc. will be the Company's largest operators for the
year ended December 31, 1998, operating 12 facilities which represent
approximately 52%, 31% and 11%, respectively, of the Company's total expected
annual lease revenue for such period and 63%, 23% and 9%, respectively, of the
Company's total pro forma real estate investments as of June 30, 1998. These
operators, and the Company's other operators, manage long-term care facilities
on each of the Company's properties. See "-Concentration of Company Operators
in Long-Term Care Industry" and "BUSINESS AND PROPERTIES." The financial
position of the Company may be adversely affected by financial difficulties
experienced by any of such operators, or any other major operator of the
Company, including a
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bankruptcy, insolvency or general downturn in the business of any such operator,
or in the event any such operator does not renew its leases as they expire.
Karrington Health, Inc., Sun Healthcare Group, Inc. and Integrated Health
Services, Inc. are publicly-traded companies and as such, have financial and
other information on file with the Commission. The following table contains
summary information for these operators which was extracted from public reports
on file with the Commission (in thousands; balance sheet data is as of the end
of the period):
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED DECEMBER 31,
JUNE 30, 1998 1997
---------------- -------------
<S> <C> <C>
KARRINGTON HEALTH, INC.
Total assets.............................. $ 139,849 $ 141,316
Total debt................................ 105,469 104,506
Total stockholders' equity................ 20,664 26,507
Total revenues............................ $ 14,414 $ 19,220
Loss before taxes......................... (5,843) (5,860)
Net loss.................................. (5,843) (5,670)
INTEGRATED HEALTH SERVICES, INC.
Total assets.............................. $ 5,398,583 $ 5,063,144
Total debt................................ 3,184,153 3,238,233
Total stockholders' equity................ 1,469,401 1,088,161
Total revenues............................ $ 1,671,554 $ 1,993,197
Income before taxes and extraordinary
items................................... 134,877 13,326
Net income (loss)......................... 79,577 (33,505)
<CAPTION>
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
1998 1997
---------------- -------------
<S> <C> <C>
SUN HEALTHCARE GROUP, INC.
Total assets.............................. $ 2,687,986 $ 2,579,236
Total debt................................ 1,694,638 1,626,842
Total stockholders' equity................ 639,550 617,053
Total revenues............................ $ 741,490 $ 2,010,820
Income before taxes and extraordinary
items................................... 31,977 95,882
Net income................................ 18,387 34,801
</TABLE>
CONCENTRATION OF COMPANY OPERATORS IN LONG-TERM CARE INDUSTRY
The long-term care businesses of the major operators of the Company, and
the healthcare industry generally, are subject to extensive federal, state and
local regulation governing licensure and conduct of operations at existing
facilities, certain capital expenditures, the quality of services provided, the
manner in which such services are provided, financial and other arrangements
between healthcare providers (including anti-kickback and self-referral
arrangements) and reimbursement for services rendered. The failure of any
Company operator to comply with such laws, requirements and regulations could
adversely affect its ability to operate the facility or facilities and could
adversely affect such Company operator's ability to make payments to the
Company, thereby adversely affecting the Company.
RELIANCE ON GOVERNMENT REIMBURSEMENT. A significant portion of the revenue
of the Company's borrowers and lessees is derived from governmentally-funded
reimbursement programs, such as Medicare and Medicaid. These programs are
highly regulated and subject to frequent and substantial changes resulting from
legislation, adoption of rules and regulations, and administrative and judicial
interpretations of existing law. In recent years, there have been fundamental
changes in the Medicare program which have resulted in reduced levels of payment
for a substantial portion of health care services. Moreover, health care
facilities have experienced increasing pressures from private payers such as
health maintenance organizations attempting to control health care costs, and
reimbursement from
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<PAGE>
private payers has in many cases effectively been reduced to levels approaching
those of government payers. Governmental and popular concern regarding health
care costs may result in significant reductions in payment to health care
facilities, and there can be no assurance that future payment rates for either
governmental or private health care plans will be sufficient to cover cost
increases in providing services to patients. In many instances, revenues from
Medicaid programs are already insufficient to cover the actual costs incurred in
providing care to those patients. Any changes in reimbursement policies which
reduce reimbursement to levels that are insufficient to cover the cost of
providing patient care could adversely affect revenues of the Company's
borrowers and lessees and thereby adversely affect those borrowers' and lessees'
abilities to make their debt or lease payments to the Company. Failure of the
borrowers or lessees to make their debt or lease payments would have a direct
and material adverse impact on the Company.
HEALTH CARE REFORM. The Balanced Budget Act of 1997 signed by President
Clinton on August 5, 1997 (the "Act"), enacted significant changes to the
Medicare and Medicaid Programs designed to "modernize" payment and health care
delivery systems while achieving substantial budgetary savings.
In seeking to limit Medicare reimbursement for long term care services, the
Act mandated the establishment of a prospective payment system for skilled
nursing facility services to replace the current cost-based reimbursement
system. The cost-based system reimburses skilled nursing facilities for
reasonable direct and indirect allowable costs incurred in providing "routine
services" (as defined by the Program) as well as capital costs and ancillary
costs, subject to limits fixed for the particular geographic area served by the
skilled nursing facility. Under the prospective payment system, skilled nursing
facilities will be paid a federal per diem rate for covered services. The per
diem payment will cover routine service, ancillary, and capital-related costs.
The prospective payment system will be phased in over three cost reporting
periods, starting with periods beginning on or after July 1, 1998.
Under provisions of the Act, states will be provided additional flexibility
in managing their Medicaid programs while achieving in excess of $13 million in
federal budgetary savings over five years. Among other things, the Act repealed
the Boren Amendment payment standard, which had required states to pay
"reasonable and adequate" payments to cover the costs of efficiently and
economically operated hospitals, nursing facilities, and certain intermediate
care facilities.
These health care reforms may reduce reimbursement to levels that are
insufficient to cover the cost of providing patient care, which could adversely
affect revenues of the Company's borrowers and lessees and thereby adversely
affect those borrowers' and lessees' abilities to make their debt or lease
payments to the Company. Failure of the borrowers or lessees to make their debt
or lease payments would have a direct and material adverse impact on the
Company.
FRAUD AND ABUSE ENFORCEMENT. In the past several years, due to rising
health care costs, there has been an increased emphasis on detecting and
eliminating fraud and abuse in the Medicare and Medicaid programs. Payment of
any remuneration to induce the referral of Medicare and Medicaid patients is
generally prohibited by federal and state statutes. Both federal and state
self-referral statutes severely restrict the ability of physicians to refer
patients to entities in which they have a financial interest. The Act provided
the federal government with expanded enforcement powers to combat waste, fraud
and abuse in the delivery of health care services. Further, pursuant to a
government initiative called Operation Restore Trust, the Office of Inspector
General and the Health Care Financing Administration have increased
investigations and enforcement activity of fraud and abuse, specifically
targeting nursing homes, home health providers and medical equipment suppliers.
Failure to comply with the foregoing fraud and abuse laws or government program
integrity regulations may result in sanctions including the loss of licensure or
eligibility to participate in reimbursement programs (including Medicare and
Medicaid), asset forfeitures and civil and criminal penalties.
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<PAGE>
It is anticipated that the trend toward increased investigation and
informant activity in the area of fraud and abuse, as well as self-referral,
will continue in future years. In the event that any borrower or lessee were to
be found in violation of laws regarding fraud, abuse or self-referral, that
borrower's or lessee's licensure or certification to participate in government
reimbursement programs could be jeopardized, or that borrower or lessee could be
subject to civil and criminal fines and penalties. Either of these occurrences
could have a material adverse affect on the Company by adversely affecting the
borrower's or lessee's ability to make debt or lease payments to the Company.
TAX CONSEQUENCES OF THE DISTRIBUTION
LTC will recognize gain for Federal income tax purposes as a result of the
transfer of certain properties and assets to the Company in exchange for
additional shares of Company Common Stock. Such gain will be in an amount equal
to the excess of the fair market value of the Company Common Stock received in
the exchange plus the amount of the liabilities assumed by Healthcare in the
exchange (as well as the liabilities to which any of the transferred assets are
subject) over LTC's tax basis in the properties and assets immediately prior to
the exchange. LTC's tax basis in the Company Common Stock received in such
exchange will be equal to the fair market value thereof at the time of such
exchange. LTC will recognize gain upon the Distribution equal to the excess, if
any, of the fair market value of the Company Common Stock on the Distribution
Date over LTC's adjusted tax basis in such stock. Because of the factual nature
of the issue of the value of the Company Common Stock received by LTC as a
result of the transfer of assets and then distributed by LTC, Latham & Watkins,
tax counsel to the Company and LTC ("Tax Counsel") is unable to render an
opinion on the amount of gain recognized as a result of these transactions. For
a more detailed explanation, see "THE DISTRIBUTION--Material Federal Income Tax
Consequences of the Distribution."
The Distribution will be treated as a distribution, the amount of which
equals the value of the Company Common Stock distributed plus any cash in lieu
of fractional shares, and LTC stockholders and holders of Debentures will
receive a basis in Company Common Stock equal to the value thereof at the time
of the Distribution. Because of the factual nature of the issue of the value of
the Company Common Stock distributed, Tax Counsel is unable to render an opinion
on it. The Distribution will be taxable to LTC stockholders to the same extent
as any other distribution made by LTC to its stockholders and will be fully
taxable as ordinary income to holders of Debentures. As long as LTC qualifies
as a REIT, distributions (including the Distribution) made to LTC's taxable U.S.
stockholders out of LTC's current or accumulated earnings and profits (and not
designated as capital gain dividends) will be taxable as ordinary income and,
for corporate stockholders, will not be eligible for the dividends received
deduction. Distributions in excess of current and accumulated earnings and
profits will not be taxable to LTC's taxable U.S. stockholders to the extent
they do not exceed the adjusted tax basis of the stockholder's shares of LTC
Common Stock, but rather will reduce the adjusted tax basis of such shares. To
the extent that distributions in excess of current and accumulated earnings and
profits exceed the adjusted tax basis of the stockholder's shares of LTC Common
Stock, such distributions generally will be taxable as capital gain. LTC will
treat the amount of the Distribution to holders of Debentures, as a distribution
of ordinary income that will not be a dividend or interest on the Debentures.
LTC will make a determination of the fair market value of the Company Common
Stock as of the Distribution Date. LTC will report the amount of the
Distribution received by each stockholder to such stockholder and to the IRS on
IRS Form 1099-DIV and will report the amount of the Distribution received by
each holder of Denbentures to such holder and to the IRS on IRS Form 1099-MISC.
There can be no assurance that the IRS or the courts will agree with the amount
determined by LTC. For a more detailed explanation, see "THE
DISTRIBUTION--Material Federal Income Tax Consequences of the Distribution."
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<PAGE>
DILUTION
The Company may from time to time raise additional capital from the
issuance and sale of equity securities. Any such issuances may significantly
dilute the interests of the existing holders of Company securities, including
the Company Common Stock.
ABSENCE OF PRIOR TRADING MARKET FOR COMPANY COMMON STOCK; POTENTIAL
VOLATILITY
There is no existing market for the Company Common Stock. Although the
Company has applied for listing and trading of the Company Common Stock on
the Pacific Exchange, no assurance can be given that an active trading market
for the Company Common Stock will develop following the Distribution or, if
developed, that any such market will be sustained. In the absence of a
public trading market, an investor may be unable to liquidate his investment
in the Company. Prices at which the Company Common Stock may trade cannot be
predicted. Nothing herein should be construed to suggest that the trading
price of LTC Common Stock at any point in time may be used as a substitute
for the trading price of Company Common Stock. The prices at which the
Company Common Stock trades will be determined by the marketplace and may be
influenced by many factors, including, among others, the success of the
Company's business, the depth and liquidity of the market for the Company
Common Stock, investor perception of the Company and its assets, the
Company's dividend policy, and general economic and market conditions. In
addition, the prices at which the Company Common Stock trades may fluctuate
as recipients of the Company Common Stock may sell their shares of the
Company Common Stock because the Company's objectives are not consistent with
their investment criteria or for other reasons. The depth and liquidity of
the market for the Company Common Stock may be affected by the aggregate
beneficial ownership by executive officers and directors of the Company of
approximately 3.2% of the Company Common Stock immediately following the
Distribution. See "--Control by Executive Officers and Directors." The
prices at which the Company Common Stock trades also may be affected by
certain provisions of the Company Articles and the Company Bylaws, as each
will be in effect following the Distribution, which may have an anti-takeover
effect. See "--Certain Anti-Takeover Features Affecting a Change in Control
of the Company."
SHARES ELIGIBLE FOR FUTURE SALE
The approximately 3,326,202 shares of Company Common Stock distributed
to LTC stockholders and debenture holders in the Distribution will be freely
transferable, except for the shares distributed to persons who may be deemed
to be "affiliates" of the Company under the Securities Act. Such affiliates
will be permitted to sell their shares of Company Common Stock pursuant to
Rule 144 under the Securities Act beginning 90 days after the Distribution,
subject to certain volume limitations, manner of sale limitations, notice
requirements and the availability of current public information about the
Company. In addition, immediately following the Distribution, options to
purchase 120,000 shares of Company Common Stock will be granted to the
Company's executive officers under the Healthcare 1998 Plan. See
"MANAGEMENT--Healthcare 1998 Plan." Shares issued pursuant to the exercise
of options granted under the Healthcare 1998 Plan will be freely transferable
without restriction, subject, in the case of sales by affiliates, to
compliance with Rule 144.
The Company is unable to estimate the number of shares that may be sold in
the future by its stockholders or the effect, if any, that sales of shares by
such stockholders will have on the market price of the Company Common Stock
prevailing from time to time. Sales of substantial amounts of Company Common
Stock, or the prospect of such sales, could adversely affect the market price of
the Company Common Stock.
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<PAGE>
POTENTIAL ADVERSE EFFECTS ON LTC COMMON STOCK OF THE DISTRIBUTION
After the Distribution, the LTC Common Stock will continue to be traded on
the New York Stock Exchange. As a result of the Distribution, the trading price
of LTC Common Stock is expected to be lower than the trading price of LTC Common
Stock prior to the Distribution to reflect the value of the assets transferred
to the Company. The combined trading prices of LTC Common Stock and Company
Common Stock after the Distribution may be less than, equal to or greater than
the trading prices of LTC Common Stock prior to the Distribution. In addition,
until the market has fully analyzed the operations of LTC without the Company's
assets, the price at which the LTC Common Stock trades may fluctuate
significantly.
DIFFICULTY OF LOCATING SUITABLE INVESTMENTS; COMPETITION
The Company was recently organized and has not, to date, began to seek
investments. Identifying, completing and acquiring real estate investments has
from time to time been highly competitive, and involves a high degree of
uncertainty. After the Distribution, the Company will be competing for
investments with many public and private real estate investment vehicles,
including financial institutions (such as mortgage banks, pension funds and
REITs) and other institutional investors, as well as individuals. There can be
no assurance that the Company will be able to locate and complete investments
which satisfy the Company's rate of return objective or realize upon their value
or that it will be able to fully invest its available capital.
Many of those with whom the Company will compete for investments are far
larger than the Company, may have greater financial resources than the Company
and may have management personnel with more experience than the officers of the
Company.
ACQUISITION, DEVELOPMENT, CONSTRUCTION AND RENOVATION ACTIVITIES
ACQUIRED PROPERTIES MAY FAIL TO PERFORM AS EXPECTED AND CAPITAL
EXPENDITURES MAY EXCEED ESTIMATES. As of the Distribution Date, the Company
will own a total of 13 properties. The acquisitions of these properties and the
future acquisitions of any properties entail general investment risks associated
with any real estate investment, including the risk that investments will fail
to perform as expected, that estimates of the cost of improvements to bring an
acquired property up to standards established for the intended market position
may prove inaccurate and the occupancy rates and rents achieved may be less than
anticipated.
UNCERTAINTY OF CASH FLOW FROM DEVELOPMENT, CONSTRUCTION AND RENOVATION
ACTIVITIES. Risks associated with the Company's development, construction and
renovation activities include the risks that: the Company may abandon
development opportunities after expending resources to determine feasibility;
construction and renovation costs of a project may exceed original estimates;
occupancy rates and rents at a newly completed property may not be sufficient to
make the property profitable; and development, construction, renovation and
lease-up may not be completed on schedule (including risks beyond the control of
the Company, such as weather or labor conditions or material shortages)
resulting in increased debt service expense and construction costs.
Development, construction and renovation activities also are subject to risks
relating to the inability to obtain, or delays in obtaining, all necessary
zoning, land-use, building, occupancy and other required governmental permits
and authorizations. These risks could result in substantial unanticipated
delays or expenses and, under certain circumstances, could prevent completion of
development, construction and renovation activities once undertaken, any of
which could adversely affect the financial condition and results of operations
of the Company. Properties under development or acquired for development may
generate little or no cash flow from the date of acquisition through the date of
completion of development and may experience operating deficits after the date
of completion. In addition, new development and renovation activities,
regardless of whether or not they are ultimately successful, typically require a
substantial portion of management's time and attention.
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Any properties developed and renovated by the Company will be subject to
the risks associated with the ownership and operation of real estate described
elsewhere in this section entitled "RISK FACTORS."
OPERATING RISKS
POTENTIAL INCREASES IN OPERATING COSTS. If the properties of the Company, the
properties of those entities in which it invests or the properties of those
entities to which it will lend (collectively, the "Properties") do not generate
revenue sufficient to meet operating expenses, including debt service and
capital expenditures, the financial condition and results of operations of the
Company may be adversely affected. The Properties are subject to operating
risks common to the particular property type, any and all of which may adversely
affect occupancy or rental rates.
DEPENDENCE ON RENTAL INCOME FROM REAL PROPERTY
The Company's cash flow, results of operations and value of its assets
would be adversely affected if a significant number of operators of the
Properties failed to meet their lease obligations. The bankruptcy or insolvency
of a major operator may have an adverse effect on a property. At any time, an
operator also may seek protection under the bankruptcy laws, which could result
in rejection and termination of such operator's lease and thereby cause a
reduction in the cash flow of the property. If an operator rejects its lease,
the owner's claim for breach of the lease would (absent collateral securing the
claim) be treated as a general unsecured claim. Generally, the amount of the
claim would be capped at the amount owed for unpaid pre-petition lease payments
unrelated to the rejection, plus the greater of one year's lease payments or
15.0% of the remaining lease payments payable under the lease (but not to exceed
the amount of three years' lease payments). No assurance can be given that the
Properties will not experience significant operator defaults in the future.
POTENTIAL ADVERSE CONSEQUENCES OF DEBT FINANCING
USE OF LEVERAGE COULD ADVERSELY AFFECT THE COMPANY. As of the Distribution
Date, some of the Company's real estate equity investments utilize a leveraged
capital structure, in which case third party lenders are entitled to cash flow
generated by such investments prior to the Company receiving a return. As a
result of such leverage, the Company is subject to the risks normally associated
with debt financing, including the risk that cash flow from operations and
investments will be insufficient to meet required payments of principal and
interest, the risk that existing debt (which in most cases will not have been
fully amortized at maturity) will not be able to be refinanced or that the terms
of such refinancings will not be as favorable to the Company, and the risk that
necessary capital expenditures for such purposes as renovations and other
improvements will not be able to be financed on favorable terms or at all.
While such leverage may increase returns or the funds available for investment
by the Company, it also will increase the risk of loss on a leveraged
investment. If the Company defaults on secured indebtedness, the lender may
foreclose and the Company could lose its entire investment in the security for
such loan. Because the Company may engage in portfolio financings where several
investments are cross-collateralized, multiple investments may be subject to the
risk of loss. As a result, the Company could lose its interests in performing
investments in the event such investments are cross-collateralized with poorly
performing or non-performing investments. In addition, recourse debt, which the
Company reserves the right to obtain, may subject other assets of the Company to
risk of loss.
Inability to Repay or Refinance Indebtedness at Maturity; Foreclosures.
The Company anticipates that only a portion of the principal of the Company's
indebtedness outstanding from time to time will be repaid prior to maturity.
However, the Company may not have sufficient funds to repay such indebtedness at
maturity; it may therefore be necessary for the Company to refinance debt
through additional debt financing or equity offerings. If the Company is unable
to refinance this indebtedness on acceptable terms, the Company may be forced to
dispose of properties or other assets upon
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disadvantageous terms, which could result in losses to the Company and adversely
affect the amount of cash available for further investment.
RISING INTEREST RATES COULD INCREASE THE COMPANY'S INTEREST EXPENSE. The
Company may incur indebtedness in the future that bears interest at a variable
rate or may be required to refinance its debt at higher rates. Accordingly,
increases in interest rates could increase the Company's interest expense and
adversely affect the financial condition and results of operations of the
Company.
RESTRICTIVE COVENANTS COULD ADVERSELY AFFECT THE COMPANY'S BORROWINGS.
Various credit facilities or other debt obligations may require the Company to
comply with a number of financial and other covenants on an ongoing basis.
Failure to comply with such covenants may limit the Company's ability to borrow
funds or may cause a default under its then-existing indebtedness.
NO LIMITATION ON DEBT. The organizational documents of the Company do not
contain any limitation on the amount of indebtedness the Company may incur. The
Company also has the ability to use a more highly leveraged business strategy
than typically used by REITs. As part of its business strategy, the Company
intends to engage in the ownership of leveraged properties, and as such, the
purchase of additional properties will cause the Company's debt to increase.
Accordingly, the Company could become highly leveraged, resulting in an increase
in debt service that could increase the risk of default on the Company's
indebtedness.
INABILITY TO REFINANCE INDEBTEDNESS. As of the Distribution Date, the
Company will have approximately $29.4 million of mortgage loans payable that
were securitized by LTC in REMIC transactions. The interest rates on the
mortgage loans range from 8.0% to 12.0%. In connection with the Administrative
Services Agreement, the Company has agreed not to prepay or cause to be prepaid
any of its mortgage loans provided by LTC which are securitized in REMIC
transactions unless the property is sold to an unaffiliated third party.
Because of this agreement, the Company will not have the ability to refinance
this mortgage debt and consequently will not be able to lower its interest costs
in a low interest rate environment.
EQUITY INVESTMENTS IN AND WITH THIRD PARTIES
DEPENDENCE ON THIRD PARTIES. As of the Distribution Date, the Company
invests in health care companies and may invest in shares of REITs, health care
companies or other entities that invest in real estate or health care assets,
including debt instruments and equity interests. In such cases, the Company
will be relying on the assets, investments and management of the REIT or other
entity in which it is investing. Such entities and their properties will be
subject to the other risks affecting the ownership and operation of real estate
and investment in debt set forth in this section entitled "RISK FACTORS."
POTENTIAL LACK OF CONTROL OF MANAGEMENT. The Company also co-invests with
third parties and may continue to do so through partnerships, joint ventures or
other entities, acquiring non-controlling interests in or sharing responsibility
for managing the affairs of a property, partnership, joint venture or other
entity and, therefore, will not be in a position to exercise sole
decision-making authority regarding the property, partnership, joint venture or
other entity.
POTENTIAL CONFLICTS AND INCREASED BANKRUPTCY, LIABILITY AND OTHER RISKS.
Investments in partnerships, joint ventures or other entities may, under certain
circumstances, involve risks not present were a third party not involved,
including the possibility that the Company's partners or co-venturers might
become bankrupt or otherwise fail to fund their share of required capital
contributions, that such partners or co-venturers might at any time have
economic or other business interests or goals which are inconsistent with the
business interests or goals of the Company, and that such partners or
co-venturers may be in a position to take action contrary to the instructions or
the requests of the Company and contrary to the Company's policies or
objectives. Such investments also may have the potential risk
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of impasse on decisions, such as a sale, because neither the Company nor the
partner or co-venturer would have full control over the partnership or joint
venture. Consequently, actions by such partner or co-venturer might result in
subjecting properties owned by the partnership or joint venture to additional
risk. In addition, the Company may in certain circumstances be liable for the
actions of its third-party partners or co-venturers.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS
Equity and debt investments in real estate may be relatively illiquid.
Such illiquidity limits the ability of the Company to modify its portfolio in
response to changes in economic or other conditions and may have a material
adverse effect on the Company. Illiquidity may result from the absence of an
established market for the investments as well as legal or contractual
restrictions on their resale by the Company.
DISADVANTAGES OF INVESTMENTS IN DEBT INSTRUMENTS
DEPENDENCE ON BORROWERS TO PRESERVE VALUE OF COLLATERAL; POSSIBILITY OF
NONPAYMENT. As of the Distribution Date, the Company owns convertible
subordinated debentures and may originate additional debt investments and may
acquire performing or non-performing debt investments. In general, debt
instruments carry the risk that borrowers may not be able to make debt service
payments or to pay principal when due, the risk that the value of any collateral
may be less than the amounts owed, the risk that interest rates payable on the
debt instruments may be lower than the Company's cost of funds, and the risk
that the collateral may be mismanaged or otherwise decline in value during
periods in which the Company is seeking to obtain control of the underlying real
estate. The Company is also dependent on the ability of the borrowers to
operate successfully their properties. Such borrowers and their properties will
be subject to the other risks affecting the ownership and operation of real
estate set forth in this section entitled "RISK FACTORS." Some of the loans may
be structured so that all or a substantial portion of the principal will not be
paid until maturity, which increases the risk of default at that time.
UNRATED DEBT INSTRUMENTS. It is anticipated that a substantial portion of
the debt in which the Company invests will not be rated by any
nationally-recognized rating agency. Generally, the value of unrated classes is
more subject to fluctuation due to economic conditions than rated classes. The
Company's acquisition of credit supported classes of securitizations (which
generally are expected to be first loss classes) which are unrated at the time
of acquisition and which have lower ratings may increase the risk of nonpayment
or of a significant delay in payments on these classes. Should rated assets be
downgraded, it may adversely affect their value and the Company. The Company's
potential investments in such assets will likely be from unrelated third
parties.
LIMITED REMEDIES UPON DEFAULT OF MORTGAGE LOANS
To the extent the Company invests in mortgage loans, such mortgage loans
may or may not be recourse obligations of the borrower and generally will not be
insured or guaranteed by governmental agencies or otherwise. In the event of a
default under such obligations, the Company may have to foreclose its mortgage
or protect its interest by acquiring title to a property and thereafter making
substantial improvements or repairs in order to maximize the property's
investment potential. Borrowers may contest enforcement of foreclosure or other
remedies, seek bankruptcy protection against such enforcement and/or bring
claims for lender liability in response to actions to enforce mortgage
obligations. Relatively high "loan-to-value" ratios and declines in the value
of the property may prevent the Company from realizing an amount equal to its
mortgage loan upon foreclosure.
The Company may participate in loans originated by other financing
institutions. As a participant, the Company may not have the sole authority to
declare a default under the mortgage or to control the property or any
foreclosure.
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Any investments in junior mortgage loans which are subordinate to liens of
senior mortgages would involve additional risks, including the lack of control
over the collateral and any related foreclosure proceeding. In the event of a
default on a senior mortgage, the Company may make payments to prevent
foreclosure on the senior mortgage without necessarily improving the Company's
position with respect to the subject real property. In such event, the Company
would be entitled to share in the proceeds only after satisfaction of the
amounts due to the holder of the senior mortgage.
DISADVANTAGES OF INVESTMENTS IN COMMERCIAL MORTGAGE-BACKED SECURITIES
INVESTMENTS IN COMMERCIAL MORTGAGE-BACKED SECURITIES SUBJECT TO REAL ESTATE
RISKS APPLICABLE TO UNDERLYING PROPERTIES. The Company may seek to invest in
real estate-related debt instruments, which may include commercial
mortgage-backed securities. Many of the risks of investing in commercial
mortgage-backed securities reflect the risks of investing directly in the real
estate securing the underlying mortgage loans. This may be especially true in
the case of commercial mortgage securities secured by, or evidencing an interest
in, a single commercial mortgage loan or a relatively small or less diverse pool
of commercial mortgage loans. See "--Disadvantages of Investments in Mortgage
Loans."
INVESTMENT IN COMMERCIAL MORTGAGE-BACKED SECURITIES SUBJECT TO RISKS
ASSOCIATED WITH PREPAYMENT OF UNDERLYING MORTGAGES. As with many interest
bearing mortgage-backed instruments, prepayments of the underlying mortgages may
expose the Company to the risk that an equivalent rate of return is not
available in the current market and that new investment of equivalent risk will
have lower rates of return. Certain types of investments in commercial
mortgage-backed securities may be interest-only securities which expose the
holder to the risk that the underlying mortgages may prepay at a faster rate
than anticipated at acquisition. Faster than anticipated prepayments may cause
the investment in interest-only commercial mortgage-backed securities to have a
lower than anticipated rate of return and could result in a loss of the initial
investment under extreme prepayment scenarios.
CREDIT SUPPORT FOR COMMERCIAL MORTGAGE-BACKED SECURITIES MAY PROVE
INADEQUATE. The risks of investing in commercial mortgage-backed securities
include risks that the existing credit support will prove to be inadequate,
either because of unanticipated levels of losses or, if such credit support is
provided by a third party, because of difficulties experienced by such provider.
Delays or difficulties encountered in servicing commercial mortgage-backed
securities may cause greater losses and, therefore, greater resort to credit
support than was originally anticipated, and may cause a rating agency to
downgrade a security.
SUBORDINATED SECURITIES MAY NOT BE REPAID UPON DEFAULT. The Company may
acquire subordinated tranches of commercial mortgage-backed securities
issuances. In general, subordinated tranches of commercial mortgage-backed
securities are entitled to receive repayment of principal only after all
principal payments have been made on more senior tranches and also have
subordinated rights as to receipt of interest distributions. In addition, an
active secondary market for such subordinated securities is not as well
developed as the market for certain other mortgage-backed securities.
Accordingly, such subordinated commercial mortgage-backed securities may have
limited marketability and there can be no assurance that a more efficient
secondary market will develop.
LIMITATIONS ON REMEDIES UPON DEFAULT
Although the Company will have certain contractual remedies upon the
default by borrowers under certain debt instruments, such as foreclosing on the
underlying real estate or collecting rents generated therefrom, certain legal
requirements (including the risks of lender liability) may limit the ability of
the Company to effectively exercise such remedies.
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The right of a mortgage lender to convert its loan position into an equity
interest may be limited or prevented by certain common law or statutory
provisions.
THIRD-PARTY BANKRUPTCY RISKS
Investments made in assets operating in workout modes or under Chapter 11
of the Bankruptcy Code could be subordinated or disallowed, and the Company
could be liable to third parties in such circumstances. Furthermore,
distributions made to the Company in respect of such investments could be
recovered if any such distribution is found to be a fraudulent conveyance or
preferential payment. Bankruptcy laws, including the automatic stay imposed
upon the filing of a bankruptcy petition, may delay the ability of the Company
to realize on collateral for loan positions held by it or may adversely affect
the priority of such loans through doctrines such as equitable subordination or
may result in a restructure of the debt through principles such as the
"cramdown" provisions of the bankruptcy laws.
COSTS OF COMPLIANCE WITH THE INVESTMENT COMPANY ACT
The Company is currently not registered as an investment company under the
Investment Company Act of 1940, as amended (the "Investment Company Act"), since
management believes that the Company either is not within the definition of
"investment company" thereunder or, alternatively, is excluded from regulation
under the Investment Company Act by one or more exemptions. In the future, the
Company will seek to continue to conduct its operations so as to avoid
registration under the Investment Company Act. Therefore, the assets that the
Company may acquire or sell may be limited by the provisions of the Investment
Company Act. If the Company were to become an investment company under the
Investment Company Act and if it failed to qualify for an exemption thereunder,
it would be unable to conduct its business as presently conducted which could
have a material adverse effect on the Company and the market price for the
Company Common Stock.
UNINSURED LOSSES
The Company will carry comprehensive liability, fire, extended coverage and
rental loss insurance with respect to all of the properties that it owns, with
policy specifications, insured limits and deductibles customarily carried for
similar properties. There are, however, certain types of losses (such as losses
arising from acts of war or relating to pollution) that are not generally
insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
Company could lose its capital invested in a property, as well as the
anticipated future revenue from such property and would continue to be obligated
on any mortgage indebtedness or other obligations related to the property. Any
such loss would adversely affect the financial condition and results of
operations of the Company.
With respect to those properties in which the Company holds an interest
through a mortgage, as well as those properties owned by entities to whom the
Company makes unsecured loans, the borrowers will most likely be obligated to
maintain insurance on such properties and to arrange for the Company to be
covered as a named insured on such policies. The face amount and scope of such
insurance coverage may be less comprehensive than the Company would carry if it
held the fee interest in such property. Accordingly in such circumstances, or
in the event that the borrowers fail to maintain required coverage, uninsured or
underinsured losses may occur, which could have an adverse impact on the
Company's cash flow or financial condition.
POTENTIAL ENVIRONMENTAL LIABILITY RELATED TO THE PROPERTIES
As of the Distribution Date, the Company will own a total of 13 properties.
Under various Federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
These laws often impose such liability without regard to whether the owner or
operator knew of, or was
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responsible for, the presence of such hazardous or toxic substances. The cost
of any required remediation and the owner's liability therefor as to any
property is generally not limited under such enactments and could exceed the
value of the property and/or the aggregate assets of the owner. The presence of
such substances, or the failure to properly remediate such substances, may
adversely affect the owner's ability to sell or rent such property or to borrow
using such property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances also may be liable for the costs of
removal or remediation of such substances at a disposal or treatment facility,
whether or not such facility is owned or operated by such persons. Certain
environmental laws govern the removal, encapsulation or disturbance of
asbestos-containing materials ("ACMs") when such materials are in poor
condition, or in the event of renovation or demolition. Such laws impose
liability for release of ACMs into the air and third parties may seek recovery
from owners or operators of real properties for personal injury associated with
ACMs. The operation and subsequent removal of certain underground storage tanks
also are regulated by Federal and state laws. In connection with the ownership
(direct or indirect), operation, management and development of real properties,
the Company may be considered an owner or operator of such properties or as
having arranged for the disposal or treatment of hazardous or toxic substances,
and, therefore, potentially liable for removal or remediation costs, as well as
certain other related costs, including governmental fines and injuries to
persons and property. See "BUSINESS AND PROPERTIES--Environmental Matters."
HEDGING POLICIES/RISKS
In connection with the financing of certain real estate investments, the
Company may employ hedging techniques designed to protect the Company against
adverse movements in currency and/or interest rates. While such transactions
may reduce certain risks, such transactions themselves may entail certain other
risks. Thus, while the Company may benefit from the use of these hedging
mechanisms generally, unanticipated changes in interest rates, securities
prices, or currency exchange rates may result in a poorer overall performance
for the Company than if it had not entered into such hedging transactions. See
"THE COMPANY--Financing Policies."
In connection with the financing of certain real estate investments, the
Company may use derivative financial instruments primarily to reduce exposure to
adverse fluctuations in interest rates and foreign exchange rates. The Company
does not intend to enter into derivative financial instruments for trading
purposes. Any derivative position maintained by the Company would be used to
reduce risk by hedging an underlying economic exposure. Because of the high
correlation between the hedging instrument and the underlying exposure,
fluctuations in the value of the instruments are generally offset by reciprocal
changes in the value of the underlying exposure. The Company intends to invest
in derivatives having straightforward instruments with liquid markets. In
order to reduce counter-party credit or legal enforcement risk, all
counter-parties will be major investment or commercial banks and all
transactions will be executed with documentation consistent with accepted
industry practice. See "THE COMPANY--Financing Policies."
DIVIDEND POLICY
The future payment of dividends by the Company will depend on decisions
that will be made by the Company Board from time to time based on the results of
operations and financial condition of the Company and such other business
considerations as the Company Board considers relevant. The Company presently
anticipates that it will retain all available funds for use in the operation and
expansion of its business and does not anticipate paying any dividends in the
foreseeable future. See "THE DISTRIBUTION-Listing and Trading of Company Common
Stock; Dividend Policy."
In addition, the stock market has experienced extreme price and volume
fluctuations which have affected the market price of many companies and which
have at times been unrelated to the operating
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performance of the specific companies whose stock is traded. Broad market
fluctuations and general economic conditions may adversely affect the market
price of the Company Common Stock.
CERTAIN ANTI-TAKEOVER FEATURES AFFECTING A CHANGE IN CONTROL OF THE COMPANY
Upon consummation of the Distribution, certain provisions of the Company
Articles and the Company Bylaws could discourage potential acquisition proposals
and could delay or prevent a change in control of the Company. Such provisions
include Article II of the Company Articles which authorizes the Company Board to
issue shares of preferred stock of the Company, in one or more series, and to
establish the rights and preferences (including the convertibility of such
shares of preferred stock into shares of Company Common Stock) of any series of
preferred stock so issued. The Company's stockholders have no right to take
action by written consent and are, except as otherwise required by law, not
permitted to call special meetings of stockholders. Any amendment of the
Company Bylaws by the stockholders or certain provisions of the Company Articles
requires the affirmative vote of at least 66 2/3% of the shares of voting stock
then outstanding. In addition, the affirmative vote of at least 66 2/3% of the
shares of voting stock then outstanding is required for any merger, exchange or
consolidation to which the Company is a party and which requires stockholder
approval under Nevada statutory law and any sale or other disposition by the
Company of all or substantially all of its assets. Such provisions could
diminish the opportunities for a stockholder to participate in tender offers,
including tender offers at a price above the then current market value of the
Company Common Stock. Such provisions also may inhibit fluctuations in the
market price of the Company Common Stock that could result from takeover
attempts and could discourage an acquisition attempt or other transaction that
some or a majority of stockholders might believe to be in their best interests.
Such provisions could further have the effect of making it more difficult for
third parties to cause the replacement of the current management of the Company
without the concurrence of the Company Board. See "HEALTHCARE ARTICLES OF
INCORPORATION AND BYLAWS."
In addition, certain provisions of Nevada statutory law may make more
difficult the acquisition of control of the Company without the approval of the
Company Board. Nevada's Combinations with Interested Stockholders statute (NRS
Sections 78.411-78.444), which applies to Nevada corporations having at least
200 stockholders, prevents an "interested stockholder" and an applicable Nevada
corporation from entering into a "combination" unless certain conditions are
met. A "combination" means any merger or consolidation with an "interested
stockholder," or any sale, lease exchange, mortgage, pledge, transfer or other
disposition, in one transaction or a series of transactions, with an "interested
stockholder" having: (i) an aggregate market value equal to 5% or more of the
aggregate market value of the assets of the corporation, (ii) an aggregate
market value equal to 5% or more of the aggregate market value of all
outstanding shares of the corporation, or (iii) 10% or more of the earning power
or net income of the corporation. An "interested stockholder" means a person
who, together with affiliates and associates, beneficially owns (or within the
prior three years, did beneficially own) 10% or more of the voting power of the
corporation. A corporation to which this statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares unless the combination or purchase is approved by the board of directors
before the interested stockholder acquired such shares. If this approval is not
obtained, then, after the expiration of the three-year period, the business
combination may be consummated with the approval of the board of directors or a
majority of the voting power held by disinterested stockholders, or if the
consideration to be paid by the interested stockholder is at least equal to the
highest of: (i) the highest price per share paid by the interested stockholder
within the three years immediately preceding the date of the announcement of the
combination or in the transaction in which it became an interested stockholder,
whichever is higher; (ii) the market value per share of common stock on the date
of announcement of the combination and the date the interested stockholder
acquired the shares, whichever is higher; or (iii) for holders of preferred
stock, the highest liquidation value of the preferred stock, if it is higher.
Nevada's Acquisition of Controlling Interest statute (NRS Sections
78.378-78.3793) applies only to Nevada corporations with at least 200
stockholders, including at least 100 stockholders of record who are
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Nevada residents, and which conduct business directly or indirectly in Nevada.
As of the date of this Information Statement, the Company does not have 100
stockholders of record who are residents of Nevada, although there can be no
assurance that in the future the Acquisition of Controlling Interest statute
will not apply to the Company.
The Acquisition of Controlling Interest statute prohibits an acquirer,
under certain circumstances, from voting its shares of a target corporation's
stock after crossing certain ownership threshold percentages, unless the
acquirer obtains approval of the target corporation's disinterested
stockholders. The statute specifies three thresholds: one-fifth or more but
less than one-third, one-third but less than a majority, and a majority or more,
of the outstanding voting power. Once an acquirer crosses one of the above
thresholds, those shares in an offer or acquisition and acquired within 90 days
thereof become "Control Shares" and such Control Shares are deprived of the
right to vote until disinterested stockholders restore the right. The
Acquisition of Controlling Interest statute also provides that in the event
Control Shares are accorded full voting rights and the acquiring person has
acquired a majority or more of all voting power, all other stockholders who do
not vote in favor of authorizing voting rights to the Control Shares are
entitled to demand payment for the fair value of their shares in accordance with
statutory procedures established for dissenters' rights. See "DESCRIPTION OF
THE COMPANY'S CAPITAL STOCK."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the efforts of its executive officers and other
key personnel. While the Company believes that it could find replacements for
these persons, the loss of their services could have a temporary adverse effect
on the operations of the Company. None of the Company's executive officers or
other key personnel has an employment agreement with the Company. There can be
no assurance that the Company will be able to retain these persons or to attract
suitable replacements or additional personnel if required. The Company has not
obtained key-man insurance for any of its executive officers or other key
personnel.
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THE DISTRIBUTION
BACKGROUND AND REASONS FOR THE DISTRIBUTION
LTC is a self-administered, self-managed REIT which invests in long-term
care facilities through mortgage loans, facility lease transactions and other
investments. To a large extent, public REITs, including LTC, manage their
property portfolios with consideration to both public market perceptions and tax
laws. Because investors are seeking a consistent and growing income stream from
their REIT investments, REITs are encouraged to (i) grow FFO, (ii) maintain a
low leverage ratio (debt to total capitalization is one measure used to
determine the relative risk of that cash flow stream, as rising interest rates
can diminish FFO and impact dividends) and (iii) make conservative investments
as evidenced by positive debt service coverages or low per bed or per unit
investments in health care facilities. As a result, REITs have generally been
hesitant to participate in long-term, higher-risk projects or to bring their
leverage ratios to above 40.0%. In addition, the tax laws governing REITs
include limitations on (i) the types of assets that REITs may own and the time
period that real estate may be held, restricting REITs from investing in
operating companies, equity securities, debt securities and participating in
short-term trading opportunities, and (ii) the ability of REITs to retain
earnings, requiring REITs to distribute 95.0% of net taxable income, excluding
capital gains, each year. Further, because gains on the sales of real estate
are not included in the calculation of FFO, REITs are not given value for buying
properties that have substantial long-term appreciation. Thus, the LTC Board
determined that it is in the best interests of LTC and its stockholders to
organize the Company to pursue opportunities available to those investors that
are not restricted by the Federal income tax laws governing REITs or influenced
by public market perception with regard to REIT securities, to transfer to the
Company certain equity investments, real properties and related assets and
liabilities currently held by LTC, and to spin-off the Company to the LTC
stockholders. The Distribution will enable investors who own both LTC Common
Stock and Company Common Stock to participate in the benefits of the REIT
operations of LTC and the non-REIT operations of the Company.
All of the properties to be transferred to the Company by LTC are subject
to long-term leases. Ownership of these properties by LTC is consistent with
the limitations on REITs described above however, LTC believes it is in the best
interests of LTC and its stockholders to transfer these properties to the
Company for the following reasons. As described above, REITs are encouraged to
increase FFO. Significant leverage on properties in the Healthcare Asset Group
and the LTC Partners IX, LP ("Partners IX") properties results in such
properties generating minimal FFO. As of June 30, 1998, the total pro forma
mortgages payable on these properties was $29,331,100. Expected FFO and use of
cash for the next twelve months, based on annual base rent and debt service
pursuant to leases and mortgages in effect on the Distribution Date, is
approximately $253,500 and $41,700, respectively, for the properties in the
Healthcare Asset Group and the LTC Partners IX properties. LTC's investment
strategy has been to make conservative, low cost per unit/bed investments. As
of June 30, 1998, LTC's average investment in owned assisted living facilities
was approximately $62,000 per unit. Four of the properties acquired from
Karrington Health, Inc. were acquired for approximately $125,000 per unit and
LTC has the opportunity to finance approximately 75% of the purchase price of
these properties with non-recourse mortgage financing, and the remaining 25% of
the purchase price with equity. The remaining two properties acquired from
Karrington Health, Inc. were acquired for approximately $121,000 per unit and
LTC intends to encumber such properties with non-recourse mortgage financing.
Because the leveraged returns are attractive, LTC felt this was a more
appropriate investment for Healthcare. See "LTC HEALTHCARE, INC. UNAUDITED PRO
FORMA FINANCIAL INFORMATION" and "BUSINESS AND PROPERTIES-LTC Partners IX
Properties, -Karrington on the Scioto, -Karrington of Bexley, -Karrington at
Tucker Creek, -Karrington Place, -Karrington of Rocky River and -Karrington on
Presque Isle Bay."
The LTC Board recognized in its planning that the Distribution would result
in a transaction taxable to LTC stockholders, LTC debenture holders and to LTC.
Due to the nature of the assets to be
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transferred to the Company and the amount and duration of LTC's holdings
thereof, LTC and the Company are not positioned to effect the Distribution on a
tax-free basis. The LTC Board has considered that LTC's substantial tax basis
in the Company Common Stock (and prior to their transfer to the Company, in the
assets to be transferred) would reduce taxable gains, if any, to LTC that would
otherwise be recognized. Upon review of this and other relevant factors
discussed in the preceding paragraphs of this section "-Background and Reasons
for the Distribution", the LTC Board concluded that the benefits of the
Distribution would more than offset any negative tax consequences of the
Distribution. See "-Material Federal Income Tax Consequences of the
Distribution."
A small number of REITs, operating under tax provisions that no longer are
available to other REITs, have shares of capital stock that are "paired" or
"stapled" with shares of capital stock of an operating company that is liable
for regular corporate income tax. The shares of LTC Common Stock, Series C
Preferred Stock and Company Common Stock are not, and will not be, paired or
stapled in any manner and may be owned and transferred separately and
independently of each other. However, investors who choose to own both shares
of LTC Common Stock or shares of Series C Preferred Stock and Company Common
Stock will, in effect, have substantially the same economic equivalent of a
"stapled" investment in LTC and the Company.
DISTRIBUTION AGENT
The Distribution Agent is Harris Trust and Savings Bank, 311 West Monroe
Street, Chicago, Illinois 60606, telephone: (312) 360-5294.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth
in the Distribution Agreement (the "Distribution Agreement") that will be
executed on or prior to the Distribution Date by and between LTC and the
Company.
LTC will effect the Distribution on the Distribution Date by delivering
all outstanding shares of Company Common Stock to the Distribution Agent for
distribution to the holders of record of LTC Common Stock, Series C Preferred
Stock and Debentures as of the close of business on the Record Date. The
Distribution will be made on the basis of 1/10 share of Company Common Stock
for each share of LTC Common Stock held and for each share of LTC Common
Stock into which Series C Preferred Stock and Debentures may be converted as
of the close of business on the Record Date. Only whole shares of Company
Common Stock will be issued. Stockholders and debenture holders who would
have otherwise received a fractional share of Healthcare common stock will
receive cash in lieu thereof. LTC shall instruct the Distribution Agent to
aggregate all fractional shares of Company Common Stock into whole shares and
sell the whole shares obtained thereby in the open market as soon as
practicable following the Distribution Date at then prevailing prices on
behalf of holders who otherwise would be entitled to receive fractional share
interests and to distribute to each such holder such holder's ratable share
of the proceeds of such sale as soon as practicable after the Distribution
Date. LTC shall bear the costs of commissions incurred in connection with
such sales. Based on 27,657,900 shares of LTC Common Stock, 2,000,000 shares
of LTC Common Stock into which shares of Series C Preferred Stock may be
converted and 3,700,919 shares of LTC Common Stock into which Debentures may
be converted less 96,800 shares of LTC Common Stock held by the Company as of
the date of this filing, approximately 3,326,202 shares of Company Common
Stock will be distributed to LTC stockholders and debenture holders. The
shares of Company Common Stock will be fully paid and non-assessable, and the
holders thereof will not be entitled to preemptive rights. See "DESCRIPTION
OF THE COMPANY'S CAPITAL STOCK." It is expected that certificates
representing shares of the Company Common Stock and checks for cash in lieu
of fractional shares will be mailed to holders of LTC Common Stock, holders
of Series C Preferred Stock and holders of Debentures as soon as practicable
after the Distribution Date.
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HOLDERS OF LTC COMMON STOCK, SERIES C PREFERRED STOCK AND DEBENTURES SHOULD NOT
SEND CERTIFICATES TO THE COMPANY, LTC OR THE DISTRIBUTION AGENT. THE
DISTRIBUTION AGENT WILL MAIL THE STOCK CERTIFICATES REPRESENTING SHARES OF
COMPANY COMMON STOCK AS SOON AS PRACTICABLE AFTER THE DISTRIBUTION DATE. LTC
STOCK CERTIFICATES AND DEBENTURE CERTIFICATES WILL CONTINUE TO REPRESENT SHARES
OF LTC COMMON STOCK, SERIES C PREFERRED STOCK AND DEBENTURES AFTER THE
DISTRIBUTION IN THE SAME AMOUNT SHOWN ON THE CERTIFICATES.
No holder of LTC Common Stock, Series C Preferred Stock or Debentures will
be required to pay any cash or other consideration for the shares of Company
Common Stock to be received in the Distribution or to surrender or exchange
shares of LTC Common Stock, Series C Preferred Stock or Debentures or to take
any other action in order to receive the Company Common Stock pursuant to the
Distribution.
RESULTS OF THE DISTRIBUTION
After the Distribution, the Company will be a separate public company which
will own certain equity investments, real properties, debentures and related
assets and liabilities. See "THE COMPANY" and "BUSINESS AND PROPERTIES." The
number and identity of the holders of Company Common Stock immediately after the
Distribution will be substantially the same as the number and identity of the
holders of LTC Common Stock on the Record Date. Immediately after the
Distribution, the Company expects to have approximately 900 holders of record
of the Company Common Stock and approximately 3,326,202 shares of the Company
Common Stock outstanding based on the number of LTC stockholders and debenture
holders as of the date of this filing and the outstanding shares of LTC Common
Stock and the number of shares of LTC Common Stock into which shares of Series
C Preferred Stock and Debentures may be converted as of the date of this filing
and the distribution ratio of 1/10 share of Company Common Stock for each share
of LTC Common Stock and for each share of LTC Common Stock into which shares of
Series C Preferred Stock and Debentures may be converted.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
INTRODUCTION. The following is a summary of certain material Federal
income tax considerations associated with the Distribution. This discussion is
based upon the laws, regulations and reported rulings and decisions in effect as
of the date of this Information Statement, all of which are subject to change,
retroactively or prospectively, and to possibly differing interpretations. This
discussion does not purport to deal with the Federal income or other tax
consequences applicable to all stockholders in light of their particular
investment circumstances or to all categories of stockholders, some of whom may
be subject to special rules (including, for example, insurance companies,
tax-exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States). No ruling on the Federal, state or local tax considerations relevant
to the operations of LTC or the Company or to the Distribution is being
requested from the IRS or from any other tax authority.
TAXATION OF LTC IN GENERAL. LTC has made an election to be treated as a
REIT under Sections 856 through 860 of the Code, commencing with its
organization on May 12, 1992. LTC believes that it was organized and has
operated in such a manner so as to qualify as a REIT, and LTC intends to
continue to operate in such a manner, but no assurance can be given that it has
operated in a manner so as to qualify, or will operate in a manner so as to
continue to qualify, as a REIT.
The sections of the Code relating to qualifications and operation as a REIT
are highly technical and complex. LTC believes that, with respect to its
taxable years ending on or after December 31, 1992, it has been organized in
conformity with the requirements for qualification as a REIT, and its proposed
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manner of operation will enable it to meet the requirements for qualification as
a REIT. Continued qualification as a REIT will depend upon LTC's ability to
meet, through actual annual operating results, the distribution levels, stock
ownership requirements and the various qualification tests and other
requirements imposed under the Code. Accordingly, no assurance can be given
that the actual stock ownership of LTC, the mix of its assets, or the results of
its operations for any particular taxable year will satisfy such requirements.
TAXABLE INCOME RECOGNITION BY LTC AS A RESULT OF THE DISTRIBUTION.
Immediately prior to the Distribution, LTC will transfer to the Company certain
equity investments, real properties and related assets and liabilities held by
LTC in exchange for additional shares of Company Common Stock which the Company
will issue to LTC (the "Contribution"). See "BUSINESS AND PROPERTIES." LTC
will generally recognize gain for Federal income tax purposes as a result of the
Contribution in an amount equal to the excess of the fair market value of the
Company Common Stock received in the exchange plus any liabilities assumed by
the Company (as well as any liabilities to which any transferred assets are
subject) over LTC's adjusted tax basis in the properties and assets immediately
prior to the exchange. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS-Interests Relating to LTC." LTC's tax basis in the Company Common
Stock received in exchange for the contributed assets will be equal to the fair
market value of the Company Common Stock received in the exchange.
TRANSFER OF LTC GP VI, INC. STOCK. As discussed below in "BUSINESS AND
PROPERTIES -- LTC Partners IX Properties," LTC holds indirect interests in
several real properties through the ownership of a general partnership interest
in Partners IX. This general partnership interest is held by LTC GP VI, Inc.
("LTC GP VI"), a wholly owned subsidiary corporation of LTC that qualifies for
Federal income tax purposes as a "qualified REIT subsidiary." For purposes of
the Code, a corporation is a qualified REIT subsidiary if 100% of its stock is
owned by a REIT. A qualified REIT subsidiary's status as a separate taxable
entity is disregarded, and its assets, liabilities, and items of income, loss,
deduction and credit are treated as assets, liabilities, and items of income,
loss, deduction and credit of the parent REIT.
LTC will transfer its LTC GP VI stock to the Company in the Contribution.
For Federal income tax purposes, such transfer will terminate LTC GP VI's status
as a qualified REIT subsidiary, and will further be treated as if (i)
immediately prior to the transfer, LTC contributed the assets of LTC GP VI to a
new corporation in exchange for that new corporation's stock, and then (ii) LTC
transferred the stock of such new corporation to the Company in exchange for
additional shares of Company Common Stock. With respect to the deemed transfer
described in (i), LTC will recognize gain equal to the excess, if any, of the
fair market value of the stock of the new corporation received in the deemed
exchange plus any liabilities deemed to be assumed by the new corporation in the
deemed exchange and any liabilities to which the assets deemed transferred are
subject over the adjusted tax basis of LTC GP VI's share of partnership assets
immediately before the deemed transfer. Subject to the risk of being
characterized as gain from a prohibited transaction, as described below, any
such gain should be qualifying income for purposes of the 95% and 75% tests
described below. LTC will further recognize gain, if any, on its transfer of
the LTC GP VI stock to the Company in the Contribution to the extent that the
fair market value of the Company Common Stock received in exchange for the LTC
GP VI stock exceeds LTC's adjusted tax basis in such stock immediately prior to
the Contribution. Such gain will constitute qualifying income for purposes of
the 95% gross income test described below, but will not be qualifying income for
purposes of the 75% gross income test described below.
INCOME ON REVOLVING NOTE. In connection with the Contribution, the Company
will issue to LTC a revolving note in the principal amount of approximately $20
million. Such note will bear interest at the rate of 10% per annum, mature on
March 31, 2008 and be a full recourse unsecured obligation. See "RELATIONSHIP
BETWEEN HEALTHCARE AND LTC AFTER THE DISTRIBUTION." Interest income with
respect to the line of credit will be qualifying income for purposes of the 95%
gross income test described below. However, because the line of credit is not
an obligation secured by real property,
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the interest income will not be qualifying income for purposes of the 75% gross
income test described below. Further, the note will not qualify under certain
asset tests applicable to REITs.
INCOME FROM ADMINISTRATIVE SERVICES AGREEMENT. In connection with the
Distribution, LTC and Healthcare will enter into an Administrative Services
Agreement, pursuant to which LTC will provide certain management and
administrative services to the Company. See "RELATIONSHIP BETWEEN HEALTHCARE
AND LTC AFTER THE DISTRIBUTION-Administrative Services Agreement." Gross income
under the Administrative Services Agreement will not be qualifying income under
either the 95% or 75% gross income tests described below.
GAIN TO LTC ON THE DISTRIBUTION. LTC's taxable gain on the Distribution,
if any, will be measured by the extent to which, at the time of the
Distribution, the fair market value of the Company Common Stock distributed by
LTC exceeds LTC's adjusted tax basis in such stock.
Because of the factual nature of the issue of the value of the Company
Common Stock received by LTC as a result of the Contribution and then
distributed by LTC, Tax Counsel is unable to render an opinion on the amount of
gain recognized by LTC as a result of these transactions. The amount of gain,
if any, will increase LTC's current or accumulated earnings and profits, and
thereby increase the portion of LTC's distributions that are treated as made out
of earnings and profits, and thus are dividends for Federal income tax purposes.
CHARACTERIZATION OF GAIN RECOGNIZED FOR PURPOSES OF REIT INCOME TESTS. The
gain recognized by LTC in the Contribution and the Distribution will, depending
upon the nature of the assets transferred, be qualifying or non-qualifying
income for purposes of the REIT income tests. In order to maintain
qualification as a REIT, LTC annually must satisfy two gross income
requirements. First, at least 75% of LTC's gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including "rents from real property," certain interest, and gains from
the sale or other disposition of real property) or from certain types of
temporary investments. Second, at least 95% of LTC's gross income (excluding
gross income from prohibited transactions) for each taxable year must be derived
from investments the income from which satisfies the 75% gross income test or
from dividends, interest and gain from the sale or other disposition of stock or
securities (or from any combination of the foregoing). To the extent that the
gain LTC will recognize on either the Contribution or the Distribution
constitutes gain from the sale or other disposition of real property that is not
a prohibited transaction, as described below, such gain will be qualifying
income for purposes of both the 75% and 95% gross income tests. However, to the
extent that such gain constitutes gain from the sale or other disposition of
stock or securities or other non-real estate assets (which, for example, will be
the case with respect to the contribution of the common stock of Assisted Living
Concepts, Inc. ("ALC") and Regent, and the stock of LTC GP VI in the
Contribution, and the distribution of Company Common Stock in the Distribution),
such gain will be qualifying income for purposes of the 95% gross income test,
but will not be qualifying income for purposes of the 75% gross income test.
FAILURE TO SATISFY 75% GROSS INCOME TEST. Because of the nature of the
assets being transferred to the Company in the Contribution and the uncertainty
of the value of the Company Common Stock, as discussed above, the amount of gain
recognized by LTC on the Distribution could cause LTC to fail to satisfy the 75%
gross income test for its current taxable year. However, if LTC fails to
satisfy the 75% gross income test, it will nonetheless be deemed to satisfy such
test (and therefore will continue to qualify as a REIT for such taxable year) if
certain disclosure requirements are met and the failure to meet such test is due
to reasonable cause and not willful neglect. LTC believes that it has exercised
ordinary business care and prudence in connection with the Contribution and the
Distribution in attempting to satisfy the 75% gross income test, and that it
will continue to exercise such ordinary business care and prudence in attempting
to satisfy the 75% gross income test. Furthermore, LTC has engaged an
independent, nationally recognized valuation firm to render an opinion as to the
value of the Company
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Common Stock to be distributed in the Distribution, and believes that its
reliance on such opinion will constitute reasonable cause for purposes of the
relief provisions discussed herein. LTC has knowledge of no facts which would
cause it to believe that it will realize gain upon the Distribution.
Even if the relief provisions discussed in the preceding paragraph apply, a
tax would be imposed on an amount equal to (a) the gross income attributable to
the greater of the amount by which LTC failed the 75% test or 95% test
multiplied by (b) a fraction intended to reflect LTC's profitability.
If the relief provisions discussed above do not apply, LTC's REIT status
would terminate in the taxable year of the Distribution.
GAIN FROM PROHIBITED TRANSACTION. Because, among other things, LTC will
have held some of the assets to be transferred to the Company for a relatively
short period of time prior to the Contribution, there is a risk that any gain
recognized on the deemed contribution would be characterized as gain from the
sale or other disposition of property held for sale in the ordinary course of
business. If this result occurs, such gain would further constitute gain from a
"prohibited transaction," as such term is defined in Section 857(b)(6) of the
Code. Any such gain would be subject to a 100% tax on the net income derived
from such prohibited transaction. LTC believes that, on the date of the
Contribution, the deemed contribution of such assets will not result in the
recognition of any gain.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS AND HOLDERS OF DEBENTURES OF LTC
AS A RESULT OF THE DISTRIBUTION. The Distribution will be treated as a
distribution, the amount of which equals the value of the Company Common Stock
distributed plus any cash in lieu of fractional shares, and LTC stockholders and
holders of Debentures will receive a tax basis in Company Common Stock equal to
the fair market value thereof at the time of the Distribution. Because of the
factual nature of the issue of the fair market value of the Company Common Stock
distributed, Tax Counsel is unable to render an opinion on it. As long as LTC
qualifies as a REIT, distributions (including the Distribution) made to LTC's
taxable U.S. stockholders out of LTC's current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by such U.S. stockholders as ordinary income and, for corporate
stockholders, will not be eligible for the dividends received deduction.
Distributions in excess of current and accumulated earnings and profits will not
be taxable to a stockholder to the extent that they do not exceed the adjusted
tax basis of the stockholder's shares of LTC Common Stock, but rather will
reduce the adjusted tax basis of such shares. To the extent that distributions
in excess of current and accumulated earnings and profits exceed the adjusted
tax basis of a stockholder's shares of LTC Common Stock, such distributions will
be capital gain if the shares are a capital asset in the hands of the
stockholder. For certain non-corporate stockholders (including individuals),
such capital gain will be subject to a reduced rate if the stockholder has held
the shares for more than one year, and will be eligible for a further reduced
rate if the stockholder has held the shares for more than 18 months. In
addition, any distribution declared by LTC in October, November or December of
any year payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by LTC and received by the stockholder on
December 31 of such year, provided that the distribution is actually paid by LTC
during January of the following calendar year. Stockholders may not include any
net operating losses or capital losses of LTC in their respective income tax
returns. In general, any loss upon a sale or exchange of shares by a
stockholder who has held such shares for six months or less (after applying
certain holding period rules) will be treated as a long-term capital loss to the
extent of distributions from LTC required to be treated by such stockholder as
long-term capital gain. LTC will treat the amount of the Distribution to
holders of Debentures as a distribution of ordinary income that will not be
treated as a dividend or interest on the Debentures.
TAXATION OF TAX-EXEMPT STOCKHOLDERS AND HOLDERS OF DEBENTURES OF LTC AS A
RESULT OF THE DISTRIBUTION. Most tax-exempt employees' pension trusts are not
subject to Federal income tax except to the extent of their receipt of
"unrelated business taxable income" as defined in Section 512(a) of the Code
("UBTI"). The Distribution to a stockholder or holder of Debentures that is a
Tax-Exempt entity
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should not constitute UBTI, provided that the Tax-Exempt entity has not financed
the acquisition of its shares of LTC Common Stock or Debentures with
"acquisition indebtedness" within the meaning of the Code and such shares are
not otherwise used in an unrelated trade or business of the Tax-Exempt entity.
In addition, certain pension trusts that own more than 10% of a "pension-held
REIT" must report a portion of the dividends that they receive from such a REIT
as UBTI. LTC has not been and does not expect to be treated as a pension-held
REIT for purposes of this rule.
TAXATION OF FOREIGN STOCKHOLDERS OF LTC AS A RESULT OF THE DISTRIBUTION.
The rules governing United States Federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
persons (collectively, "Non-U.S. Persons") holding stock of a domestic
corporation ("Non-U.S. Stockholders") are complex, and no attempt will be made
in this Information Statement to provide more than a summary of such rules.
Non-U.S. Persons holding LTC Common Stock or Debentures should consult with
their own tax advisors to determine the impact of Federal, state and local tax
laws with regard to the Distribution, including any reporting requirements. In
general, as is the case with domestic taxable stockholders and holders of
Debentures of LTC, the Distribution is treated as a distribution whose amount
equals the value of the Company Common Stock distributed plus any cash in lieu
of fractional shares, and LTC stockholders and holders of Debentures will
receive a basis in Company Common Stock equal to the fair market value thereof
at the time of the Distribution.
Distributions to Non-U.S. stockholders that are not attributable to gain
from sales or exchanges by LTC of United States real property interests and not
designated by LTC as capital gain dividends will be treated as dividends of
ordinary income to the extent that they are made out of current and accumulated
earnings and profits of LTC. Distributions to Non-U.S. Persons holding
Debentures will be treated as a distribution of ordinary income that will not be
treated as a dividend or interest on the Debentures. Such distributions
ordinarily will be subject to a withholding tax equal to 30% of the gross amount
of the distribution, unless an applicable tax treaty reduces or eliminates that
tax. LTC expects to withhold U.S. income tax at the rate of 30% on the gross
amount of any such distribution made to a Non-U.S. Person unless (i) a lower
treaty rate applies and the Non-U.S. Person has filed the required IRS Form 1001
with LTC (or, as discussed below, such other certifications as shall be required
under the Final Treasury Regulations to establish that the Non-U.S. Person is
entitled to claim the benefits of such reduced treaty rate), or (ii) the
Non-U.S. Person files an IRS Form 4224 with LTC claiming that the distribution
is effectively connected with the Non-U.S. Person's conduct of a U.S. trade or
business.
Distributions in excess of LTC's current and accumulated earnings and
profits will not be taxable to a stockholder to the extent that such
distributions do not exceed the adjusted tax basis of the stockholder's shares
of LTC Common Stock, but rather will reduce the adjusted tax basis of such
shares. To the extent that distributions in excess of current and accumulated
earnings and profits exceed the adjusted tax basis of a Non-U.S. Stockholder's
shares, such distributions will give rise to tax liability if the Non-U.S.
Stockholder would otherwise be subject to tax on any gain from the sale or
disposition of the LTC Common Stock. Any portion of the Distribution which is
treated as a capital gain dividend and is not attributable to a disposition by
LTC of a United States real property interest shall also be subject to rules
similar to those applicable to gain from the sale or disposition of the LTC
Common Stock.
Provided that LTC is a "domestically controlled REIT" for Federal income
tax purposes, a Non-U.S. Stockholder would be subject to taxation on gain from a
sale or disposition of LTC Common Stock only if (i) the investment in the LTC
Common Stock were treated as effectively connected with such Non-U.S.
Stockholder's U.S. trade or business, in which case the Non-U.S. Stockholder
would be subject to the same treatment as U.S. stockholders with respect to such
gain (plus the 30% branch profits tax in the case of foreign corporations unless
reduced or except under the applicable treaty), or (ii) the Non-U.S. Stockholder
is a nonresident alien individual who was present in the United States for 183
days or more during the taxable year of the sale or disposition and either the
individual has a "tax home" in the United States or the gain is attributable to
an office or other fixed place of business maintained by the individual in the
United States, in which case the gain will be subject to a 30% tax. The Company
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believes that LTC is and currently expects to continue to be a "domestically
controlled REIT" for Federal income tax purposes.
If it cannot be determined at the time a distribution is made whether or
not such distribution will be in excess of current and accumulated earnings and
profits, the distributions would be subject to withholding at the same rate as
dividends. However, a Non-U.S. Stockholder may seek a refund of such amounts
from the IRS if it is subsequently determined that such distribution was, in
fact, in excess of LTC's current and accumulated earnings and profits.
The Company anticipates that a portion of the Distribution will be treated
as attributable to LTC's disposition of a United States real property interest.
To the extent that a portion of the Distribution were to be treated as
attributable to the disposition of a United States real property interest, a
Non-U.S. Stockholder would be subject to tax on such portion as though it were
gain that was effectively connected with a United States trade or business of
such Non-U.S. Stockholder. Thus, Non-U.S. Stockholders would be generally
entitled to offset such portions of the Distribution by allowable deductions and
would pay tax on the resulting net taxable income at the same rates applicable
to U.S. stockholders (plus the 30% branch profits tax in the case of foreign
corporations unless reduced or except under the applicable treaty). LTC is
required under applicable Treasury Regulations to withhold 35% of a portion of
the Distribution attributable to LTC's disposition of a United States real
property interest. The amount so withheld is creditable against the Non-U.S.
Stockholder's U.S. tax liability.
Amounts required to be withheld from payments to Non-U.S. Persons will be
collected by converting a portion of the Company Common Stock to be distributed
into cash.
REPORTING OF THE DISTRIBUTION. LTC will make a determination of the fair
market value of the Company Common Stock as of the Distribution Date. Based
upon such determination, LTC will report the amount of the Distribution received
by each stockholder to such stockholder and to the IRS on IRS Form 1099-DIV, and
will report the amount of the Distribution received by each holder of Debentures
to such holder and to the IRS on IRS Form 1099-MISC. There can be no assurance
that the IRS or the courts will agree with the amount determined by LTC.
CLINTON ADMINISTRATION 1999 BUDGET PROPOSALS. On February 2, 1998, the
Department of the Treasury (the "Treasury") released an explanation of the
revenue proposals included in the Clinton Administration's fiscal 1999 budget.
These proposals contains several provisions which, if enacted in their proposed
form, may have an adverse impact on LTC's continued qualification as a REIT.
One provision would prohibit a REIT from holding greater than 10 percent of
the outstanding stock of any one issuer, measured by vote OR value. This
proposal would be effective with respect to stock acquired on or after the date
of first committee action (such date, the "Action Date"). However, under a
grandfather provision, stock acquired before the Action Date would become
subject to the proposal when the corporation in which stock is owned engages in
a trade or business in which it was not engaged on the Action Date or if the
corporation acquires substantial new assets on or after the Action Date.
A second provision would impose as an additional requirement for REIT
qualification that no person can own stock of a REIT possessing more than 50
percent of the combined voting power of all classes of voting stock OR 50
percent of the total value of shares of all classes of stock. For purposes of
determining stock ownership, rules similar to the attribution rules for REIT
qualification under present law would apply. This proposal would be effective
for entities electing REIT status for taxable years beginning on or after the
Action Date.
Finally, a third proposal regarding the "grandfathered" status of certain
"stapled" or "paired share" REITs that would otherwise be subject to Section
269B of the Code has been enacted in a
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provision of the IRS Restructuring and Reform Act of 1998, which was signed by
President Clinton on July 22, 1998 (the "1998 Act"). Under the provision in the
1998 Act, such grandfathered status would be revoked and the stapled entities
would be treated as a single corporation with respect to certain properties
acquired by the stapled entities on or after March 26, 1998 and activities or
services relating to such properties performed on or after such date. Under the
1998 Act, the anti-pairing rules provided in the Code apply to real property
interests acquired after March 26, 1998 by a REIT or a stapled entity, or a
subsidiary or partnership in which ten percent or greater interest is owned by
the REIT or a stapled entity unless (i) the real property interests are acquired
pursuant to a written agreement which was binding on March 26, 1998 and all
times thereafter or (ii) the acquisition of such real property interests was
described in a public announcement or in a filing with the Commission on or
before March 26, 1998.
With respect to the first proposal, LTCTC owns 100% of the nonvoting
preferred stock of LTC Development Company, Inc. ("LTC Development") and 100% of
the nonvoting common stock of the Company, (the Company and LTC Development are
collectively referred to herein as the "Preferred Stock Subsidiaries"), which
ownership represents, in each case, approximately 99% of the economic value of
all classes of stock of each of the Preferred Stock Subsidiaries. LTC does not
and will not own any of the voting securities of either of the Preferred Stock
Subsidiaries, and therefore LTC will not be considered to own more than 10% of
the voting securities of either of the Preferred Stock Subsidiaries (which would
be prohibited by the REIT asset tests currently set forth in the Code). If this
proposal were enacted in its present form, LTC's stock ownership in the
Preferred Stock Subsidiaries would be grandfathered, but such grandfathered
status would terminate if either of the Preferred Stock Subsidiaries engages in
a trade or business that it is not engaged in on the Action Date or acquires
substantial new assets on or after such date, even if such activities are
undertaken or assets are acquired prior to the adoption of the proposal. In
such case, LTC's continued ownership of more than 10% of the economic value of
the Preferred Stock Subsidiaries beyond LTC's next quarterly asset testing date
following the Action Date (which could occur prior to the adoption of the
proposal) could cause LTC to fail to qualify as a REIT. See "-Failure to
Qualify." At this time, it is expected that LTC Development will not acquire
additional properties notwithstanding the proposed legislation regarding REIT
subsidiaries. It is anticipated that the Company will not acquire any assets
other than from LTCC by way of the Company's contribution of certain of its
assets to the Company prior to the Distribution. It is presently uncertain,
however, whether any proposal regarding REIT subsidiaries, such as the Preferred
Stock Subsidiaries, will be enacted, or if enacted, what the terms of such
proposal (including its effective date) will be.
With respect to the second proposal, because LTCC's Common Stock is widely
held, and possesses approximately 80% of the value and 100% of the voting power
of all classes of LTC's stock, LTC does not anticipate that, if this proposal is
adopted as proposed, ownership of its stock will cause it to fail to satisfy
this test. Additionally, LTC believes that the share ownership and transfer
restrictions with respect to LTC's Common Stock and Preferred Stock contained in
LTC's Charter and Articles Supplementary should enable it to satisfy this
proposed share ownership requirement. Furthermore, if required, LTC intends to
take other reasonable action to ensure that this proposed share ownership
requirement, if enacted, would be met.
The Treasury's explanation of the two foregoing budget proposals provides
only a general description of the proposals, and the details of the statutory
amendments that would implement these proposals are not known, and would be
subject to change until such time as they are enacted into law. Consequently,
it is impossible to determine all of the ramifications of these proposals.
With respect to the anti-pairing provision under the 1998 Act, Section
269B(a)(3) of the Code provides that if the shares of a REIT and a non-REIT are
paired or "stapled," then the REIT and the stapled non-REIT shall be treated as
one entity for purposes of determining whether either company qualifies as a
REIT. Section 269B(a)(3) does not apply, however, if the shares of the REIT and
the non-REIT were paired on June 30, 1983 and the REIT was taxable as a REIT on
such date. While this "grandfathering" of stapled REITs does not apply to LTC,
LTC and the Company are not stapled entities,
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nor is LTC a stapled entity with respect to any other non-REIT corporate entity.
Therefore, LTC believes that this proposal will have no effect on LTC's
continued qualification as a REIT. However, if Section 269B(a)(3) did apply to
LTC and the Company, LTC and the Company would be treated as one entity for
purposes of determining REIT qualification, and LTC may not qualify as a REIT.
ALL LTC STOCKHOLDERS AND DEBENTURE HOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM,
INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX LAWS.
LISTING AND TRADING OF COMPANY COMMON STOCK; DIVIDEND POLICY
There is not currently a public market for the Company Common Stock.
Prices at which the Company Common Stock may trade prior to the Distribution on
a "when-issued" basis or after the Distribution cannot be predicted. Until the
Company Common Stock is fully distributed and an orderly market develops, the
prices at which trading in such stock occurs may fluctuate significantly. The
prices at which the Company Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others, the
success of the Company's business, the depth and liquidity of the market for the
Company Common Stock, investor perception of the Company and its assets, the
Company's dividend policy, and general economic and market conditions. Such
prices also may be affected by certain provisions of the Company Articles and
the Company Bylaws, as each will be in effect following the Distribution, which
may have an anti-takeover effect. See "RISK FACTORS-Absence of Prior Trading
Market for Company Common Stock; Potential Volatility" and "HEALTHCARE ARTICLES
OF INCORPORATION AND BYLAWS."
The Company has applied to have the Company Common Stock approved for
listing and trading on the Pacific Exchange. Immediately after the
Distribution, the Company expects to have approximately 900 stockholders of
record based upon the number of stockholders of record of LTC as of the date
of this filing. For certain information regarding options to purchase the
Company Common Stock that will be outstanding after the Distribution, see
"MANAGEMENT-Healthcare 1998 Plan."
The Company presently intends to retain future earnings to finance the
growth and development of its business; and, therefore, the Company does not
currently anticipate paying any cash dividends. Any future determination
relating to dividend policy will be made at the discretion of the Company Board.
Such determinations will depend on a number of factors, including the future
earnings, capital requirements, financial condition and prospects of the
Company, possible loan or financing covenant restrictions, and such other
factors as the Company Board may deem relevant. See "RISK FACTORS-Dividend
Policy."
The Company initially will consist of certain equity investments, real
properties, debentures and related assets and liabilities, as described in
"BUSINESS AND PROPERTIES." Nothing herein should be construed to suggest that
the trading price of LTC Common Stock at any point in time may be used as a
substitute for the trading price of Company Common Stock. No assurance can be
given that the Company Common Stock will trade at a price per share reflecting
the earnings per share or other multiple, or other attributes, of LTC. See
"RISK FACTORS-Absence of Prior Trading Market for Company Common Stock;
Potential Volatility."
It is the Company's belief that the Company Common Stock distributed to
LTC's stockholders and debenture holders in the Distribution will be freely
transferable, except for securities received by persons who may be deemed to be
"affiliates" of LTC within the meaning of Rule 144 under the Securities Act, in
which case such persons may not publicly offer or sell the Company Common Stock
34
<PAGE>
received in connection with the Distribution except pursuant to a registration
statement under the Securities Act or pursuant to Rule 144. There can be no
assurance that the Commission will not take a contrary view, and no ruling from
the Commission has been or will be sought. See "RISK FACTORS-Shares Eligible
for Future Sale."
CONDITIONS; TERMINATION
The LTC Board has conditioned the Distribution upon, among other things,
(i) the transfers of assets and liabilities to occur prior to consummation of
the Distribution having been consummated in all material respects; (ii) the
Company Board, comprised as contemplated in the Distribution Agreement, having
been elected, and the Company Articles and Company Bylaws, having been adopted
and in effect; (iii) LTC and Healthcare having obtained all third party consents
or approvals necessary or desirable in connection with the transactions
comprising the Distribution, the failure of which to obtain would not, in the
sole judgment of the LTC Board, have a material adverse effect on LTC or
Healthcare; (iv) the Registration Statement on Form 10 under the Exchange Act
filed by Healthcare having been declared effective by the Commission; (v) the
Healthcare Common Stock having been approved for listing and trading on the
Pacific Exchange subject to official notice of issuance; and (vi) LTC and
Healthcare having entered into all of the agreements, instruments,
understandings, assignments or other arrangements which are entered into in
connection with the transactions contemplated by the Distribution and which are
set forth in a writing, including, without limitation (a) conveyancing and
assumption instruments, (b) the Administrative Services Agreement, (c) the Tax
Sharing Agreement and (d) the Intercompany Agreement. The Company believes that
there are no third-party consents which if not obtained would have a material
adverse effect on the Company, LTC or the Distribution. Any of the conditions
to the Distribution may be waived in the discretion of the LTC Board. Even if
all of the above conditions are satisfied, the LTC Board has reserved the right
to abandon, defer or modify the Distribution or the other elements of the
Distribution at any time prior to the Distribution Date; however, the LTC Board
will not waive any of the conditions to the Distribution or make any changes in
the terms of the Distribution unless the LTC Board determines that such changes
would not be materially adverse to the LTC stockholders. See "RELATIONSHIP
BETWEEN HEALTHCARE AND LTC AFTER THE DISTRIBUTION-Distribution Agreement."
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by LTC solely to provide
information to LTC stockholders and debenture holders who will receive Company
Common Stock in the Distribution. It is not, and is not to be construed as, an
inducement or encouragement to buy or sell any securities of LTC or the Company.
The information contained in this Information Statement is believed by LTC and
the Company to be accurate as of the date set forth on the cover of this
Information Statement. Changes may occur after that date, and neither the
Company nor LTC will update the information except in the normal course of their
respective public disclosure practices.
35
<PAGE>
RELATIONSHIP BETWEEN HEALTHCARE AND LTC
AFTER THE DISTRIBUTION
For the purpose of governing certain of the ongoing relationships between
the Company and LTC after the Distribution and to provide mechanisms for an
orderly transition, the Company and LTC have entered or will enter into various
agreements, and will adopt policies, as described in this section.
DISTRIBUTION AGREEMENT
Prior to the Distribution Date, the Company and LTC will enter into the
Distribution Agreement, which provides for, among other things, (i) the division
between the Company and LTC of certain assets and liabilities, (ii) the
Distribution, and (iii) certain other agreements governing the relationship
between the Company and LTC following the Distribution. Pursuant to the
Distribution Agreement, as consideration for the asset transfers, the Company
will issue to LTC a sufficient number of shares of Company Common Stock to
effect the Distribution. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
Subject to certain exceptions, the Distribution Agreement provides for,
among other things, assumptions of liabilities and cross-indemnities designed to
allocate to the Company, effective as of the Distribution Date, financial
responsibility for the liabilities arising out of or in connection with the
assets to be transferred to the Company pursuant to the Distribution Agreement.
The agreements to be executed in connection with the Distribution Agreement set
forth certain specific allocations of liabilities between the Company and LTC.
See "-Administrative Services Agreement" and "-Tax Sharing Agreement."
The Distribution Agreement also provides that by the Distribution Date, the
Company Articles and the Company Bylaws shall be in the forms attached hereto as
Annexes I and II, respectively, and that the Company and LTC will take all
actions which may be required to elect or otherwise appoint, as directors of the
Company, the persons indicated herein. See "MANAGEMENT" and "HEALTHCARE
ARTICLES OF INCORPORATION AND BYLAWS."
The Distribution Agreement also provides that each of the Company and LTC
will be granted access to certain records and information in the possession of
the others, and requires the retention by each of the Company and LTC for a
period of ten years following the Distribution of all such information in its
possession, and thereafter requires that each party give the others prior notice
of its intention to dispose of such information. In addition, the Distribution
Agreement provides for the allocation of shared privileges with respect to
certain information and requires each of the Company and LTC to obtain the
consent of the others prior to waiving any shared privilege.
The Distribution Agreement provides that, except as otherwise set forth
therein or in any related agreement, all costs and expenses in connection with
the Distribution will be charged to the party for whose benefit the expenses are
incurred, with any expenses that cannot be allocated on such basis to be split
equally between the parties.
ADMINISTRATIVE SERVICES AGREEMENT
The Distribution Agreement calls for LTC and the Company to enter into an
Administrative Services Agreement (the "Administrative Services Agreement")
containing a number of provisions relating to employees of LTC and the Company.
The Administrative Services Agreement generally provides that, after the
Distribution, LTC will provide rental space and management and administrative
services to the Company, including the ability to use the services of LTC's
employees in connection with the Company's business. In exchange for those
services, the Company is required to pay LTC on a monthly basis 25% of (1) the
aggregate amount of all wages, salaries and bonuses paid during each month to
LTC employees and (2) the aggregate amount of rent paid by LTC for rental of its
principal corporate offices during each month. Under the Administrative
Services Agreement, LTC will be
36
<PAGE>
responsible for continuing to provide employee benefits (other than those
provided under the Healthcare 1998 Plan) to LTC employees. The Administrative
Services Agreement has a term of ten years but may be terminated either by LTC
or the Company at any time upon 30 days' prior written notice to the other
party. In addition, the Administrative Services Agreement may be terminated
upon a change of control of LTC. A change of control of LTC shall occur upon
the occurrence of any of the following: (i) any person or related group of
persons directly or indirectly acquires beneficial ownership of more than 50% of
the voting power of LTC, (ii) there is a change in the composition of the LTC
Board over a period of 36 consecutive months (or less) such that a majority of
the LTC Board ceases to be comprised of individuals who either (A) have been
board members continuously since the beginning of such period or (B) have been
elected or nominated for election as board members during such period by at
least a majority of the board members described in clause (A) who were still in
office at the time such election or nomination was approved by the LTC Board; or
(iii) there is a change in the composition of LTC's senior executive management
such that both Andre C. Dimitriadis and James J. Pieczynski cease to be employed
by LTC. Any individuals independently hired by the Company after the
Distribution as separate employees of the Company will not be subject to the
Administrative Services Agreement. The income LTC receives under the
Administrative Services Agreement will not be qualifying income for purposes of
the 75.0% REIT income test or the 95.0% REIT income test. Moreover, the
Company, at its option, may choose to pay bonuses to LTC's employees based on
their performance in connection with the Company's business. See "RISK
FACTORS-Related Party Transactions On or Prior to the Distribution."
TAX SHARING AGREEMENT
LTC and the Company will enter into a Tax Sharing Agreement defining the
parties' rights and obligations with respect to tax returns and tax liabilities,
including, in particular, Federal and state income tax returns and liabilities,
for taxable years and other taxable periods ending on or before the Distribution
Date. In general, LTC will be responsible for (i) filing all Federal and state
income tax returns of LTC, the Company and any of their subsidiaries for all
taxable years ending on or before the Distribution Date, and (ii) paying the
taxes relating to such returns (including any deficiencies proposed by
applicable taxing authorities). For post-Distribution periods, LTC and the
Company will each be responsible for filing its own returns and paying its own
taxes relating to such returns (including any deficiencies proposed by
applicable taxing authorities). LTC and the Company will cooperate with each
other and share information in preparing income tax returns and in dealing with
other tax matters.
INTERCOMPANY AGREEMENT
The Company and LTC will enter into the Intercompany Agreement on or prior
to the Distribution Date to provide each other with rights to participate in
certain transactions. See "THE COMPANY-Intercompany Agreement."
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
As of the Distribution Date and continuing thereafter for a period of time
until the next annual shareholders meeting or until his or her successor is
elected and is duly qualified, the Company Board will consist of Andre C.
Dimitriadis, who is currently Chairman and Chief Executive Officer of LTC and
who serves in the same positions with the Company, James J. Pieczynski, who is
currently President and Chief Financial Officer of LTC and who serves in the
same positions with the Company, and Steven Stuart and Bary G. Bailey, who are
not affiliated with LTC. As of the Distribution Date and continuing thereafter
for a period of time until the next annual board meeting or until his or her
successor is chosen and is duly qualified, the executive officers of the Company
will include Mr. Dimitriadis, Mr. Pieczynski, Christopher T. Ishikawa, who is
currently Senior Vice President and Chief Investment Officer of LTC and
currently serves in the same positions with the Company and Pamela J. Privett,
who is currently
37
<PAGE>
Senior Vice President, General Counsel and Secretary of LTC and currently serves
in the same positions with the Company. See "MANAGEMENT."
Based solely on their ownership of LTC Common Stock and options to acquire
LTC Common Stock on June 30, 1998, the executive officers and directors of the
Company will beneficially own an aggregate of 106,882 shares, or approximately
3.2% of the outstanding Company Common Stock immediately following the
Distribution. In addition, certain officers of the Company will be granted
options to acquire 140,000 shares of Company Common Stock under the Healthcare
1998 Plan upon consummation of the Distribution. See "RISK FACTORS-Control by
Executive Officers and Directors"; "MANAGEMENT-Healthcare 1998 Plan"; "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS" and "SECURITIES OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT."
The Company and LTC intend to pursue separate and distinct business
strategies to minimize potential conflicts of interest between the two
companies. Nonetheless, the on-going relationships between the Company and LTC
may present conflict situations for the persons who will serve as officers
and/or directors of both the Company and LTC, and who will own (or have options
or other rights to acquire) a significant number of shares of common stock in
both companies. Such persons may be presented with conflicts of interest with
respect to certain matters affecting the Company and LTC, such as the
determination of which company may take advantage of potential business
opportunities, decisions concerning the business focus of each company
(including decisions concerning the types of properties and geographic locations
in which such companies make investments), potential competition between the
business activities conducted, or sought to be conducted, by such companies
(including competition for properties and tenants), possible corporate
transactions (such as acquisitions), and other strategic decisions affecting the
future of such companies. Conflicts also may arise with respect to the
restriction on the Company's right to develop a direct or indirect opportunity
to invest in real estate through mortgage loans, facility lease transactions and
other investments unless LTC is first offered the opportunity and declined to
pursue such activities or investments (as described below).
The Company and LTC will adopt appropriate policies and procedures on or
prior to the Distribution Date to be followed by the Board of Directors of each
company to limit the involvement of such officers and directors in conflict
situations. Such procedures will include requiring the persons serving as
directors of both companies to abstain from voting as directors with respect to
matters that present a significant conflict of interest between the companies
and will require approval of the disinterested directors of both companies with
respect to the Intercompany Agreement and the Administrative Services Agreement.
Whether or not a significant conflict of interest situation exists will be
determined on a case-by-case basis depending on such factors as the dollar value
of the matter, the degree of personal interest of any officers or directors in
the matter and the likelihood that resolution of the matter has significant
strategic, operational or financial implications for the business of the Company
and/or LTC. It is anticipated that the members of the Board of Directors of
each company that do not have any potentially significant conflict of interest
between the companies will determine whether a matter presents such a
significant conflict. The Intercompany Agreement will prohibit the Company from
developing a direct or indirect opportunity to invest in real estate through
mortgage loans, facility lease transactions and other investments unless LTC is
first offered the opportunity and declined to pursue such activities or
investments. The Intercompany Agreement also prohibits the Company from
prepaying or causing to be prepaid any of its mortgage loans provided by LTC
which are securitized in REMIC transactions. See "RISK FACTORS-Possible
Conflicts with LTC After the Distribution" and "THE COMPANY-Intercompany
Agreement."
REGULATORY APPROVALS
The Company does not believe that any material Federal or state regulatory
approvals will be necessary in connection with the Distribution.
38
<PAGE>
PRO FORMA COMBINED CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 and the pro forma capitalization of the Company at such date. The
table should be read in conjunction with the historical and pro forma combined
financial statements and the notes thereto contained elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------
ACTUAL AS ADJUSTED
----------- ------------
<S> <C> <C>
Mortgages payable. . . . . . . . . . $ - $46,731,100
Note payable to LTC. . . . . . . . . 4,939,000 11,528,900
Minority interest. . . . . . . . . . - 3,469,100
Stockholders' equity . . . . . . . . 2,005,000 12,757,300
---------- -----------
Total Capitalization . . . . . . . . $6,944,000 $74,486,400
---------- -----------
---------- -----------
</TABLE>
39
<PAGE>
LTC HEALTHCARE, INC.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma balance sheet of LTC Healthcare, Inc. as of
June 30, 1998 and unaudited pro forma condensed combined statements of
operations for the six months ended June 30, 1998 and the year ended December
31, 1997 have been prepared to reflect the results of the Distribution and
acquisition of assets and assumption of liabilities by the Company. The
unaudited pro forma balance sheet has been prepared as if the transactions had
occurred on June 30, 1998. The unaudited pro forma statements of operations
have been prepared as if the transactions had occurred at the beginning of the
year ended December 31, 1997. The unaudited pro forma financial information is
not necessarily indicative of the results that actually would have occurred if
the Distribution and capitalization had been consummated as of June 30, 1998.
PRO FORMA BALANCE SHEET - UNAUDITED
AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
TRANSFER OF ASSETS BY LTC
------------------------------------------------------
ASSETS
HEALTHCARE HEALTHCARE PURCHASED BY
HISTORICAL ASSET GROUP OTHER ASSETS HEALTHCARE
(A) (B) (C) (D)
---------- ------------- ------------------ --------------
<S> <C> <C> <C> <C>
ASSETS
Real estate:
Buildings and improvements . . . . . . . . $ - $ 17,248,300 $ 7,261,400 (1) $ -
36,770,000 (4)
Land . . . . . . . . . . . . . . . . . . . - 976,600 300,000 (1) -
2,530,000 (4)
Accumulated depreciation . . . . . . . . - (3,105,300) (90,500) (1) -
--------- ------------- ------------- --------------
Real Estate investments, net . . . . . . . . - 15,119,600 46,770,900 -
Convertible subordinated debentures. . . . . 6,500,000 - - 2,000,000
Rent and other receivables . . . . . . . . . 12,000 220,500 - -
Other assets . . . . . . . . . . . . . . . . 435,700 - 11,700 (1) 1,291,200
532,100 (2)
431,300 (3)
Cash . . . . . . . . . . . . . . . . . . . . 100,700 - 72,100 (1) -
--------- ------------- ------------- --------------
Total Assets . . . . . . . . . . . . . . . $7,048,400 $ 15,340,100 $ 47,818,100 $ 3,291,200
--------- ------------- ------------- --------------
--------- ------------- ------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage loans payable . . . . . . . . . . . $ - $ 23,039,900 $ 6,291,200 (1) $ -
17,400,000 (4)
Note payable - LTC. . . . . . . . . . . . . 4,939,000 - 1,876,100 (4) 3,291,200
Deferred tax liability. . . . . . . . . . . - 409,200 - -
Interest payable . . . . . . . . . . . . . . 98,500 109,300 31,800 (1) -
Other liabilities. . . . . . . . . . . . . . 5,900 111,100 77,400 (1) -
--------- ------------- ------------- --------------
Total Liabilities. . . . . . . . . . . . . . 5,043,400 23,669,500 25,676,500 3,291,200
Minority interest. . . . . . . . . . . . . . - - 3,469,100 (1) -
Stockholders' equity:
Non-voting common stock ($0.01 par
value, 4,900,000 shares authorized, 2
shares outstanding as of March 25, 1998,
4,002 shares outstanding as of
June 30, 1998) . . . . . . . . . . . . . . - - - -
Voting common stock ($0.01 par value,
100,000 shares authorized, 2 shares
outstanding as of March 25, 1998 and
June 30, 1998) . . . . . . . . . . . . . . - - - -
Paid-in capital. . . . . . . . . . . . . . . 2,002,000 (8,329,400) (2,314,800) (1) -
532,100 (2)
431,300 (3)
20,023,900 (4)
Retained earnings. . . . . . . . . . . . . . 3,000 - - -
--------- ------------- ------------- --------------
Total Stockholders' Equity . . . . . . . . . 2,005,000 (8,329,400) 18,672,500 -
--------- ------------- ------------- --------------
Total Liabilities and Stockholders' Equity. . $7,048,400 $ 15,340,100 $ 47,818,100 $ 3,291,200
--------- ------------- ------------- --------------
--------- ------------- ------------- --------------
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
(E) CONSOLIDATED
------------ --------------
<S> <C> <C>
ASSETS
Real estate:
Buildings and improvements . . . . . . . . $ - $ 61,279,700
Land . . . . . . . . . . . . . . . . . . . - 3,806,600
Accumulated depreciation . . . . . . . . - (3,195,800)
------------ -------------
Real Estate investments, net . . . . . . . . - 61,890,500
Convertible subordinated debentures. . . . . 1,500,000 (2) 10,000,000
Rent and other receivables . . . . . . . . . - 232,500
Other assets . . . . . . . . . . . . . . . . - 2,702,000
Cash . . . . . . . . . . . . . . . . . . . . 1,422,600 (1) 95,400
(1,500,000) (2)
------------ -------------
Total Assets . . . . . . . . . . . . . . . $ 1,422,600 $ 74,920,400
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage loans payable . . . . . . . . . . . $ - $ 46,731,100
Note payable -LTC. . . . . . . . . . . . . . 1,422,600 (1) 11,528,900
Deferred tax liability. . . . . . . . . . . (3,313,700) (3) -
2,904,500 (3)
Interest payable . . . . . . . . . . . . . . - 239,600
Other liabilities. . . . . . . . . . . . . . - 194,400
------------ -------------
Total Liabilities. . . . . . . . . . . . . . $ 1,013,400 58,694,000
Minority interest. . . . . . . . . . . . . . - 3,469,100
Stockholders' equity:
Non-voting common stock ($0.01 par
value, 4,900,000 shares authorized, 2
shares outstanding as of March 25, 1998,
4,002 shares outstanding as of
June 30, 1998) . . . . . . . . . . . . . . - -
Voting common stock ($0.01 par value,
100,000 shares authorized, 2 shares
outstanding as of March 25, 1998 and
June 30, 1998) . . . . . . . . . . . . . . - -
Paid-in capital . . . . . . . . . . . . . . 3,313,700 (3) 12,754,300
(2,904,500) (3)
Retained earnings. . . . . . . . . . . . . . - 3,000
------------ -------------
Total Stockholders' Equity . . . . . . . . . 409,200 12,757,300
------------ -------------
Total Liabilities and Stockholders' Equity. . $ 1,422,600 $ 74,920,400
------------ -------------
------------ -------------
</TABLE>
40
<PAGE>
NOTES TO PRO FORMA BALANCE SHEET
(A) Reflects the unaudited historical balance sheet of the Company as of June
30, 1998. See LTC Healthcare, Inc. Balance Sheet at page F-3.
(B) Reflects the transfer at historical cost of the assets and liabilities
included in the Healthcare Asset Group at June 30, 1998. These assets and
liabilities were contributed to the Company for non-voting common stock.
See Combined Balance Sheet of Healthcare Asset Group at F-9. The
Healthcare Asset Group includes four skilled nursing facilities which are
encumbered by mortgage loans.
(C) In addition to the assets described in footnote (B) above, LTC intends to
transfer the following assets: (1) a controlling general partner interest
in a limited partnership that owns three skilled nursing facilities with a
book value equal to LTC's historical cost less accumulated depreciation of
approximately $7.5 million that are encumbered by mortgages payable of
approximately $6.3 million and a minority interest of approximately $3.4
million along with cash of $72,100, other assets of $11,700, interest
payable of $31,800 and other liabilities of $77,400; (2) 30,847 shares of
ALC common stock with a book value equal to fair market value of
approximately $532,100; (3) 69,000 shares of Regent common stock with a
book value equal to fair market value of approximately $431,300; and (4)
six recently acquired assisted living facilities with a book value equal to
LTC's historical cost of approximately $39.3 million and encumbered by
mortgage loans of approximately $17.4 million payable to third parties and
borrowings under the unsecured line of credit provided by LTC (see note
(D)).
LTC's investment posture regarding its investment in ALC and Regent common
stock is to hold the investments long-term. Accordingly, LTC accounts for
its investment in ALC and Regent as available-for-sale securities under the
fair value provisions of Statement of Financial Accounting Standards
("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY
SECURITIES which require the securities to be reported at fair value with
unrealized gains and losses on changes in the fair value to be reported as
a separate component of stockholders' equity. Subsequent to the
Distribution, Healthcare intends to hold these securities long-term and
will account for them at fair value as available-for-sale securities.
(D) Subsequent to June 30, 1998, the Company utilized borrowings of
approximately $3.3 million under the line of credit to acquire 73,400
shares of LTC Common Stock for approximately $1.3 million and $2.0 million
principal amount of 7.5% convertible subordinated debentures of Regent due
2008 (the "Regent Debentures"). The Regent Debentures bear interest at
7.5% per annum and are convertible, at any time in whole or in part at
Healthcare's option, into Regent common stock at a price of $7.50 per
share, subject to adjustment. Regent can require conversion of the Regent
Debentures at such time as the Regent common stock trades at $12 per share
or more for thirty consecutive days. See "BUSINESS AND PROPERTIES-Initial
Investments-Convertible Subordinated Debentures of Regent."
41
<PAGE>
(E) Represents the following pro forma adjustments as numbered on the
accompanying pro forma balance sheet: (1) borrowings of approximately $1.4
million under the unsecured line of credit provided by LTC to fund the
purchase of additional convertible subordinated debentures of Regent; (2)
the purchase of an additional $1.5 million face amount of 7.5% convertible
subordinated debentures of Regent, and (3) for federal and state income tax
purposes, the Company will record the assets transferred at fair market
value, estimated to be approximately $8.3 million over their current book
value, which would result in a deferred tax asset of approximately $3.3
million which will be offset by the $409,200 deferred tax liability
transferred from the Healthcare Asset Group. See "BUSINESS AND
PROPERTIES-Initial Investments-Convertible Subordinated Debentures of
Regent." Sufficient taxable income must be generated in future years in
order to realize tax benefits associated with the net deferred tax asset.
The Company believes that it is more likely than not that future taxable
income will not be sufficient to realize such tax benefits and,
accordingly, a valuation allowance of approximately $2.9 million has been
established.
42
<PAGE>
LTC HEALTHCARE, INC.
PRO FORMA STATEMENTS OF OPERATIONS-UNAUDITED
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND
THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
TRANSFER OF ASSETS BY LTC
------------------------------------------------------
ASSETS
HEALTHCARE HEALTHCARE PURCHASED BY
HISTORICAL ASSET GROUP OTHER ASSETS HEALTHCARE
(A) (B) (C) (D)
---------- ------------- ------------------ --------------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Revenues:
Rental income. . . . . . . . . . . . . . . $ - $ 1,225,800 $ 1,519,700 $ -
Interest and other income. . . . . . . . . 115,000 - - 276,900
--------- ------------- ------------- --------------
Total Revenues . . . . . . . . . . . . . . . 115,000 1,225,800 1,519,700 276,900
--------- ------------- ------------- --------------
Expenses:
Interest . . . . . . . . . . . . . . . . . 98,500 833,900 960,000 313,000
Depreciation . . . . . . . . . . . . . . . - 316,500 476,000 -
Minority interest. . . . . . . . . . . . . - - 171,600 -
Other. . . . . . . . . . . . . . . . . . . 12,600 45,100 - -
--------- ------------- ------------- --------------
Total Expenses . . . . . . . . . . . . . . . 111,100 1,195,500 1,607,600 313,000
--------- ------------- ------------- --------------
Income (Loss) Before Taxes . . . . . . . . . 3,900 30,300 (87,900) (36,100)
Provision (Benefit) for Income Taxes . . . . 900 11,800 - -
--------- ------------- ------------- --------------
Net Income (Loss) . . . . . . . . . . . . . $ 3,000 $ 18,500 $ (87,900) $ (36,100)
--------- ------------- ------------- --------------
--------- ------------- ------------- --------------
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . .
Pro forma shares outstanding (F) . . . . . .
YEAR ENDED DECEMBER 31, 1997
Revenues:
Rental income. . . . . . . . . . . . . . . $ - $ 2,350,400 $ 3,039,300 $ -
Interest and other income. . . . . . . . . - - - 776,400
--------- ------------- ------------- --------------
Total Revenues . . . . . . . . . . . . . . . - 2,350,400 3,039,300 776,400
--------- ------------- ------------- --------------
Expenses:
Interest . . . . . . . . . . . . . . . . . - 1,323,000 1,919,800 823,000
Depreciation . . . . . . . . . . . . . . . - 632,000 952,000 -
Minority interest. . . . . . . . . . . . . - - 343,200 -
Other. . . . . . . . . . . . . . . . . . . - 86,800 - -
--------- ------------- ------------- --------------
Total Expenses . . . . . . . . . . . . . . . - 2,041,800 3,215,000 823,000
--------- ------------- ------------- --------------
Income (Loss) Before Taxes . . . . . . . . . - 308,600 175,700 (46,600)
Provision (Benefit) for Income Taxes . . . . - 120,000 - -
--------- ------------- ------------- --------------
Net Income (Loss) . . . . . . . . . . . . . $ - $ 188,600 $ 175,700 $ (46,600)
--------- ------------- ------------- --------------
--------- ------------- ------------- --------------
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . .
Pro forma shares outstanding (F) . . . . . .
<CAPTION>
PRO FORMA
ADJUSTMENTS PRO FORMA
(E) CONSOLIDATED
------------ --------------
<S> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
Revenues:
Rental income. . . . . . . . . . . . . . . $ - $ 2,745,500
Interest and other income. . . . . . . . . 56,300 (4) 448,200
----------- -------------
Total Revenues . . . . . . . . . . . . . . . 56,300 3,193,700
----------- -------------
Expenses:
Interest . . . . . . . . . . . . . . . . . 178,500 (1) 2,455,000
71,100 (2)
Depreciation . . . . . . . . . . . . . . . - 792,500
Minority interest. . . . . . . . . . . . . - 171,600
Other. . . . . . . . . . . . . . . . . . . 392,300 (3) 450,000
----------- -------------
Total Expenses . . . . . . . . . . . . . . . 641,900 3,869,100
----------- -------------
Income (Loss) Before Taxes . . . . . . . . . (585,600) (675,400)
Provision (Benefit) for Income Taxes . . . . (12,700) (5) -
----------- -------------
Net Income (Loss) . . . . . . . . . . . . . $ (572,900) $ (675,400)
----------- -------------
----------- -------------
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . $ (0.20)
Diluted . . . . . . . . . . . . . . . . . $ (0.20)
Pro forma shares outstanding (F) . . . . . . 3,326.202
YEAR ENDED DECEMBER 31, 1997
Revenues:
Rental income. . . . . . . . . . . . . . . $ - $ 5,389,700
Interest and other income. . . . . . . . . 112,500 (4) 888,900
----------- -------------
Total Revenues . . . . . . . . . . . . . . . 112,500 6,278,600
----------- -------------
Expenses:
Interest . . . . . . . . . . . . . . . . . 713,100 (1) 4,921,200
142,300 (2)
Depreciation . . . . . . . . . . . . . . . - 1,584,000
Minority interest. . . . . . . . . . . . . - 343,200
Other. . . . . . . . . . . . . . . . . . . 813,200 (3) 900,000
----------- -------------
Total Expenses . . . . . . . . . . . . . . . 1,668,600 7,748,400
----------- -------------
Income (Loss) Before Taxes . . . . . . . . . (1,556,100) (1,469,800)
Provision (Benefit) for Income Taxes . . . . (120,000) (5) -
----------- -------------
Net Income (Loss) . . . . . . . . . . . . . $(1,436,100) $ (1,469,800)
----------- -------------
----------- -------------
Net income (loss) per share:
Basic . . . . . . . . . . . . . . . . . . $ (0.44)
Diluted . . . . . . . . . . . . . . . . . $ (0.44)
Pro forma shares outstanding (F) . . . . . . 3,326.202
</TABLE>
43
<PAGE>
NOTES TO PRO FORMA STATEMENTS OF OPERATIONS
(A) Reflects the historical revenue and expenses as of June 30, 1998. See
Statement of Income of LTC Healthcare, Inc. at page F-4.
(B) Reflects the historical revenue and expenses associated with the transfer
of the Healthcare Asset Group assets held by LTC. See Combined Statements
of Income of the Healthcare Asset Group at page F-10.
(C) Reflects revenues and expenses from the properties purchased by LTC
subsequent to December 31, 1997 that will be transferred to the Company.
See "BUSINESS AND PROPERTIES-LTC Partners IX Properties" and "-Karrington
Properties." The revenues and expenses consist of the following: (1) base
rental income under existing long-term triple-net leases on two skilled
nursing facilities leased to a wholly owned subsidiary of Sun Healthcare
Group, Inc. ($602,900 annually), three assisted living facilities and one
Alzheimer facility leased to a wholly owned subsidiary of Karrington
Health, Inc. ($2,092,500 annually) and one skilled nursing facility leased
to Sensitive Care, Inc. ($343,900 annually). See "RISK FACTORS -Reliance
on Major Operators."; (2) interest expense at a weighted average rate of
10.4% on mortgage loans of $6,291,200 currently encumbering the Partners IX
Properties and interest expense at 7.27% on a mortgage loan with a third
party lender of $17,400,000 secured by four properties operated by
Karrington Health, Inc.; (3) depreciation expense calculated using
depreciable lives of 35 years for real property and seven years for
personal property; and (4) minority interest expense equal to the 10%
preferred return on the limited partners initial contribution to the
limited partnership owning the properties of LTC Partners IX, LP. The pro
forma results of operations do not include base rental income ($1,484,600
annually) and related depreciation ($522,100 annually) for two properties
that were not available for occupancy during the year ended December 31,
1997 or the six months ended June 30, 1998. Construction was completed in
May and June 1998 on these two assisted living facilities which are leased
to a wholly owned subsidiary of Karrington Health, Inc.
(D) Interest and other income represents the adjustment necessary to reflect a
full period of interest on the $8.5 million of 7.5% convertible
subordinated debentures of Regent and dividends on 96,800 shares of LTC
Common Stock. See "BUSINESS AND PROPERTIES-Initial Investments-Convertible
Subordinated Debentures of Regent." Interest expense represents the
adjustment necessary to reflect a full period of interest at 10% on
borrowings of approximately $8.2 million under the unsecured line of credit
provided by LTC.
(E) Represents the following pro forma adjustments as numbered on the
accompanying pro forma statements of operations: (1) interest expense at
8% on approximately $8.9 million of mortgage loans placed on two properties
in the Healthcare Asset Group on March 31, 1998; (2) interest expense at
10.0% on borrowings of $1.4 million under the unsecured line of credit
provided by LTC; (3) general and administrative costs of operating the
Company are estimated to be $900,000 annually. Such costs consist of
charges of approximately $750,000 calculated as 25% of LTC's wages,
salaries and bonuses and rent as provided for under the Administrative
Services Agreement and approximately $150,000 of direct general and
administrative costs (e.g. external legal counsel, independent audit fees,
directors and officers insurance, stockholder communication, etc.); (4)
interest income on $1.5 million of 7.5% convertible subordinated debentures
of Regent, and (5) the elimination of the tax provision previously
recorded. See "BUSINESS AND PROPERTIES-Initial Investments-Convertible
Subordinated Debentures of Regent." No additional tax benefit was recorded
because the realization of tax benefits associated with net operating loss
carryforwards is dependent upon generating sufficient taxable income prior
to their expiration. The Company believes that it is more likely than not
that future taxable income may not be sufficient to realize such tax
benefits. As such, a valuation allowance has been established against
them.
44
<PAGE>
(F) Pro forma shares outstanding were calculated by applying the dividend
ratio of one share of Healthcare common stock for each 10 shares and
potential shares of LTC common stock as follows: (i) 27,636,786 shares
of LTC common stock outstanding as of June 30, 1998; (ii) 3,722,037
shares of LTC common stock issuable upon conversion of Debentures
which were outstanding as of June 30, 1998; (iii) 2,000,000 shares of
LTC common stock issuable upon conversion of the Series C Preferred
Stock which was recently purchased by a qualified buyer; (iii) less
96,800 shares of LTC common stock held by Healthcare, in each case
divided by 10.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NATURE OF BUSINESS
The Company was recently formed and has no operating history. The Company
was organized to engage in the following activities: (i) ownership of leveraged
properties leased to third parties; (ii) ownership of secured high yield
mortgage loans; (iii) operation of long-term care facilities; (iv) development
of long-term care properties; and (v) ownership of equity investments in
long-term care companies. The Company may pursue other business opportunities
in addition to the foregoing activities after the Distribution. The Company
intends to provide investors with return opportunities that are not generally
available to publicly traded REITs due to investment limitations and leverage
expectations imposed by the public markets and Federal income tax laws
applicable to REITs.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of the Company, the
Company will have $20 million available under an unsecured line of credit
provided by LTC. Any borrowings under this line of credit bear interest at 10%
and are due in March 2008. The Company has no external source of financing and
has not received any commitment for required funds.
The Company anticipates that cash flow from operations will be adequate
to meet its short-term liquidity requirements. The Company expects to meet
its long term liquidity requirements such as property acquisitions and
development, the granting of high yield loans, the purchase of equity
investments and mortgage debt maturities through the most advantageous
sources of capital available to the Company at that time. This may include,
but not be limited to, the sale of common stock, preferred stock or debt
securities through public offerings or private placements, the incurrence of
indebtedness through secured or unsecured borrowings and the reinvestment of
proceeds from the disposition of assets. Currently the Company has no
external source of financing and the Company has not received any commitment
with respect to any funds needed in the future. The Company expects to be
able to access capital markets or to seek other financing, but there can be
no assurance that it will be able to do so at all or in amounts or on terms
acceptable to the Company.
Following the distribution, the Company will own approximately $99.0
million in real estate that will be encumbered with mortgages totaling
approximately $46.7 million. The Company will also own unencumbered assets
consisting of approximately $16.1 million in real estate, $10 million of 7.5%
convertible subordinated debentures and approximately $2.7 million in
marketable equity securities.
As of the date of this Information Statement, the Company has no
commitments to purchase any additional assets. The Company intends to operate
its business as described herein, and may purchase additional assets from time
to time in the future. The purchase of additional assets will be contingent
upon securing adequate funding on terms acceptable to the Company. The Company
is not aware of any material unfavorable trends in either capital resources or
the outlook for long-term cash generation; nor, does it expect any material
changes in the availability and relative cost of such capital resources.
There are currently no material changes being considered in the objectives
and policies of the Company as set forth in this Information Statement.
OPERATING RESULTS
The results of operations for the Healthcare Asset Group are set forth
below.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996
Rental income for the year ended December 31, 1997 of $2,350,400 was
comparable to rental income of $2,348,900 for the year ended December 31, 1996.
46
<PAGE>
Interest expense increased approximately 18.8% to $1,323,000 for the year
ended December 31, 1997 from $1,113,700 for the year ended December 31, 1996.
During February 1996, two properties in Arizona were encumbered with mortgage
loans totaling $14,505,000 bearing interest at 9.25%. The increase in interest
expense is the result of a full year of interest during 1997 compared to ten
months of interest during 1996. Partially offsetting the increase in interest
expense was a decrease resulting from scheduled principal payments on mortgage
loans.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO THE YEAR ENDED DECEMBER 31, 1995
Rental income for the year ended December 31, 1996 increased by $6,100 as a
result of increased contingent rents based on incremental revenues generated by
the facilities.
Interest expense increased to $1,113,700 for the year ended December 31,
1996 from $0 for the year ended December 31, 1995. During February 1996, two
properties in were encumbered with mortgage loans totaling $14,505,000 bearing
interest at 9.25%. Interest expense for the year ended December 31, 1996
represents ten months of interest.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Rental income for the six months ended June 30, 1998 increased by $54,800
(or approximately 4.7%) to $1,225,800 from $1,171,000 for the six months ended
June 30, 1997. The increase in rental income is due to the renewal of the lease
on Coronado Care Center which resulted in an increase in the rent recorded under
the straight-line method of accounting for the facility. Somewhat mitigating
this increase in rent was a decrease in contingent rent based on incremental
revenues generated by the facilities.
Interest expense increased $170,500 for the six months ended June 30, 1998
compared to the same period in 1997. On March 31, 1998, two properties were
encumbered with mortgage loans totaling $8,926,000 bearing interest at 8.0%.
YEAR 2000
The Company has evaluated its internal software and hardware and believes
the existing systems will function properly with respect to dates in the year
2000 and beyond. The Company is currently assessing the extent to which its
operations are vulnerable should its tenants or other parties with which the
Company conducts business fail to ensure their computer systems are year 2000
compliant. The Company believes the year 2000 issue will not have a material
adverse effect upon the Company's financial position or results of operations.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain information contained in this report includes forward looking
statements, which can be identified by the use of forward looking terminology
such as "may", "will", "expect", "should" or comparable terms or negatives
thereof. These statements involve risks and uncertainties that could cause
actual results to differ materially from those described in the statements.
These risks and uncertainties include (without limitation) the following: the
effect of economic and market conditions and changes in interest rates,
government policy relating to the health care industry including changes in
reimbursement levels under the Medicare and Medicaid programs, changes in
reimbursement by other third party payors, the financial strength of the
operators of the Company's facilities as it affects the continuing ability of
such operators to meet their obligations to the Company under the terms of the
Company's agreements with its borrowers and operators, the amount and the timing
of additional investments and access to capital markets.
47
<PAGE>
THE COMPANY
GENERAL
The Company was organized to create and realize value by identifying and
making opportunistic real estate and health care investments through the direct
acquisition, development, financing and operation of real properties and/or
participation in these activities through the purchase of debt instruments or
equity interests of entities engaged in the health care or real estate
businesses. The Company will endeavor to provide investors with return
opportunities that are not generally available to publicly traded REITs due
to investment limitations and leverage expectations imposed by the public
markets and Federal income tax laws applicable to REITs.
To a large extent, public REITs, including LTC, manage their property
portfolios with consideration to both public market perceptions and tax laws.
Because investors are seeking a consistent and growing income stream from their
REIT investments, REITs are encouraged to (i) grow FFO, an indicator of
performance in the REIT industry, (ii) maintain a low leverage ratio (debt to
total capitalization is one measure used to determine the relative risk of that
cash flow stream, as rising interest rates can diminish FFO and impact
dividends) and (iii) make conservative investments as evidenced by positive debt
service coverages or low per bed or per unit investments in health care
facilities. As a result, REITs have generally been hesitant to participate in
long-term, higher-risk development projects or to bring their leverage ratios
above 40.0%. In addition, the tax laws governing REITs include limitations on
(i) the types of assets that REITs may own and the time period that real estate
may be held, restricting REITs from investing in operating companies, equity
securities, debt securities and participating in short-term trading
opportunities, and (ii) the ability of REITs to retain earnings, requiring REITs
to distribute 95.0% of net taxable income, excluding capital gains, each year.
Further, because gains on the sales of real estate are not included in the
calculation of FFO, REITs are dissuaded from buying distressed assets which may
have substantial long-term appreciation potential but lack immediate cash flow.
LTC has adopted The National Association of Real Estate Investment Trusts
("NAREIT") definition of Funds From Operations ("FFO") which is (i) net income
(computed in accordance with generally accepted accounting principles ("GAAP"))
excluding gains (or losses) from debt restructuring and sales of property, plus
(ii) depreciation of real property and (iii) after adjustments for
unconsolidated entities in which a REIT holds an interest. LTC believes that
FFO is an important supplemental measure of operating performance. FFO should
not be considered as an alternative to net income or any other GAAP measurement
of performance as an indicator of operating performance or as an alternative to
cash flows from operations, investing, and financing activities as a measure of
liquidity. LTC believes that FFO is helpful in evaluating a real estate
investment portfolio's overall performance considering the fact that historical
cost accounting implicitly assumes that the value of real estate assets
diminishes predictably over time. The term FFO was designed by the REIT
industry to provide useful supplemental information. FFO provides an
alternative measurement criteria, exclusive of certain non-cash charges included
in GAAP income, by which to evaluate the performance of such investments. FFO,
as used by the Company in accordance with the NAREIT definition, may not be
comparable to similarly entitled items reported by other REITs that have not
adopted the NAREIT definition.
In such an environment, the Company believes that significant opportunities
are available to those investors that are not restricted by the Federal income
tax laws governing REITs or influenced by public market perception with regard
to REIT securities. All of the properties to be transferred to the Company by
LTC are subject to long-term leases. Ownership of these properties by LTC is
consistent with the limitations on REITs described above however, LTC believes
it is in the best interests of LTC and its stockholders to transfer these
properties to the Company for the following reasons. As described above, REITs
are encouraged to increase FFO. Significant leverage on properties in the
Healthcare Asset
48
<PAGE>
Group and the LTC Partners IX, LP ("Partners IX") properties results in such
properties generating minimal FFO. As of June 30, 1998, the total pro forma
mortgages payable on these properties was $29,331,100. The expected FFO of
$253,500 generated by the Healthcare Asset Group and the Partners IX properties
equates to only 0.9% of the $29,331,100 of mortgages payable that are being
transferred to the Company. By transferring these mortgages payable to the
Company, LTC will be able to increase its debt carrying capacity to fund
additional investments, thereby allowing LTC to generate FFO that will be
greater than the $253,500 generated by the Healthcare Asset Group and the
Partners IX properties. The assets in the Healthcare Asset Group were
attributed a value of approximately $23.4 million which represents the current
annual rent on the properties at a 10% capitalization rate. The book value of
these properties was approximately $15.1 million as of June 30, 1998. The
Partners IX properties were attributed a value of approximately $7.6 million,
which represents the purchase price of the properties in February 1998. The
book value of these properties was approximately $7.5 million as of June 30,
1998. Expected FFO and use of cash for the next twelve months, based on annual
base rent and debt service pursuant to leases and mortgages in effect on the
Distribution Date, is approximately $253,500 and $41,700, respectively, for the
properties in the Healthcare Asset Group and the LTC Partners IX properties.
LTC's investment strategy has been to make conservative, low cost per unit/bed
investments. As of June 30, 1998, LTC's average investment in owned assisted
living facilities was approximately $62,000 per unit. Four of the properties
acquired from Karrington Health, Inc. were acquired for approximately $125,000
per unit and LTC has the opportunity to finance 75% of the purchase price of
these properties with non-recourse mortgage financing, and the remaining 25% of
the purchase price with equity. The remaining two properties acquired from
Karrington Health, Inc. were acquired for approximately $121,000 per unit and
LTC intends to encumber such properties with non-recourse mortgage financing.
Because the leveraged returns are attractive, LTC felt this was a more
appropriate investment for Healthcare. The properties acquired from Karrington
Health, Inc. were attributed a value of approximately $39.3 million which
represents the purchase price of such properties.
In addition to the properties it will own immediately following the
Distribution, the Company intends to invest in a variety of real estate related
assets such as (i) development opportunities that provide substantial value
appreciation rather than immediate cash flow, (ii) properties with long-term
leases enabling the Company to utilize a substantial amount of leverage,
(iii) properties requiring restructuring in order to create significant value,
and (iv) public and private debt and equity securities of real estate and health
care-related entities. Although such real estate related assets are not subject
to the limitations applicable to REITs described above, there are some risks
associated with investments in these types of assets. See "RISK
FACTORS-Disadvantages of Investments in Debt Instruments"; "-Limited Remedies
Upon Default of Mortgage Loans"; "-Disadvantages of Investments in Commercial
Mortgage-Backed Securities" and "-Limitations on Remedies Upon Default."
Further, the Company will be able to manage the timing of asset dispositions
without regard to the minimum hold periods required of REITs while also
acquiring properties using substantial, yet prudent, leverage, to increase
returns on what otherwise might be less attractive investments. As
opportunities emerge, the Company may in the future expand its real estate
related businesses and activities beyond the areas listed above.
The Company and LTC will enter into the Intercompany Agreement on or prior
to the Distribution Date to provide each other with rights to participate in
certain transactions. See "RISK FACTORS-Possible Conflicts with LTC After the
Distribution"; "RELATIONSHIP BETWEEN HEALTHCARE AND LTC AFTER THE
DISTRIBUTION-Policies and Procedures for Addressing Conflicts" and
"-Intercompany Agreement."
The Company currently does not intend to qualify as a REIT under the Code.
Consequently, the Company has the flexibility to respond quickly to
opportunities without the structural limitations inherent in REITs and to
operate, when deemed advantageous by management, on a more highly leveraged
basis than most REITs. By not qualifying as a REIT under the Code (which would
require the Company to
49
<PAGE>
distribute each year at least 95.0% of its net taxable income, excluding capital
gains), the Company has the ability and currently intends to retain for
reinvestment its cash flow generated from operations and to sell properties
without the substantial income tax penalties which may be imposed on REITs in
such transactions. In addition, the Company differs from real estate
opportunity funds that are typically structured as private partnerships. In
that regard, the business of the Company is conducted without the payment of
acquisition, disposition or management fees to general partners which should
result in additional cash flow being available for reinvestment. In addition,
unlike investors in opportunity funds, the Company's stockholders will have
voting rights and are expected to have enhanced liquidity through their ability
to sell or margin their stock. The Company also hopes to attract a broader
range of investors because there will be no stipulated investment minimum.
However, unlike REITs and opportunity funds, the Company is subject to corporate
level taxation.
In pursuing the real estate related opportunities described above, the
Company expects to compete for real estate investments with many public and
private real estate investment vehicles, including financial institutions (such
as mortgage banks, pension funds and REITs) and other institutional investors,
as well as individuals. The real estate industry and the process of
identifying, completing and acquiring real estate investments has from time to
time been highly competitive. In addition, many of those with whom the Company
will compete for investments are far larger than the Company, may have greater
financial resources than the Company and may have management personnel with more
experience than the officers of the Company. See "RISK FACTORS-Difficulty of
Locating Suitable Investments; Competition."
The Company was incorporated under the laws of Nevada on March 20, 1998.
The Company's executive offices are located at 300 Esplanade Drive, Suite 1860,
Oxnard, California 93030, and its telephone number is (805) 981-8655.
INTERCOMPANY AGREEMENT
The Company and LTC will enter into the Intercompany Agreement on or prior
to the Distribution Date to provide each other with rights to participate in
certain transactions. Pursuant to the Intercompany Agreement, during the term
thereof, the Company will agree not to engage in activities or make investments
that involve real estate, unless it has first provided written notice to LTC of
the material terms and conditions of such activities or investments, and LTC has
determined not to pursue such activities or investments either by providing
written notice to the Company rejecting the opportunity within ten days
following the date of receipt of notice of the opportunity or by allowing such
ten-day period to lapse.
Pursuant to the Intercompany Agreement, during the term thereof, the
Company and LTC also will agree to notify each other of, and make available to
each other, investment opportunities which they develop or of which they become
aware but are unable or unwilling to pursue. The Company also agrees not to
prepay or cause to be prepaid any of its mortgage loans provided by LTC which
are securitized in REMIC transactions. The Intercompany Agreement has a term of
ten years but shall terminate earlier upon a change of control of LTC. A change
of control of LTC shall occur upon the occurrence of any of the following:
(i) any person or related group of persons directly or indirectly acquires
beneficial ownership of more than 50% of the voting power of LTC, (ii) there is
a change in the composition of the LTC Board over a period of 36 consecutive
months (or less) such that a majority of the LTC Board ceases to be comprised of
individuals who either (A) have been board members continuously since the
beginning of such period or (B) have been elected or nominated for election as
board members during such period by at least a majority of the board members
described in clause (A) who were still in office at the time such election or
nomination was approved by the LTC Board; or (iii) there is a change in the
composition of LTC's senior executive management such that both Andre C.
Dimitriadis and James J. Pieczynski cease to be employed by LTC. See "RISK
FACTORS-Possible Conflicts with LTC After
50
<PAGE>
the Distribution" "-Termination of Administrative Services and Intercompany
Agreements" and "RELATIONSHIP BETWEEN HEALTHCARE AND LTC AFTER THE
DISTRIBUTION-Policies and Procedures for Addressing Conflicts."
51
<PAGE>
BUSINESS AND PROPERTIES
INITIAL INVESTMENTS
Healthcare was formed in March 1998 and immediately began making
investments. Healthcare's first investment was the purchase of convertible
subordinated debentures from Regent. Healthcare's second investment was the
purchase of shares of LTC Common Stock. The details of these investments are
further described below.
CONVERTIBLE SUBORDINATED DEBENTURES OF REGENT
In March 1998, pursuant to the terms of a Convertible Subordinated
Debenture Purchase Agreement (the "Regent Purchase Agreement"), Healthcare
agreed to invest $10.0 million in Regent Debentures. Regent is a publicly
traded (NASDAQ:RGNT) owner, operator and developer of high quality assisted
living communities. Assisted living is part of a spectrum of long-term care
services that provide a combination of housing, personal services and health
care designed to respond to elderly individuals who require assistance with
activities of daily living in a manner that promotes maximum independence.
Regent caters to private pay residents and provides graduated levels of care
within their communities. As of June 30, 1998 Regent's operating capacity
totaled 2,152 beds in 19 assisted living communities located in eight states.
As of June 30, 1998, LTC has provided $52.8 million of sale/leaseback financing
to Regent on eight assisted living communities with 744 units. Based upon
public reports filed by Regent with the Commission, Regent reported a net
operating loss and net loss of approximately $4.1 million and $3.9 million,
respectively, for the year ended December 31, 1997 and total assets and
shareholders' equity of approximately $75.7 million and $15.9 million,
respectively, at December 31, 1997.
As of June 30, 1998, pursuant to the terms of the Regent Purchase
Agreement, Healthcare had purchased $6.5 million aggregate principal amount of
Regent Debentures. Additionally, pursuant to the Purchase Agreement, Healthcare
must purchase up to an additional $3.5 million principal amount of Regent
Debentures on or prior to March 31, 2000. The Regent Debentures bear interest
at 7.5% and are convertible, at any time in whole or in part at Healthcare's
option, into Regent common stock at a price of $7.50 per share, subject to
adjustment. Regent can require conversion of the Regent Debentures at such time
as the Regent common stock trades at $12 per share or more for thirty
consecutive days. Assuming that Healthcare has purchased all additional Regent
Debentures required to be purchased under the Regent Purchase Agreement, and
assuming that all such additional debentures are converted, Healthcare would
hold approximately 1.3 million shares of Regent common stock.
Healthcare also entered into a Registration Rights Agreement with Regent
pursuant to which Healthcare has, among other things, the right, under certain
circumstances and subject to certain conditions and exceptions, to require
Regent to register all or any portion of the shares of Regent common stock
issued to it upon conversion of all or any portion of the Regent Debentures.
LTC COMMON STOCK
The Company purchased for investment purposes, 96,800 shares of LTC Common
Stock. The shares were purchased at a weighted average price of $17.84 per
share for a total investment amount of approximately $1,726,900. As of June 30,
1998, the purchase price approximated the fair market value of such shares of
LTC Common Stock. The Company classifies its investment in LTC Common Stock as
available-for-sale. Changes in LTC Common Stock's fair market value are
reported as a separate component of equity on Healthcare's balance sheet. LTC
reported total revenues and net income of approximately $73.4 million and $35.8
million, respectively, for the year ended December 31, 1997, and
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total assets and stockholders' equity of $656.7 million and $386.1 million,
respectively, at December 31, 1997.
PROPERTIES TO BE TRANSFERRED TO HEALTHCARE PRIOR TO THE DISTRIBUTION
Pursuant to the terms of the Distribution Agreement, prior to the
Distribution, LTC will transfer all outstanding shares of capital stock of
several wholly owned subsidiaries to Healthcare. As a result of such transfer,
such subsidiaries will become wholly owned subsidiaries of Healthcare. Such
subsidiaries currently operate (and, after such contribution, Healthcare intends
to operate through such subsidiaries) the properties described below.
CORONADO CARE CENTER
In May 1994, LTC acquired Coronado Care Center, a 193 bed skilled nursing
facility located in Phoenix, Arizona. Coronado Care Center is a 38,400
square-foot single-story building situated on approximately 2.9 acres of land
located in a stable multi-family and business area. The facility was
constructed in 1985 with an addition of a 64-bed Alzheimer's wing in 1992.
Coronado Care Center provides a wide range of skilled nursing, subacute
medical and subacute rehabilitation services, including ancillary therapies, as
well as specialized Alzheimer's care. The facility is operated by Sunrise
Healthcare Corporation ("Sunrise"), a wholly owned subsidiary of the Sun
Healthcare Group, Inc. ("Sun"), a public company and a leading provider of
long-term health care services. Based on leases in effect as of the date of
this Information Statement, the Company presently expects that Sun will be one
of the Company's largest operators for the year ended December 31, 1998,
representing approximately 31% of the Company's total expected annual lease
revenue for such period. See "RISK FACTORS-Reliance on Major Operators" and
"-Concentration of Company Operators in Long-Term Care Industry." The facility
receives significant referrals from local area hospitals and has maintained
occupancy rates in excess of 95% over the past three years. The facility
competes with two other skilled nursing facilities located within a two-mile
radius; however, both competitors have occupancy rates in excess of 90%. The
facility has generated gross operating cash flows (defined as cash flow before
rent, non-cash charges, and management fees) of approximately $2.0 million for
each of the years ended December 31, 1995, 1996 and 1997.
LTC acquired Coronado Care Center for approximately $7.2 million or $37,300
per bed. LTC's current book value associated with such property is
approximately $6.2 million. The facility is leased to Sunrise on a triple-net
basis ("Triple-Net Basis") under which the tenant is responsible for all ongoing
maintenance expenses, including taxes, utilities, insurance and general upkeep
of the property. Under the terms of the lease, the current annual rent is
approximately $810,000 with annual increases of 3%. Sunrise exercised its first
lease renewal option in January 1998, which expires in December 2002. Sunrise
has the option to extend the lease for an additional five-year term at that
time. In addition, Sunrise has a right of first refusal to purchase the
facility upon an acceptable bona fide offer to buy from a third party or if the
facility is offered for sale.
In March 1996, the ownership of the facility was transferred to Coronado
Corporation, a Delaware corporation ("Coronado Corp."), a wholly owned
subsidiary of LTC. Concurrently with the transfer, a non-recourse mortgage loan
of approximately $7.8 million was placed on the facility by LTC. The loan bears
interest at rate of 9.25% per annum with monthly scheduled principal and
interest payments based on a 25-year amortization period. The current balance
of the loan is approximately $7.7 million with an annual debt service
requirement of approximately $808,000. The mortgage has a 10-year maturity with
a scheduled balloon payment of approximately $6.6 million due in March 2006.
The mortgage is prepayable in whole or in part at any time without penalty.
However, pursuant to the Intercompany Agreement, Healthcare has agreed not to
prepay or cause to be prepaid any of its mortgage
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loans provided by LTC which are securitized in REMIC transactions. The mortgage
was subsequently sold by LTC through a REMIC securitization completed in March
1996.
PARK VILLA CONVALESCENT CENTER
In March 1993, LTC acquired Park Villa Convalescent Center ("Park Villa"),
a 200-bed skilled nursing facility located in Tucson, Arizona. Park Villa is a
64,100 square-foot two-story building situated on approximately 2.3 acres of
land located in a stable residential and multi-family area and is approximately
one mile north of the University of Arizona. The facility was constructed in
1985.
Park Villa provides a wide range of skilled nursing, subacute medical and
subacute rehabilitation services, including ancillary therapies. Park Villa
also offers Alzheimer's care. The facility is operated by Sunrise. See "RISK
FACTORS-Reliance on Major Operators" and "-Concentration of Company Operators in
Long-Term Care Industry." The facility competes with four other skilled nursing
facilities; however, their proximity ranges from 4 to 10 miles. Occupancy for
the facility in 1997 was approximately 80%. The facility has generated gross
operating cash flows (defined as cash flow before rent, non-cash charges, and
management fees) in excess of $1.2 million for each of the years ended December
31, 1995, 1996 and 1997.
LTC acquired Park Villa for approximately $4.1 million or $20,500 per bed.
LTC's current book value associated with such property is approximately $3.4
million. The facility is leased to Sunrise on a Triple-Net Basis. Under the
terms of the lease, the current annual rent is approximately $739,000 with
scheduled annual increases of 3%. The initial term of the lease expires April
1, 2003. Sunrise has the option to extend the lease for three additional
five-year terms. The lease does not contain a right of first refusal or purchase
option.
In March 1996, the ownership of the facility was transferred to Park Villa
Corporation, a Delaware corporation ("Park Villa Corp."), a wholly owned
subsidiary of LTC. Concurrently with the transfer, a non-recourse mortgage loan
of approximately $6.6 million was placed on the facility by LTC. The loan bears
interest at rate of 9.25% per annum with monthly scheduled principal and
interest payments based on a 25-year amortization period. The current balance of
the loan is approximately $6.5 million with an annual debt service requirement
of approximately $683,000. The mortgage has a 10-year maturity with a scheduled
balloon payment of approximately $5.5 million due in March 2006. The mortgage
is prepayable in whole or in part at any time without penalty. However, pursuant
to the Intercompany Agreement, Healthcare has agreed not to prepay or cause to
be prepaid any of its mortgage loans provided by LTC which are securitized in
REMIC transactions. The mortgage was subsequently sold by LTC through a REMIC
securitization completed in March 1996.
CASA MARIA NURSING HOME
In November 1992, LTC acquired Casa Maria Nursing Home ("Casa Maria"), a
116-bed skilled nursing facility located in Roswell, New Mexico. Casa Maria is
a 47,800 square-foot single-story building situated on approximately 6.4 acres
of land located in a stable residential and multi-family area. The facility was
constructed in 1979 with an addition completed in 1990. The facility is located
immediately south of Eastern New Mexico Medical Center.
Casa Maria provides a wide range of skilled nursing services. In addition,
ancillary services such as physical, speech and other therapies are provided as
contracted services. Through September 1997 the facility was operated by
Horizon. In October 1997, Integrated acquired the operations of Horizon and is
now the facility's operator. See "RISK FACTORS-Reliance on Major Operators" and
"-Concentration of Company Operators in Long-Term Care Industry." Over the past
three years, the facility has maintained occupancy rates in excess of 95%. The
facility competes with two other skilled nursing
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facilities; however, both competitors are located several miles from the
facility. The facility has generated gross operating cash flows (defined as
cash flow before rent, non-cash charges, and management fees) ranging from
approximately $0.8 million to $1.0 million for each of the years ended December
31, 1995, 1996 and 1997.
LTC acquired Casa Maria for approximately $3.0 million or $25,800 per bed.
LTC's current book value associated with such property is approximately $2.4
million. The lease with Horizon (which was assumed by Integrated) was provided
on a Triple-Net Basis. The current annual base rent is approximately $360,000,
which is fixed; however, incremental rents are due based upon 4% of incremental
revenues over lease year 1994 revenues. Incremental rents were approximately
$14,000 for the year ended December 31, 1997. The initial lease term expires
November 2002; however, Integrated has the option to extend the lease for an
additional six five-year terms. The lease does not contain a right of first
refusal or purchase option.
In March 1998, the ownership of the facility was transferred to LTC-New
Mexico, Inc. ("New Mexico Corp."), a wholly owned subsidiary of LTC.
Concurrently with the transfer, a non-recourse mortgage loan of approximately
$4.1 million was placed on the facility by LTC. The loan bears interest at rate
of 8.00% per annum and is fully amortizing over 30 years. Interest and principal
is payable monthly with an annual debt service requirement of approximately
$360,000. The mortgage is prepayable in whole or in part at any time subject to
a yield maintenance penalty. However, pursuant to the Intercompany Agreement,
Healthcare has agreed not to prepay or cause to be prepaid any of its mortgage
loans provided by LTC which are securitized in REMIC transactions. The mortgage
was subsequently sold in a REMIC securitization that was completed in May 1998.
CASA ARENA BLANCA
In March 1993, LTC acquired Casa Arena Blanca Nursing Home ("Casa Arena"),
a 120-bed skilled nursing facility located in Alamogordo, New Mexico.
Alamogordo is located approximately 90 miles north of El Paso Texas. Casa Arena
is a 43,000 square-foot single-story building situated on approximately 7.8
acres of land located in a stable multi-family area. The facility was
constructed in 1985.
Casa Arena provides a wide range of skilled nursing services. In addition,
ancillary services such as physical, speech and other therapies are provided as
contracted services. Through September 1997 the facility was operated by
Horizon. In October 1997, Integrated acquired the operations of Horizon and is
now the facility's operator. See "RISK FACTORS-Reliance on Major Operators" and
"-Concentration of Company Operators in Long-Term Care Industry." Over the past
three years, the facility has maintained occupancy rates above 90%. The
facility competes with one other skilled nursing facility which is located
approximately 1.5 miles from the facility. The facility has generated gross
operating cash flows (defined as cash flow before rent, non-cash charges, and
management fees) ranging between approximately $1.0 million and $1.5 million for
each of the years ended December 31, 1995, 1996 and 1997.
LTC acquired Casa Arena for approximately $3.9 million or $32,300 per bed.
LTC's current book value associated with such property is approximately $3.2
million. The lease with Horizon (which was assumed by Integrated) was provided
on a Triple-Net Basis. The current annual base rent is approximately $426,000
which is fixed; however, incremental rents are due based upon 4% of incremental
revenues over lease year 1994 revenues. Incremental rents were approximately
$20,300 for the year ended December 31, 1997. The initial lease term expires
March 2003; however, Integrated has the option to extend the lease for an
additional six five-year terms. The lease does not contain a right of first
refusal or purchase option.
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In March 1998, the ownership of the facility was transferred to New Mexico
Corp. Concurrently with the transfer, a non-recourse mortgage loan of
approximately $4.8 million was placed on the facility by LTC. The loan bears
interest at rate of 8.00% per annum and is fully amortizing over 30 years.
Interest and principal is payable monthly with an annual debt service
requirement of approximately $426,000. The mortgage is prepayable in whole or in
part at any time subject to a yield maintenance penalty. However, pursuant to
the Intercompany Agreement, Healthcare has agreed not to prepay or cause to be
prepaid any of its mortgage loans provided by LTC which are securitized in REMIC
transactions. The mortgage was subsequently sold in a REMIC securitization that
was completed in May 1998.
LTC PARTNERS IX PROPERTIES
In February 1998, LTC acquired three skilled nursing facilities through the
formation of a limited partnership, Partners IX. The transaction was effected
through the contribution of a 100% undivided interest in the three properties by
the previous general partners. In exchange for the contribution of such
properties, the contributing general partners became limited partners of
Partners IX and received 201,882 partnership units. A wholly owned subsidiary
of LTC, LTC GP VI, Inc., is currently the general partner of Partners IX.
Two of the facilities were contributed subject to mortgage debt that was
financed by LTC in August 1992. These two mortgages were subsequently sold by
LTC in a REMIC securitization in July 1993. Additionally, subsequent to the
acquisition of the properties by the partnership, LTC provided $2.9 million of
mortgage financing on the third facility. The financing was used to repay
approximately $689,000 of outstanding debt on the facility and the remaining
proceeds of approximately $2.2 million were distributed to the general partner,
and then subsequently transferred to LTC.
Under the terms of the partnership agreement, the limited partners receive
a 10% preferred return on their partnership units. The limited partnership
units are convertible into LTC Common Stock at any time at a price of $17 per
share. In addition, the limited partners receive 10% of any excess cash flow
generated by the partnership.
SUNRISE GOLDEN AGE CARE & REHABILITATION
In February 1998, LTC acquired an interest in SunRise Golden Age Care &
Rehabilitation ("Golden Age") in the above described Partners IX transaction.
Golden Age is an 82-bed skilled nursing facility located in Clovis, New Mexico.
Golden Age is a 28,150 square-foot one-story building situated on approximately
2.3 acres of land located in a rural residential area. The facility was
constructed in 1969, with an addition of a 28 bed wing in 1995.
Golden Age provides a wide range of skilled nursing, subacute medical and
subacute rehabilitation services, including ancillary therapies. The facility is
currently operated by Sunrise. See "RISK FACTORS-Reliance on Major Operators"
and "-Concentration of Company Operators in Long-Term Care Industry." The
facility competes with three other skilled nursing facilities (including High
Plains described below) within three to five miles. Two of these facilities
have occupancy rates of approximately 98%. For the year ended December 31,
1997, the facility generated gross operating cash flows (defined as cash flow
before rent, non-cash charges, and management fees) of approximately $1.3
million and had an occupancy rate of 99%.
Partners IX acquired the Golden Age facility for approximately $2.0 million
or $24,300 per bed. The facility is leased to Sunrise on a Triple-Net Basis.
Under the terms of the lease, the current annual rent is $261,000, which is
fixed. The initial term of the lease expires July 31, 2001. Sunrise has the
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option to extend the lease for two additional six-year terms. The lease does not
contain a right of first refusal or purchase option.
Subsequent to the acquisition of the facility, LTC placed a non-recourse
mortgage loan of $2.9 million on the facility. The loan bears interest at rate
of 8.50% per annum with monthly scheduled principal and interest payments based
on a 30-year amortization period. The current balance of the loan is
approximately $2.9 million with an annual debt service requirement of
approximately $267,500. The mortgage has a 15-year maturity with a scheduled
balloon payment of approximately $2.3 million due in March 2013. The mortgage
is not prepayable in whole or in part at any time without consent of the lender.
In addition, upon a sale of any portion of the borrower's interest in the
mortgaged property, the borrower is required to prepay the entire loan with a
yield maintenance penalty. Moreover, pursuant to the Intercompany Agreement,
Healthcare has agreed not to prepay or cause to be prepaid any of its mortgage
loans provided by LTC which are securitized in REMIC transactions. The mortgage
was subsequently sold in a REMIC securitization that was completed in May 1998.
SUNRISE HIGH PLAINS CARE & REHABILITATION
In February 1998, LTC acquired an interest in SunRise High Plains Care &
Rehabilitation ("High Plains") in the above described Partners IX transaction.
High Plains is a 76-bed skilled nursing facility located in Clovis, New Mexico.
The facility is a 21,500 square-foot one-story building situated on
approximately 2.0 acres of land located in a stable commercial area. The
facility was constructed in 1968.
High Plains provides a wide range of skilled nursing, subacute medical and
subacute rehabilitation services, including ancillary therapies. The facility
is currently operated by Sunrise. See "RISK FACTORS-Reliance on Major
Operators" and "-Concentration of Company Operators in Long-Term Care Industry."
The facility competes with another skilled nursing facility located
approximately one-mile away, which has a 98% occupancy rate. Golden Age
(described above) is also a competitor. During the three prior years, the
facility's occupancy rates have been in excess of 90% with an occupancy rate of
approximately 97% in 1997. The facility has generated gross operating cash
flows (defined as cash flow before rent, non-cash charges, and management fees)
in excess of $750,000 for each of the years ended December 31, 1995, 1996 and
1997.
Partners IX acquired the High Plains facility for approximately $2.6
million or $34,200 per bed, subject to an existing mortgage loan of
approximately $1.7 million. The facility is leased to Sunrise on a Triple-Net
Basis. Under the terms of the lease, the current annual rent is $342,000, which
is fixed. The initial term of the lease expires July 31, 2001. Sunrise has the
option to extend the lease for two additional six-year terms. The lease does not
contain a right of first refusal or purchase option.
As indicated above, the facility was acquired subject a non-recourse
mortgage loan of approximately $1.7 million. The mortgage was originated by LTC
in August 1992. In July 1993, LTC sold the mortgage in a REMIC securitization.
Currently, the loan bears interest at rate of 12% per annum with monthly
scheduled principal and interest payments based on a 25-year amortization
period. The current balance of the loan is approximately $1.7 million and the
current annual debt service is approximately $210,000. The mortgage has a
10-year maturity with a scheduled balloon payment of approximately $1.6 million
due in September 2002. The mortgage is not prepayable unless the facility is
sold. However, in the event of a sale, the borrower is required to substitute
another similar skilled nursing facility such that the original terms of the
note will be satisfied. Moreover, pursuant to the Intercompany Agreement,
Healthcare has agreed not to prepay or cause to be prepaid any of its mortgage
loans provided by LTC which are securitized in REMIC transactions.
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BOULEVARD MANOR
In February 1998, LTC acquired an interest in Boulevard Manor in the above
described Partners IX transaction. Boulevard Manor is a 122-bed skilled nursing
facility located in Richland Hills, Texas. The facility is a 32,000 square-foot
one-story building situated on approximately 2.4 acres of land located in a
stable mixed area. The facility was originally constructed around in 1964;
however, an addition and major renovations were completed in 1976.
Boulevard Manor provides a wide range of skilled nursing services,
including ancillary therapies. The facility is operated by Sensitive Care, Inc.
("Sensitive Care"), a regional nursing home operator in Texas. The facility
competes with four other skilled nursing facilities in the area. During the
three prior years, the facility's occupancy rates have been in excess of 85%.
The facility has generated gross operating cash flows (defined as cash flow
before rent, non-cash charges, and management fees) of approximately $550,000
for each of the years ended December 31, 1995, 1996 and interim 1997.
Partners IX acquired the Boulevard Manor facility for approximately $2.9
million or $23,800 per bed, which approximated its fair value, subject to an
existing mortgage loan of approximately $1.8 million. The facility is leased to
Sensitive Care on a Triple-Net Basis. Under the terms of the lease, the current
annual rent is $344,000, with annual increases of 3%. The initial term of the
lease expires in September 2003. Sensitive Care has the option to extend the
lease at the end of the initial term on a year-to-year basis. The lease does not
contain a right of first refusal or purchase option.
As indicated above, the facility was acquired subject a non-recourse
mortgage loan of approximately $1.8 million. The mortgage was originated by LTC
in August 1992. In July 1993, LTC sold the mortgage in a REMIC securitization.
Currently, the loan bears interest at rate of 12% per annum with monthly
scheduled principal and interest payments based on a 25-year amortization
period. The current loan balance is approximately $1.8 million and the annual
debt service is approximately $222,000. The mortgage has a 10-year maturity
with a scheduled balloon payment of approximately $1.7 million due in September
2002. The mortgage is not prepayable unless the facility is sold. However, in
the event of a sale, the borrower is required to substitute another similar
skilled nursing facility such that the original terms of the note will be
satisfied. Moreover, pursuant to the Intercompany Agreement, Healthcare has
agreed not to prepay or cause to be prepaid any of its mortgage loans provided
by LTC which are securitized in REMIC transactions.
KARRINGTON PROPERTIES
In April 1998, LTC-Ohio, Inc., a Delaware corporation doing business in the
State of Ohio as LTC Properties-Ohio, Inc. ("Ohio Corp."), acquired the fee
simple interest in two assisted living facilities and the ground leasehold
interest in one assisted living facility and one Alzheimer's facility
(collectively, the "Ohio Corp. Facilities") from Karrington Health, Inc. and/or
its affiliates ("Karrington") pursuant to a sale-leaseback transaction. The
Ohio Corp. Facilities were purchased for a total of $23,250,000 or approximately
$125,000 per unit. Under the terms of the master lease for the Ohio Corp.
Facilities (the "Master Lease"), the current annual rent is $2,092,500; however,
annual rent is increased by 150% of the change in the Consumer Price Index
("CPI") for the year, but in no event will the annual increase be greater than
2%. The Ohio Corp. Facilities are located in the suburbs of Columbus, Ohio.
In June and July 1998, Missouri River Corporation, a Delaware corporation
("MRC"), acquired the fee simple interest in two assisted living facilities (the
"MRC Facilities") from Karrington pursuant to sale-leaseback transactions. The
MRC Facilities were purchased for a total of $16,050,000 or approximately
$121,000 per unit. Under the terms of the leases for the MRC Facilities, the
current annual rent is $1,484,600; however annual rent is increased by 150% of
the change in CPI for the year,
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but in no event will the annual increase be greater than 2%. One of the MRC
Facilities is located on the west side of Cleveland, Ohio, and the other MRC
Facility is located in Erie, Pennsylvania.
Ohio Corp. is a wholly-owned subsidiary of MRC, and MRC is a wholly-owned
subsidiary of LTC.
The Ohio Corp. Facilities and the MRC Facilities are operated by
Karrington Operating Company, Inc. ("KOC"), a wholly-owned subsidiary of
Karrington, which is a publicly traded company based in Columbus, Ohio.
Karrington owns and operates private pay assisted living facilities for
physically frail and cognitively impaired seniors. Based on leases in effect
as of the date of this Information Statement, the Company presently expects
that Karrington will be the Company's largest operator for the year ended
December 31, 1998, representing approximately 52% of the Company's total
expected annual lease revenue for such period. See "RISK FACTORS-Reliance on
Major Operators" and "-Concentration of Company Operators in Long-Term Care
Industry."
In connection with these assets, Ohio Corp. is currently negotiating the
terms of a $17.4 million non-recourse loan with a third-party lender that will
be secured by the Ohio Corp. Facilities. The loan is expected to bear interest
at 8% per annum with monthly scheduled principal and interest payments based on
a 25-year amortization period. The initial loan balance will be $17.4 million
and the annualized debt service will be approximately $1,612,000. The mortgage
will have a 10-year maturity with a scheduled balloon payment of approximately
$14.5 million due at maturity. The mortgage will not be pre-payable; however,
at any time after three years the mortgage allows for defeasance.
KARRINGTON ON THE SCIOTO
In April 1998, Ohio Corp. acquired the fee simple interest in Karrington on
the Scioto, a 53 unit assisted living facility located in Upper Arlington, Ohio
which is a suburb of Columbus. Karrington on the Scioto is a 34,000 square foot
three-story building situated on approximately 1.7 acres of land located in a
residential area across the street from the Scioto River. The facility was
constructed in 1993.
Karrington on the Scioto provides a wide range of assisted living as well
as specialized Alzheimer's care to its residents. In addition, the facility
provides a high level of amenities to its residents, which allows the facility
to have a "home-like" atmosphere. The facility is operated by KOC and receives
significant referrals from the medical community and has maintained occupancy
rates in excess of 95% since 1996. The facility competes with four other
assisted living facilities within a five mile radius with an average occupancy
of 87%. The facility has generated gross operating cash flows (defined as cash
flow before rent, non-cash charges, and management fees) of approximately
$850,000 for each of the years ended 1996 and 1997.
Ohio Corp. acquired the fee simple interest in Karrington on the Scioto for
approximately $6.6 million or $125,000 per unit. Under the terms of the Master
Lease, the current annual rent attributable to this facility is approximately
$596,250; however, annual rent is increased by 150% of the change in the CPI for
the year, but in no event will the annual increase be greater than 2%. The
initial Master Lease term expires in April 2018; however, KOC will have two
consecutive ten-year options to extend the Master Lease so long as it extends
the leases for the MRC Facilities. There is no right of first refusal or
purchase option in the Master Leases.
KARRINGTON OF BEXLEY
In April 1998, Ohio Corp. acquired the fee simple interest in Karrington of
Bexley, a 53 unit assisted living facility located in Bexley, Ohio which is a
suburb of Columbus. Karrington of Bexley is a
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32,000 square foot three-story building situated on approximately one acre of
land. The facility was constructed in 1992.
Karrington of Bexley provides a wide range of assisted living as well as
specialized Alzheimer's care to its residents. In addition, the facility
provides a high level of amenities to its residents, which allows the facility
to have a "home-like" atmosphere. The facility is operated by KOC and receives
significant referrals from the medical community. This facility has maintained
occupancy rates in excess of 88% since 1996. The facility competes with two
other assisted living facilities within a five mile radius with average
occupancies of 83%. The facility has generated gross operating cash flows
(defined as cash flow before rent, non-cash charges, and management fees) of
approximately $750,000 for each of the years ended 1996 and 1997.
Ohio Corp. acquired the fee simple interest in Karrington of Bexley for
approximately $6.6 million or $125,000 per unit. Under the terms of the Master
Lease, the current annual rent attributable to this facility is approximately
$596,250; however, annual rent is increased by 150% of the change in the CPI for
the year, but in no event will the annual increase be greater than 2%. The
initial Master Lease term expires in April 2018; however, KOC will have two
consecutive ten-year options to extend the Master Lease so long as it extends
the leases for the MRC Facilities. There is no right of first refusal or
purchase option in the Master Lease.
KARRINGTON AT TUCKER CREEK
In April 1998, Ohio Corp. acquired the ground leasehold interest in
Karrington at Tucker Creek, a 54 unit assisted living facility located in
Worthington, Ohio which is a suburb of Columbus, Ohio. Karrington at Tucker
Creek is a 35,500 square foot three-story building situated on approximately 2.1
acres of land.
Karrington at Tucker Creek provides a wide range of assisted living as well
as specialized Alzheimer's care to its residents. In addition, the facility
provides a high level of amenities to its residents, which allows the facility
to have a "home-like" atmosphere. The facility is operated by KOC and receives
significant referrals from the medical community. This facility has maintained
occupancy rates in excess of 93% since 1996. The facility competes with one
other assisted living facility within a five mile radius with an occupancy of
100%. The facility has generated gross operating cash flows (defined as cash
flow before rent, non-cash charges, and management fees) of approximately
$800,000 for each of the years ended 1996 and 1997.
Ohio Corp. acquired the ground leasehold interest in Karrington at Tucker
Creek for approximately $6.8 million or $125,000 per unit. Under the terms of
the Master Lease, the current annual rent attributable to this facility is
approximately $607,500; however, annual rent is increased by 150% of the change
in the CPI for the year, but in no event will the annual increase be greater
than 2%. The initial Master Lease term expires in April 2018; however, KOC will
have two consecutive ten-year options to extend the Master Lease so long as it
extends the leases for the MRC Facilities. There is no right of first refusal
or purchase option in the Master Lease.
KARRINGTON PLACE
In April 1998, Ohio Corp. acquired the ground leasehold interest in
Karrington Place, a 26-unit Alzheimer's facility located in Worthington, Ohio
which is a suburb of Columbus, Ohio. Karrington Place is a 18,000 square foot
three-story building situated on approximately 0.6 acre of land.
Karrington Place is a stand-alone facility that provides a wide range of
services to Alzheimer's residents. The facility is operated by KOC and receives
significant referrals from the medical community.
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This facility has maintained occupancy rates in excess of 85% in its first full
year since opening in February of 1996. The facility competes with three other
Alzheimer facilities within a five mile radius with an average occupancy of 96%.
The facility has generated gross operating cash flows (defined as cash flow
before rent, non-cash charges, and management fees) of approximately $400,000
for the year 1997.
Ohio Corp. acquired the ground leasehold interest in Karrington Place for
approximately $3.3 million or $125,000 per unit. Under the terms of the Master
Lease, the current annual rent attributable to this facility is approximately
$292,500; however, annual rent is increased by 150% of the change in the CPI for
the year, but in no event will the annual increase be greater than 2%. The
initial Master Lease term expires in April 2018; however, KOC will have two
consecutive ten year options to extend the Master Lease so long as it extends
the leases for the MRC Facilities. There is no right of first refusal or
purchase option in the Master Lease.
KARRINGTON OF ROCKY RIVER
In July 1998, MRC acquired the fee simple interest in Karrington of Rocky
River, a 64 unit assisted living facility located on Cleveland's west side.
Karrington of Rocky River is a 44,276 square foot three-story building situated
on approximately 2.2 acres of land on the western edge of the City of Rocky
River.
Karrington of Rocky River provides a wide range of assisted living as well
as specialized Alzheimer's care to its residents. In addition, the facility
provides a high level of amenities to its residents, which allows the facility
to have a "home-like" atmosphere. The facility, which opened in May 1998, is
operated by KOC and competes with three other assisted living within a five-mile
radius with an average occupancy of 95%.
MRC acquired the fee simple interest in Karrington of Rocky River for
approximately $7.7 million or $121,000 per unit. Under the terms of the lease
for this facility, the current annual rent is approximately $714,405; however,
annual rent is increased by 150% of the change in CPI for the year, but in no
event will the annual increase be greater than 2%. The initial lease term
expires in April 2018; however KOC will have two consecutive ten-year options to
extend the lease so long as it extends the Master Lease and the lease for the
other MRC Facility. There is no right of first refusal or purchase option in
the lease for this facility.
KARRINGTON ON PRESQUE ISLE BAY
In June 1998, MRC acquired the fee simple interest in Karrington on Presque
Isle Bay, a 69 unit assisted living facility located in Erie, Pennsylvania.
Karrington on Presque Isle Bay is a 47,635 square foot three-story building
situated on approximately 2.9 acres of land along the edge of the Niagra Pier on
Presque Isle Bay, an inlet to Lake Erie.
Karrington on Presque Isle Bay provides a wide range of assisted living as
well as specialized Alzheimer's care to its residents. In addition, the
facility provides a high level of amenities to its residents, which allows the
facility to have a "home-like" atmosphere. The facility, which opened in June
1998, is operated by KOC and competes with three other assisted living within a
five- mile radius. Two of the three have a 100% occupancy, while the third
opened in November 1997.
MRC acquired the fee simple interest in Karrington on Presque Isle Bay for
approximately $8.3 million or $121,000 per unit. Under the terms of the lease
for this facility, the current annual rent is approximately $770,220; however,
annual rent is increased by 150% of the change in CPI for the year, but in no
event will the annual increase be greater than 2%. The initial lease term
expires in April 2018;
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however, KOC will have two consecutive ten-year options to extend the lease so
long as it extends the Master Lease and the lease for the other MRC Facility.
There is no right of first refusal or purchase option in the lease for this
facility.
EQUITY INVESTMENTS
ASSISTED LIVING CONCEPTS, INC. COMMON STOCK
In September 1997, LTC received 30,847 shares of common stock of ALC in
exchange for LTC's 9.9% ownership interest in a private assisted living company.
ALC is a publicly traded (AMEX:ALF), national owner, operator and developer of
assisted living residences for older adults who need assistance with activities
of daily living such as bathing and dressing. In addition to housing, ALC
provides personal care, support services and makes nursing services available
according to the individual needs of its residents. As of December 31, 1997,
ALC operated 109 assisted living residences with 4,888 units in eight states.
At June 30, 1998, the fair market value of the ALC common stock was $532,100 or
$17.25 per share (based on the closing sales price of such common stock on the
American Stock Exchange on such date). LTC's investment posture prior to the
Distribution is, and the Company's investment posture subsequent to the
Distribution will be, to hold the investment in ALC common stock as long-term
available-for-sale securities. Accordingly, LTC has accounted, and the Company
will account, for the investment in ALC common stock at fair value with
unrealized gains and losses on changes in the fair value reported as a separate
component of stockholders' equity. Based upon public reports filed by ALC with
the Commission, ALC reported net operating income and net income of
approximately $2.8 million and $4.2 million, respectively, for the year ended
December 31, 1997, and total assets and stockholders' equity of approximately
$298.3 million and $141.0 million, respectively, at December 31, 1997.
REGENT COMMON STOCK
As of June 30, 1998, the Company holds 69,000 shares of Regent common
stock, which was acquired through open market purchases by LTC, and subsequently
contributed to the Company. The weighted average purchase price of the Regent
common stock was $4.56 per share, and as of June 30, 1998 the fair market value
of the stock was $431,300 or $6.25 per share (based on the closing sales price
of such common stock on the Nasdaq National Market on such date). LTC's
investment posture prior to the Distribution is, and the Company's investment
posture subsequent to the Distribution will be, to hold the investment in Regent
common stock as long-term available-for-sale securities. Accordingly, LTC has
accounted, and the Company will account, for the investment in Regent common
stock at fair value with unrealized gains and losses on changes in the fair
value reported as a separate component of stockholders' equity.
ENVIRONMENTAL MATTERS
Pursuant to the Distribution Agreement, LTC will agree to indemnify the
Company for all liabilities arising out of LTC's prior ownership of the
properties and equity investments described above. LTC's ownership of such
properties and equity investments and LTC's agreement to indemnify the Company
could subject it to certain environmental liabilities.
Under various Federal, state and local laws, ordinances and regulations, an
owner or operator of real estate is liable for the costs of removal or
remediation of certain hazardous or toxic substances on or in such property.
These laws often impose such liability without regard to whether the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances. The cost of any required remediation and the owner's
liability therefor as to any property is generally not limited under such
enactments and could exceed the value of the property and/or the aggregate
assets of the owner.
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The presence of such substances, or the failure to properly remediate such
substances, may adversely affect the owner's ability to sell or rent such
property or to borrow using such property as collateral. Persons who arrange
for the disposal or treatment of hazardous or toxic substances also may be
liable for the costs of removal or remediation of such substances at a disposal
or treatment facility, whether or not such facility is owned or operated by such
persons. Certain environmental laws govern the removal, encapsulation or
disturbance of ACMs when such materials are in poor condition, or in the event
of renovation or demolition. Such laws impose liability for release of ACMs
into the air and third parties may seek recovery from owners or operators of
real properties for personal injury associated with ACMs. The operation and
subsequent removal of certain underground storage tanks also are regulated by
Federal and state laws.
Each of the properties being transferred to the Company prior to the
Distribution has undergone a Phase I assessment (involving investigation without
soil sampling or groundwater analysis) by environmental consultants in the past.
However, neither LTC nor the Company intends to conduct any additional Phase I
assessments on any of such properties prior to or after their transfer to the
Company. The Company is unaware of any environmental liability or noncompliance
with applicable environmental laws or regulations arising out of such properties
that the Company believes would have a material adverse effect on its business,
assets or results of operations. Nonetheless, there can be no assurance that
the Company's knowledge is complete with regard to, or that the Phase I
assessments have identified, all material environmental liabilities. See "RISK
FACTORS-Potential Environmental Liability Related to the Properties."
EMPLOYEES
Following the Distribution, the Company will have no employees. However,
pursuant to an Administrative Services Agreement, LTC is obligated to provide
the Company with the services of its employees. These employees will be
compensated by both the Company and LTC. At March 31, 1998, LTC had 18
employees. The Company will pay 25% of the aggregate amount of such employees'
wages, salaries and bonuses to LTC and LTC will pay the remaining 75% of such
amount. See "RELATIONSHIP BETWEEN HEALTHCARE AND LTC AFTER THE
DISTRIBUTION-Administrative Services Agreement." The Company believes that its
future prospects will depend, in part, on its ability to continue to attract and
retain skilled management personnel.
CORPORATE HEADQUARTERS
LTC has agreed to make available to the Company, at LTC's principal office
located at 300 Esplanade Drive, Suite 1860, Oxnard, California 93030, space for
the Company's principal corporate office. The Company will pay to LTC 25% of
the aggregate rent paid by LTC for such rental space. The Company believes that
these facilities are adequate to meet its current needs and that suitable
additional or alternative space will be available on commercially reasonable
terms as needed.
LEGAL PROCEEDINGS
The Company is a newly-formed corporation and, as such, is not a party to
any legal proceedings.
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MANAGEMENT
BOARD OF DIRECTORS
Upon consummation of the Distribution, the Company's Board of Directors is
expected to be comprised of four directors: Andre C. Dimitriadis, James J.
Pieczynski, Steven Stuart and Bary G. Bailey. Such directors will serve until
the next Annual Meeting of Stockholders of the Company and until their
respective successors have been duly elected and qualified.
The table below indicates the name, position with the Company and age of
each nominee for director.
<TABLE>
<CAPTION>
NAME POSITION WITH HEALTHCARE AGE
---- ------------------------ ---
<S> <C> <C>
Andre C. Dimitriadis. . . . . . . . . . . . . Chairman of the Board and Chief Executive Officer 57
James J. Pieczynski . . . . . . . . . . . . . Director, President and Chief Financial Officer 36
Steven Stuart . . . . . . . . . . . . . . . . Director 34
Bary G. Bailey. . . . . . . . . . . . . . . . Director 39
</TABLE>
ANDRE C. DIMITRIADIS founded LTC and was employed by Beverly Enterprises,
Inc., an owner/operator of long-term care facilities, retirement living
facilities and pharmacies, from October 1989 to May 1992, where he served as
Executive Vice President and Chief Financial Officer. Prior to that, he was
employed by American Medical International, Inc., an owner/operator of
hospitals, from 1985 to 1989, where he served as Executive Vice
President-Finance, Chief Financial Officer and director. Mr. Dimitriadis is a
member of the board of directors of Magellan Health Services.
JAMES J. PIECZYNSKI has served as President and Director of LTC since
September 8, 1997 and Chief Financial Officer since May 1994. From May 1994 to
September 1997, he also served as Senior Vice President of LTC. He joined LTC
in December 1993 as Vice President and Treasurer. Prior to joining LTC, he was
employed by American Medical International, Inc., an owner/operator of
hospitals, from May 1990 to December 1993, where he served as Assistant
Controller and Director of Development.
STEVEN STUART has been employed as a Director in the real estate finance
group of Deutsche Morgan Grenfell (a subsidiary of Deutsche Bank), an investment
banking firm, since January 1997. From 1986 to 1997, Mr. Stuart was a Vice
President of Goldman, Sachs & Co. where he focused on capital markets activities
relating to real estate including several transactions involving long-term care
and assisted living facilities.
BARY G. BAILEY currently serves as Executive Vice President, Finance of
Premier, Inc. (formerly American Healthcare Systems). Prior to joining American
Healthcare Systems in July 1995, Mr. Bailey was employed by American Medical
International, Inc., an owner/operator of hospitals, from 1987 to 1995 where he
served as Vice President of Finance and Controller from 1990 to 1995.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Audit Committee will consist of Steven Stuart and
Bary Bailey. The Audit Committee will review the annual audits of the Company's
independent public accountants, review and evaluate internal accounting
controls, recommend the selection of the Company's independent public
accountants, review and pass upon (or ratify) related party transactions, and
conduct such reviews and examinations as it deems necessary with respect to the
practices and policies of, and the relationship between, the Company and its
independent public accountants.
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COMPENSATION COMMITTEE. The Compensation Committee will consist of Steven
Stuart and Bary Bailey. The Compensation Committee will review salaries,
bonuses and stock options of senior officers of the Company, and administer the
Company's executive compensation policies and stock option plans.
COMPENSATION OF THE BOARD OF DIRECTORS
Each non-employee director of the Company will receive $10,000 per year for
serving on the Company Board and will not receive any additional compensation
for attendance at board or committee meetings. Directors also will receive
reimbursement for travel expenses incurred in connection with their duties as
directors. Each director is eligible to receive stock options pursuant to the
Healthcare 1998 Plan.
EXECUTIVE OFFICERS
Set forth below are the names, positions and ages of the individuals who
are executive officers of the Company:
<TABLE>
<CAPTION>
NAME POSITION WITH HEALTHCARE AGE
---- ------------------------ ---
<S> <C> <C>
Andre C. Dimitriadis. . . . . . . . . . . . . Chairman of the Board and Chief Executive Officer 57
James J. Pieczynski . . . . . . . . . . . . . Director, President and Chief Financial Officer 36
Christopher T. Ishikawa . . . . . . . . . . . Senior Vice President and Chief Investment Officer 34
Pamela J. Privett . . . . . . . . . . . . . . Senior Vice President, General Counsel and Secretary 40
</TABLE>
In addition to the description above under the caption "--Board of
Directors" regarding Mr. Dimitriadis and Mr. Pieczynski:
CHRISTOPHER T. ISHIKAWA has served as Senior Vice President and Chief
Investment Officer of LTC since September 8, 1997. Prior to that, he served as
the Vice President and Treasurer of LTC beginning in April 1995. Prior to
joining LTC, he was employed by Metrobank from December 1991 to March 1995,
where he served as First Vice President and Controller.
PAMELA J. PRIVETT has held the position of Senior Vice President and
General Counsel of LTC since September 8, 1997. Prior to that, Ms. Privett was
the sole owner, officer and director of Pamela J. Privett, A Professional Law
Corporation, which served as outside General Counsel to LTC beginning in August
1994. Ms. Privett was a stockholder in the Santa Monica, California law firm of
Stern, Neubauer, Greenwald & Pauly from 1990 to August 1994.
EXECUTIVE OFFICER COMPENSATION
The Company was recently formed. None of the Company's executive officers
has received compensation from or on behalf of the Company since its formation.
The Company has no employment agreements with any person and does not presently
anticipate paying a salary or other compensation to any executive officer for
his services in such capacity, although options will be granted to the executive
officers. See "-Healthcare 1998 Plan."
Pursuant to the Administrative Services Agreement, the Company will pay 25%
of the aggregate amount of the wages, salaries and bonuses of LTC's employees to
LTC and LTC will pay the remaining 75% of such amount. The following table sets
forth information for the fiscal year ended December 31, 1997 concerning the
compensation paid to the executive officers of LTC who are also executive
officers of the Company:
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<TABLE>
<CAPTION>
ALL OTHER
NAME POSITION WITH LTC SALARY ($) BONUS ($) COMPENSATION ($)
- ---- ----------------- ---------- --------- ----------------
<S> <C> <C> <C> <C>
Andre C. Dimitriadis . . . . . Chairman of the Board and Chief Executive Officer $ 400,000 $ 400,000 $ 62,400(1)
James J. Pieczynski. . . . . . President and Chief Financial Officer 190,000 265,000 17,700(1)
Pamela J. Privett. . . . . . . Senior Vice President and General Counsel 55,208(2) 150,000 1,100(1)
Christopher T. Ishikawa. . . . Senior Vice President and Chief Investment Officer 112,500 150,000 1,000(1)
</TABLE>
The following table provides certain information concerning the stock
options which the Company expects to grant to its executive officers as of the
Distribution Date. The Company does not expect to grant any stock appreciation
rights as of such date.
<TABLE>
<CAPTION>
OPTION GRANTS
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
----------------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR OPTION
UNDERLYING OPTIONS EXERCISE OR TERM(3)
OPTIONS GRANTED TO BASE PRICE EXPIRATION ----------------------------
NAME GRANTED EMPLOYEES PER SHARE DATE 5% 10%
- --------------------------------- ------------ ------------ ------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Andre C. Dimitriadis . . . . . . 40,000 24.2% $4.69 5-19-2008 $118,000 $299,000
James J. Pieczynski . . . . . . . 35,000 21.2% $4.69 5-19-2008 103,300 261,600
Christopher T. Ishikawa . . . . . 22,500 13.6% $4.69 5-19-2008 66,400 168,200
Pamela J. Privett . . . . . . . . 22,500 13.6% $4.69 5-19-2008 66,400 168,200
</TABLE>
- ------------------------
HEALTHCARE 1998 PLAN
Prior to the Distribution Date, the Company will adopt (which adoption will
be approved by Christopher Ishikawa, as sole voting stockholder of the Company)
the Healthcare 1998 Plan. The principal purposes of the Healthcare 1998 Plan
are to provide incentives for officers, employees, non-employee directors and
consultants of the Company and its subsidiaries through granting of options,
restricted stock and other awards ("Awards"), thereby stimulating their personal
and active interest in the Company's development and financial success and
inducing them to remain in the Company's employ. In addition to Awards made to
officers, employees or consultants, the Healthcare 1998 Plan permits the
granting of options ("Director Options") to the Company's independent
non-employee directors.
- ----------------------
(1) Such amounts represent LTC's contribution to the named executive
officer's deferred compensation plan account.
(2) Such amount represents salary for a partial year. Ms. Privett was
employed by LTC on September 7, 1997.
(3) These amounts represent assumed rates of appreciation in the price of the
Company Common Stock during the terms of the options in accordance with
rates specified in applicable federal securities regulations (assuming the
per share market value as of the date of grant equals the estimated book
value per share of $4.69). Actual gains, if any, on stock option
exercises will depend on the future price of the Company Common Stock and
overall stock market conditions. There is no representation that the
rates of appreciation reflected in this table will be achieved.
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Under the Healthcare 1998 Plan, not more than 500,000 shares of Company
Common Stock (or the equivalent in other equity securities) are authorized for
issuance upon exercise of options, stock appreciation rights ("SARs") and other
Awards, or upon vesting of restricted or deferred stock awards. Furthermore,
the maximum number of shares which may be subject to Awards granted under the
Healthcare 1998 Plan to any individual in any calendar year may not exceed
75,000 shares.
Upon consummation of the Distribution, the Company will issue options to
acquire an aggregate of 120,000 shares of Company Common Stock to its executive
officers under the Healthcare 1998 Plan. The options will have an exercise
price equal to the value of the Company Common Stock on the Distribution Date
(i.e., the value used to calculate tax basis in the Company Common Stock at the
time of the Distribution). The options will vest in three equal installments on
each of the first, second and third anniversary of the date of grant and shall
expire on the earlier of the seventh anniversary of the date of vesting or one
year following an executive officer ceasing to be an executive officer for any
reason: provided that no option shall vest more than one year following an
executive officer's ceasing to be an executive officer.
The principal features of the Healthcare 1998 Plan are summarized below,
but the summary is qualified in its entirety by reference to the Healthcare 1998
Plan, which is attached hereto as Annex III.
ADMINISTRATION. - The Compensation Committee of the Company Board or
another committee thereof (the "Plan Committee") will administer the Healthcare
1998 Plan with respect to grants to employees or consultants of the Company and
the full Company Board will administer the Healthcare 1998 Plan with respect to
grants to non-employee directors ("Independent Directors") Options. The Plan
Committee will consist of at least two members of the Company Board, each of
whom is a "non-employee director" for purposes of Rule 16b-3 under the
Securities Exchange Act of 1934, as amended ("Rule 16b-3") and, an "outside
director" for the purposes of Section 162(m) of the Code ("Section 162(m)").
Subject to the terms and conditions of the Healthcare 1998 Plan, the Company
Board or Plan Committee has the authority to select the persons to whom Awards
are to be made, to determine the number of shares to be subject thereto and the
terms and conditions thereof and to make all other determinations and to take
all other actions necessary or advisable for the administration of the
Healthcare 1998 Plan. Similarly, the Company Board has discretion to determine
the terms and conditions of grants to Independent Directors Options and to
interpret and administer the Healthcare 1998 Plan with respect to grants to
Independent Director Options. The Plan Committee (and the Company Board) are
also authorized to adopt, amend and rescind rules relating to the administration
of the Healthcare 1998 Plan.
ELIGIBILITY. - Options, SARs, restricted stock and other Awards under the
Healthcare 1998 Plan may be granted to individuals who are then officers or
other employees of the Company or any of its present or future subsidiaries.
Such Awards also may be granted to consultants of the Company selected by the
Company Board or Plan Committee for participation in the Healthcare 1998 Plan.
Non-employee Independent Directors of the Company may be granted NQSOs (as
defined below herein) and other Awards by the Board. The Healthcare 1998 Plan
will authorize the Plan Committee and the Company Board to, and it is expected
that the Plan Committee and the Company Board will, adopt procedures pursuant to
which employees, consultants and Independent Directors will be permitted to
elect to receive bonuses or directors' fees, which would otherwise be payable to
them in cash, in the form of NQSOs, restricted stock and/or other Awards.
GRANT OF AWARDS. - The Healthcare 1998 Plan provides that the Plan
Committee (or the Company Board, with respect to Independent Directors) may
grant or issue stock options, SARs, restricted stock, deferred stock, dividend
equivalents, performance awards, stock payments and other stock related
benefits, or any combination thereof. Each Award will be set forth in a
separate agreement or certificate with the person receiving the Award and will
indicate the type, terms and conditions of the Award.
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NONQUALIFIED STOCK OPTIONS ("NQSOS") will provide for the right to purchase
Company Common Stock at a specified price which, except with respect to NQSOs
intended to qualify as performance-based compensation under Section 162(m), may
be less than fair market value on the date of grant (but not less than par
value) and usually will become exercisable (in the discretion of the Company
Board or Plan Committee) in one or more installments after the grant date,
subject to the participant's continued provision of services to employment with
the Company and/or subject to the satisfaction of individual or Company
performance targets established by the Company Board or Plan Committee. NQSOs
may be granted for any term specified by the Company Board or Plan Committee.
INCENTIVE STOCK OPTIONS ("ISOS"), will be designed to comply with the
provisions of the Code and will be subject to certain restrictions contained in
the Code. Among such restrictions, ISOs must have an exercise price not less
than the fair market value of a share of Company Common Stock on the date of
grant, may only be granted to employees, must expire within a specified period
of time following the Optionee's termination of employment and must be exercised
within the ten years after the date of grant; but, subject to the consent of the
optionee, may be subsequently modified to disqualify them from treatment as ISOs
RESTRICTED STOCK may be sold to participants at various prices or may be
granted for no cash consideration and, in either case, may be made subject to
such restrictions as may be determined by the Company Board or Plan Committee.
Restricted stock may be repurchased by the Company at the original purchase
price if the conditions or restrictions associated with such restricted stock
are not met, or if no cash consideration was paid in connection with its sale or
grant, may be canceled if such conditions or restrictions are not met. In
general, restricted stock may not be sold, or otherwise transferred or
hypothecated, until restrictions are removed or expire. Purchasers of
restricted stock, unlike recipients of options, will have voting rights and will
receive dividends prior to the time when the restrictions lapse.
DEFERRED STOCK may be awarded to participants, typically without payment of
consideration, but subject to vesting conditions based on continued employment
or on performance criteria established by the Company Board or Plan Committee.
Like restricted stock, deferred stock may not be sold, or otherwise transferred
or hypothecated, until vesting conditions are removed or expire. Unlike
restricted stock, deferred stock will not be issued until the deferred stock
award has vested and recipients of deferred stock generally will have no voting
or dividend rights prior to the time when vesting conditions are satisfied.
STOCK APPRECIATION RIGHTS may be granted in connection with stock options
or other Awards, or separately. SARs granted by the Company Board or Plan
Committee in connection with stock options or other awards typically will
provide for payments to the holder based upon increases in the price of the
Company Common Stock over the exercise price of the related option or other
Awards, but alternatively may be based upon criteria such as book value. Except
as required by Section 162(m) with respect to an SAR intended to qualify as
performance-based compensation as described in Section 162(m), there are no
restrictions specified in the Healthcare 1998 Plan on the exercise of SARs or
the amount of gain realizable therefrom, although restrictions may be imposed by
the Company Board or Plan Committee in the SAR agreements. The Company Board or
Plan Committee may elect to pay SARs in cash or in Company Common Stock or in a
combination of both.
DIVIDEND EQUIVALENTS are rights to receive the equivalent value (in cash or
Company Common Stock) of dividends paid on common stock that is covered by a
stock option, SAR or other Award held by the participant.
PERFORMANCE AWARDS may be granted by the Company Board or Plan Committee on
an individual or group basis. Generally, these Awards will be based upon
specific performance targets and may be paid
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<PAGE>
in cash or in Company Common Stock or in a combination of both. Performance
Awards may include "phantom" stock Awards that provide for payments based upon
increases in the price of the Company Common Stock over a predetermined period.
Performance Awards may also include bonuses which may be granted by the Company
Board or Plan Committee on an individual or group basis and which may be payable
in cash or in Company Common Stock or in a combination of both.
STOCK PAYMENTS may be authorized by the Company Board or Plan Committee in
the form of shares of Company Common Stock or an option or other right to
purchase Company Common Stock as part of a deferred compensation arrangement in
lieu of all or any part of compensation, including bonuses, that would otherwise
be payable in cash to the key employee or consultant.
INDEPENDENT DIRECTOR OPTIONS to purchase covering 10,000 shares of Company
Common Stock will be granted to each person who is initially elected to the
Company Board on or after the date of the effectiveness of the Healthcare 1998
Plan and who is an Independent Director non-employee Director ("Independent
Director") at the time of such initial election. Each Independent Director
Option shall vest with respect to 3,333 shares on each of the first, second and
third anniversary of the date of grant and shall expire on the earlier of the
seventh anniversary of the date of vesting or one year following an Independent
Director ceasing to be a Director for any reason: provided that no option shall
vest more than one year following an Independent Director's ceasing to be a
Director. The Company Board may from time to time, in its absolute discretion,
and subject to applicable limitations of the Healthcare 1998 Plan determine (i)
which Independent Directors, if any, should in its opinion, be granted
Non-Qualified Stock Options, (ii) the number of shares subject to such options,
and (iii) the terms and conditions of such options. Members of the Company
Board who are employees of the Company who subsequently retire from the Company
and remain on the Company Board will not receive an initial option grant
pursuant to the first sentence of this paragraph.
SECURITIES LAWS AND FEDERAL INCOME TAXES
SECURITIES LAWS. The Healthcare 1998 Plan is intended to conform to the
extent necessary with all provisions of the Exchange Act and any and all
regulations and rules promulgated by the Commission thereunder, including
without limitation Rule 16b-3. The Healthcare 1998 Plan will be administered
and Awards will be granted and may be exercised, only in such a manner as to
conform to such laws, rules and regulations. To the extent permitted by
applicable law, the Healthcare 1998 Plan and Awards granted thereunder shall be
deemed amended to the extent necessary to conform to such laws, rules and
regulations.
GENERAL FEDERAL TAX CONSEQUENCES. Under current federal laws, in general,
recipients of awards and grants of nonqualified stock options, stock
appreciation rights, restricted stock, deferred stock, dividend equivalents,
performance awards and stock payments under the Healthcare 1998 Plan are taxable
under Section 83 of the Code upon the receipt of Company Common Stock or cash
with respect to such awards or grants and, subject to Section 162(m), the
Company will be entitled to an income tax deduction with respect to the amounts
taxable to such recipients. Under Sections 421 and 422 of the Code, recipients
of ISOs are generally not taxable on their receipt of Company Common Stock upon
their exercises of ISOs if the ISOs and option stock are held for certain
minimum holding periods and, in such event, the Company is not entitled to
income tax deductions with respect to such exercises. Participants in the
Healthcare 1998 Plan will be provided with detailed information regarding the
tax consequences relating to the various types of awards and grants under the
plan.
SECTION 162(m) LIMITATION. In general, under Section 162(m), income tax
deductions of publicly-held corporations may be limited to the extent total
compensation (including base salary, annual bonus, stock option exercises and
non-qualified benefits paid) for certain executive officers exceeds $1 million
(less the amount of any "excess parachute payments" as defined in Section 280G
of the Code) per officer
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in any one year. However, under Section 162(m), the deduction limit does not
apply to certain "performance-based compensation." Under Section 162(m), stock
options and SARs will satisfy the "performance-based compensation" exception if
the awards are made by a qualifying compensation committee, the plan sets the
maximum number of shares that can be granted to any person within a specified
period and the compensation is based solely on an increase in the stock price
after the grant date (i.e. the option or SAR exercise price is equal to or
greater than the fair market value of the stock subject to the award on the
grant date). Other types of awards may only qualify as "performance-based
compensation" if such awards are only granted or payable to the recipients based
upon the attainment of objectively determinable and pre-established objective
performance goals which are established by a qualifying compensation committee
and which relate to performance criteria which are approved by the corporation's
stockholders.
The Healthcare 1998 Plan has been designed in order to permit the Plan
Committee to grant stock options and SARs which will qualify as
"performance-based compensation." In addition, in order to permit Awards other
than stock options and SARs to qualify as "performance-based compensation," the
Healthcare 1998 Plan provides that the Plan Committee may designate as "Section
162(m) Participants" certain employees whose compensation for a given fiscal
year may be subject to the limit on deductible compensation imposed by Section
162(m). The Plan Committee may grant Awards to Section 162(m) Participants that
vest or become exercisable upon the attainment of performance criteria which are
related to one or more of the following performance goals: (i) net income, (ii)
investments, (iii) cash flow, (iv) earnings per share, (v) return on equity,
(vi) return on invested capital or assets, (vii) cost reductions or savings,
(viii) funds from operations, (ix) appreciation in the fair market value of
Common Stock and (x) earnings before any one or more of the following items:
interest, depreciation or amortization.
REGISTRATION STATEMENT ON FORM S-8. The Company intends to file a
registration statement on Form S-8 under the Securities Act to register the
shares of Company Common Stock reserved for issuance under the Healthcare 1998
Plan.
INDEMNIFICATION AGREEMENTS
The Company will enter into indemnification agreements with its directors
and certain executive officers (each, an "Indemnitee"). An Indemnitee is
specifically indemnified and held harmless under such agreements for costs and
expenses, including without limitation, attorneys' fees, judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with a
threatened, pending or completed claim, action, suit or proceeding (the
"Expenses") by reason of the fact that (i) he or she is or was a director,
officer, employee or agent of the Company, or (ii) he or she is or was serving
as a director, officer, employee, or agent of another corporation or entity at
the request of the Company. The Company will indemnify the Indemnitee against
any and all Expenses unless to the extent that the Indemnitee gives the Company
prompt written notice of any claim, unless (a) the Indemnitee has already
received payment pursuant to collectible insurance policies; (b) a judgment is
rendered against the Indemnitee for an accounting of profits made from the
purchase or sale of securities pursuant to Section 16(b) of the Exchange Act;
(c) the amounts paid to the Indemnitee shall be determined by a final judgment
or other final adjudication to be in violation of the law or public policy; (d)
the Indemnitee's conduct is finally adjudged to have been (or the Indemnitee has
admitted facts sufficient to conclude his or her conduct was): (i) an act or
omission that was not in good faith and which the Indemnitee did not reasonably
believe to be in the best interests of the Company, (ii) with respect to any
criminal action or proceeding, conduct which the Indemnitee had reasonable cause
to believe was unlawful, (iii) an act or omission involving intentional
misconduct, fraud or a knowing violation of law (except with respect to the
advancement of expenses pursuant to the terms of the indemnification agreement
or indemnification ordered by a court of competent jurisdiction, (iv) a
transaction from which the Indemnitee derived an
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improper personal benefit, or (v) the payment of distributions in violation of
Nevada Revised Statutes 78.300; or (e) the Expenses relate to any income taxes,
or any interest and penalties thereto with respect to any compensation received
by the Indemnitee for services as a director or officer of the Company.
Under such indemnification agreements, the Company will advance costs and
expenses incurred by the Indemnitee in advance of the final disposition of an
action, suit or proceeding if he or she undertakes to repay the amounts advanced
if it is ultimately determined by a court of competent jurisdiction that he or
she is not entitled to be indemnified by the Company. If the Company advances
costs and expenses of any action, suit or proceeding, the Company reserves the
right to assume the defense of such action, suit or proceeding upon written
notice to the Indemnitee of its intention to do so. After delivery of such
notice, the Company shall be obligated to defend the claim in good faith and in
a manner consistent with the best interests of the Indemnitee; and provided the
Company defends the claim in good faith and no conflict of interest develops
between the Company and the Indemnitee with respect to such claim, the Company
shall not be liable for any costs or expenses incurred by the Indemnitee in
connection with defending or otherwise contesting the claim after the Indemnitee
has received such notice. The indemnification provisions and provisions for
advancing expenses in such agreements are expressly not exclusive of any other
rights of indemnification or advancement of expenses pursuant to any statute,
the Company Articles, the Company Bylaws, agreement, vote of stockholders or
directors or otherwise.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
LTC owns a 99% non-voting common stock interest in the Company as of the
date of this Information Statement. Prior to the Distribution, LTC will
transfer to the Company certain equity investments, real properties and related
assets and liabilities currently held by LTC. As consideration for such asset
transfers, the Company will issue to LTC a sufficient number of shares of
Company Common Stock to effect the Distribution. See "RELATIONSHIP BETWEEN
HEALTHCARE AND LTC AFTER THE DISTRIBUTION."
The Intercompany Agreement between the Company and LTC will set forth the
basis on which the Company and LTC will provide each other with rights to
participate in certain transactions. See "THE COMPANY-Intercompany Agreement."
The Administrative Services Agreement between the Company and LTC
containing a number of provisions relating to employees of LTC and the Company.
See "RELATIONSHIP BETWEEN HEALTHCARE AND LTC AFTER THE DISTRIBUTION
- -Administrative Services Agreement."
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SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based on the number of outstanding shares of LTC Common Stock on June 30,
1998, the following table sets forth the number of shares of Company Common
Stock and the approximate percent expected to be beneficially owned immediately
following the Distribution by (i) the executive officers and directors of the
Company, (ii) all of the Company's executive officers and directors as a group,
and (iii) all other stockholders expected to beneficially own more than 5.0% of
the Company Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF COMPANY
COMMON STOCK BENEFICIALLY OWNED PERCENT
NAME (1) BENEFICIALLY OWNED (1)
- ----------------------------------------------- ------------------------------------- ------------------------
<S> <C> <C>
FMR Corporation
82 Devonshire Street
Boston, MA 02109.......................... 204,640 (2) 6.2%
Andre C. Dimitriadis........................ 74,318 2.2%
James J. Pieczynski......................... 15,698 *
Christopher T. Ishikawa..................... 7,525 *
Pamela J. Privett........................... 9,340 *
Steven Stuart............................... - *
Bary G. Bailey.............................. - *
Officers and Directors as a Group
(6 Persons)............................... 106,882 3.2%
</TABLE>
- ------------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Shares of Company Common Stock subject to options and warrants
which are currently exercisable, or will become exercisable within 60 days of
the Distribution Date, are deemed outstanding for computing the percentage of
the person or entity holding such securities but are not outstanding for
computing the percentage of any other person or entity. Except as otherwise
indicated by footnote, and subject to the community property laws where
applicable, to the knowledge of the Company each individual named in the table
above has a business address of 300 Esplanade Drive, Suite 1860, Oxnard,
California 93030, and is expected to have sole investment and voting power with
respect to the securities shown.
(2) FMR Corporation is expected to have sole voting power with respect to 110
shares and sole dispositive power with respect to 204,640 shares.
(3) Excludes the following options for the purchase of Company Common Stock:
(a) Mr. Dimitriadis - 40,000; (b) Mr. Pieczynski - 35,000; (c) Mr. Ishikawa -
22,500; and (d) Ms. Privett - 22,500. Such options are not currently
exercisable and become exercisable in three equal installments on each of the
first, second and third anniversary of the date of grant.
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HEALTHCARE ARTICLES OF INCORPORATION AND BYLAWS
Prior to the Distribution Date, the Company's Articles of Incorporation and
Bylaws will be amended by the Company Board. The following is a summary of such
Amended and Restated Articles of Incorporation (the "Company Articles") and such
Amended and Restated Bylaws (the "Company Bylaws") and is qualified in its
entirety by reference to the complete text of the Company Articles as set forth
in Annex I hereto, and the Company Bylaws as set forth in Annex II hereto.
AUTHORIZED STOCK
The Company Articles will provide that the Company is authorized to issue
50,000,000 shares of stock, consisting of 40,000,000 shares of Company Common
Stock and 10,000,000 shares of preferred stock (the "Company Preferred Stock"
and, together with the Company Common Stock, the "Company Stock"), with all of
such shares having a par value of $.01 per share. Shares of the Company
Preferred Stock may be issued from time to time, in one or more series, each of
which series shall have such voting powers designations, preferences and rights,
and the qualifications, limitations or restrictions relating thereto, as shall
be authorized by the Company Board. See "DESCRIPTION OF THE COMPANY'S CAPITAL
STOCK."
DIRECTORS
The Company Articles will provide that the governing board of the Company
shall be styled as directors. The Company Articles will provide that the
Company Board shall consist of at least one individual to be elected in the
manner provided by the Company Bylaws and that the number of directors may be
changed from time to time in such manner as provided by the Company Bylaws.
The Company Bylaws will provide that the board of directors shall consist
of one or more members, the exact number of which shall be fixed by the Company
Board from time to time by resolution. Initially, the Company Board will have
four members. The Company Bylaws will provide that a quorum of the Company
Board for the transaction of company business shall consist of a majority of the
entire Board of Directors. The act of a majority of directors present at any
meeting at which there is a quorum shall be the act of the Board of Directors.
The Company Articles and the Company Bylaws will not provide for a classified
board or for cumulative voting in the election of directors to the Company
Board. The Company Bylaws will provide that vacancies and any newly-created
directorships resulting from an increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director, except as otherwise fixed by resolution
of the Company Board pursuant to the Company Articles relating to the
authorization of the Company Board to provide by resolution for the issuance of
Company Preferred Stock and to determine the rights of the holders of such
Company Preferred Stock to elect directors.
LIABILITY FOR MONETARY DAMAGES
The Company Articles will provide that no director or officer of the
Company will be personally liable to the Company or its stockholders for damages
for breach of fiduciary duty as a director or officer, other than liability for
acts or omissions which involve intentional misconduct, fraud or a knowing
violation of law and for payment of distributions in violation of Nevada Revised
Statutes ("NRS") Section 78.300. Any repeal or modification of such provision
by the stockholders of the Company will be prospective only. Such provision
will control in the event of any conflict between such provision and any other
provision of the Company Articles.
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ANTI-TAKEOVER EFFECT OF AUTHORIZED BUT UNDESIGNATED PREFERRED STOCK
As described above, the Company Board will be authorized to provide for the
issuance of shares of Company Preferred Stock, in one or more series, and fix by
resolution to the extent permitted by the NRS, the terms and conditions of such
series. The Company believes that the availability of Company Preferred Stock
will provide the Company with increased flexibility in structuring future
financings and acquisitions and in meeting other corporate needs which might
arise from time to time. Authorized but unissued shares of Company Preferred
Stock, as well as authorized but unissued shares of Company Common Stock, will
be available for issuance without further action by Company stockholders, unless
such action is required by applicable law or the rules of any stock exchange or
automated quotation system on which any class of Company Stock may then be
listed for trading.
Although the Company has no present intention of doing so (other than as
described in the section entitled "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS"), it will be able to issue a series of Company Preferred Stock
that could, depending on its terms, either impede or facilitate the completion
of a merger, tender offer or other takeover attempt. For instance, such new
shares might impede a business combination by including class voting rights
which would enable the holder to block such transaction or facilitate a business
combination by including voting rights which would provide a required percentage
vote of stockholders. The Company Board will make any determination to issue
such shares based on its judgment as to the best interests of the Company and
its then existing stockholders. The Company Board, in so acting, will be able
to issue Company Preferred Stock having terms which would discourage an
acquisition attempt or other transaction that some or a majority of the
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then market price
of such stock. Such provisions may further have the effect of making it more
difficult for third parties to cause the replacement of the current management
of the Company without the concurrence of the Company Board and may inhibit
fluctuations in the market price of the Company Common Stock that could result
from takeover attempts.
INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
The Company Bylaws will provide for the indemnification (the
"Indemnification Provisions") of present and former directors and officers of
the Company and persons serving as a director, officer, employee, agent,
partner, or fiduciary of another corporation or partnership, joint venture,
trust, or other enterprise at the request of the Company (each, an "Indemnitee")
to the fullest extent permitted by Nevada law. The Indemnification Provisions
will continue as to an Indemnitee who has ceased to be a director or officer and
shall inure to the benefit of his or her heirs, executors and administrators,
and the Company may, by action of the Company Board and to the extent provided
in such action, indemnify employees and other persons as though they were
Indemnitees.
Indemnitees are specifically indemnified in the Indemnification Provisions
against all expense, liability and loss (including without limitation attorneys'
fees, judgments, fines, taxes, penalties, and amounts paid or to be paid in
settlement) reasonably incurred or suffered by the Indemnitee in connection with
any threatened, pending, or completed action, or suit (including without
limitation an action, suit or proceeding by or in the right of the Company),
whether civil, criminal, administrative, or investigative. The Indemnification
Provisions will provide that the Company may purchase and maintain insurance or
make other financial arrangements on behalf of any Indemnitee for any liability
asserted against him or her and expenses incurred by him or her in his or her
capacity as a director, officer, employee or agent, or arising out of his or her
status as such, whether or not the Company has the authority to indemnify him or
her against such liability and expenses. The other financial arrangements which
may be made by the Company may include the following: (i) the creation of a
trust fund; (ii) the establishment of a program of self-insurance; (iii) the
securing of its obligation of indemnification by granting a security interest or
other lien on any assets of the corporation; and/or (iv) the establishment of a
letter of credit, guarantee or
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surety. No financial arrangement made pursuant to the Indemnification
Provisions may provide protection for a person adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable for
intentional misconduct, fraud, or a knowing violation of law, except with
respect to advancement of expenses or indemnification ordered by a court. Any
insurance or other financial arrangement made on behalf of a person pursuant to
such section may be provided by the Company or any other person approved by the
Company Board, even if all or part of the other person's stock or other
securities is owned by the Company. In the absence of fraud: (i) te decision
of the Company Board as to the propriety of the terms and conditions of any
insurance or other financial arrangement made pursuant to such section and the
choice of the person to provide the insurance or other financial arrangement is
conclusive; and (ii) the insurance or other financial arrangement: (A) is not
void or voidable; and (B) does not subject any director approving it to personal
liability for his action, even if a director approving the insurance or other
financial arrangement is a beneficiary of the insurance or other financial
arrangement. The Indemnification Provisions shall constitute a contract between
the Company and each of its directors and officers which may be modified as to
any director or officer only with that person's consent or as specifically
provided in the Indemnification Provisions. Any repeal or amendment of the
Indemnification Provisions which is adverse to any director or officer shall
apply to such director or officer only on a prospective basis, and shall not
limit the rights of an Indemnitee to indemnification with respect to any action
or failure to act occurring prior to the time of such repeal or amendment. No
repeal or amendment of the Company Bylaws shall affect any or all of the
Indemnification Provisions so as to limit or reduce the indemnification in any
manner unless adopted by (a) the unanimous vote of the directors of the Company
then serving, or (b) by the affirmative vote of at least sixty-six and
two-thirds percent (66-2/3%) of the combined voting power of all the then
outstanding shares of the Company Stock entitled to vote; provided that no such
amendment shall have a retroactive effect inconsistent with the preceding
sentence.
The Company Articles will provide that the expenses of officers and
directors incurred in defending a civil or criminal action, suit or proceeding,
involving alleged acts or omissions of such officer or director in his or her
capacity as an officer or director of the Company, must be paid by the Company
or through insurance purchased and maintained by the Company or through other
financial arrangements made by the Company, as they are incurred and in advance
of the final disposition of the action, suit or proceeding, upon receipt of an
undertaking by or on behalf of the officer or director to repay the amount if
its ultimately determined by a court of competent jurisdiction that he or she is
not entitled to be indemnified by the Company. Any repeal or modification of
such provision by the stockholders of the Company will be prospective only.
Such provision will control in the event of any conflict between such provision
and any other provision of the Company Articles.
The Indemnification Provisions will be expressly not exclusive of any other
rights of indemnification or advancement of expenses pursuant any statute,
provision of the Company Bylaws or the Company Articles, agreement, vote of
stockholders or directors, or otherwise. The provisions for advancing expenses
in the Company Articles will be in addition to any other rights of
indemnification permitted by Nevada law as may be provided for in the Company
Bylaws or by agreement. Any references in the Company Bylaws to Nevada law or
to any provision thereof shall be to such law as it existed on the date the
Company Bylaws are adopted or as such law thereafter may be changed; provided
that (a) in the case of any change which expands the liability of directors or
officers or limits the indemnification rights or the rights to advancement of
expenses which the Company may provide, the rights to limited liability, to
indemnification and to the advancement of expenses provided in the Company
Articles and/or the Company Bylaws shall continue to the extent permitted by
law; and (b) if such change permits the Company, without the requirement of any
further action by stockholders or directors, to limit further the liability of
directors (or limit the liability of officers) or to provide broader
indemnification rights or rights to the advancement of expenses than the Company
was permitted to
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provide prior to such change, then liability thereupon shall be so limited and
the rights to indemnification and the advancement of expenses shall be so
broadened to the extent permitted by law.
In addition, the Company will enter into indemnification agreements with
its directors and certain of its executive officers pursuant to which such
persons are indemnified for costs and expenses actually and reasonably incurred
by such persons in connection with a threatened, pending or completed claim
arising out of service as a director, officer, employee, trustee and/or agent of
the Company or another entity at the request of the Company. See
"MANAGEMENT-Indemnification Agreements."
AMENDMENT OF THE COMPANY ARTICLES AND BYLAWS
The Company reserves the right to amend, alter, change or repeal any
provision contained in the Company Articles in the manner now or hereafter
prescribed by the NRS, and all rights granted to stockholders in the Company
Articles are subject to this reservation; PROVIDED, HOWEVER, that no amendment,
alteration, change or repeal may be made to the provisions regarding actions
taken by the stockholders or voting on certain transactions without the
affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the outstanding voting stock of the Company, voting together as a
single class. A bylaw may be repealed, altered, amended or rescinded by (i) the
Company Board or (ii) the affirmative vote of the holders of at least sixty-six
and two-thirds percent (66-2/3%) of the outstanding voting stock of the Company,
voting together as a single class. Additional bylaws may be adopted only by the
Company Board.
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DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of (i) 4,900,000 shares of
Class A (voting) Company Common Stock, par value $.01 per share, of which two
shares are issued and outstanding and are owned by Christopher T. Ishikawa and
(ii) 100,000 shares of Class B (non-voting) Company Stock, par value $.01 per
share, of which 4,002 shares are issued and outstanding and owned by LTC. Under
the Company Articles which will be adopted by the Company Board prior to the
Distribution Date in substantially the form set forth in Annex I to this
Information Statement, the total number of shares of all classes of stock that
the Company will have authority to issue will be 50,000,000 of which 40,000,000
will be shares of Company Common Stock and 10,000,000 will be shares of Company
Preferred Stock, with all of such shares having a par value of $.01 per share.
Based on the number of shares of LTC Common Stock outstanding and the
shares of LTC Common Stock into which shares of LTC Series C Preferred Stock
and Debentures may be converted less shares of LTC Common Stock owned by the
Company at the date of filing of this Information Statement, approximately
3,326,202 shares of Company Common Stock, constituting approximately eight
percent (8%) of the authorized Company Common Stock, will be issued and
distributed to stockholders and debenture holders of LTC in the Distribution.
All of the shares of Company Common Stock issued in the Distribution will be
validly issued, fully paid and non-assessable.
COMMON STOCK
Each holder of Company Common Stock will be entitled to one vote for each
share registered in his or her name on the books of the Company on all matters
submitted to a vote of stockholders. Except as otherwise provided by law, the
holders of the Company Common Stock will vote as one class. The shares of
Company Common Stock will not have cumulative voting rights. As a result,
subject to the voting rights, if any, of the holders of any shares of Company
Preferred Stock which may at the time be outstanding, the holders of the Company
Common Stock entitled to exercise more than 50% of the voting rights in an
election of directors will be able to elect 100% of the directors to be elected
if they choose to do so. In such event, the holders of the remaining shares of
Company Common Stock voting for the election of directors will not be able to
elect any persons to the Company Board. The Company Articles and the Company
Bylaws contain certain provisions that could have an anti-takeover effect. See
"HEALTHCARE ARTICLES OF INCORPORATION AND BYLAWS."
The Company Common Stock will bear no preemptive rights and is not subject
to redemption or conversion provisions. The shares of Company Stock, when
issued and paid for, will be fully paid and non-assessable.
Holders of the Company Common Stock will be entitled to dividends when, as
and if declared by the Company Board out of assets legally available therefor,
subject to the dividend rights of any Company Preferred Stock which may at the
time be outstanding (and subject to any dividend restriction contained in any
credit facility which the Company may enter into in the future) and distributed
pro rata in accordance with the number of shares of Company Common Stock held by
each stockholder. Because portions of the operations of the Company may be
conducted through wholly-owned subsidiaries, the Company's cash flow and
consequent ability to pay dividends on the Company Common Stock may be dependent
to some degree upon the earnings of such subsidiaries and on dividends and other
payments therefrom. See "RISK FACTORS--Dividend Policy."
Subject to the prior rights of Company Preferred Stock which may at the
time be outstanding, holders of the Company Common Stock are entitled in the
event of liquidation, dissolution or winding up to share pro rata in the
distribution of all remaining assets.
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The transfer agent and registrar for the Company Common Stock will be
Harris Trust and Savings Bank.
PREFERRED STOCK
The Company Articles will provide that the Company Board is authorized to
provide for the issuance of shares of Company Preferred Stock, from time to
time, in one or more series. Prior to the issuance of shares in each series,
the Company Board is required by the Company Articles and the NRS to adopt
resolutions and file a Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions Thereof with the Secretary of State
of Nevada, fixing for each such series the designations, preferences and
relative, participating, optional or other special rights applicable to the
shares to be included in any such series and any qualifications, limitations or
restrictions thereon, including, but not limited to, dividend rights, dividend
rate or rates, conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions), the redemption price or prices, and the
liquidation preferences as are permitted by Nevada law.
The Company believes that the availability of Company Preferred Stock will
provide the Company with increased flexibility in structuring future financings
and acquisitions and in meeting other corporate needs which might arise from
time to time. Authorized but unissued shares of Company Preferred Stock, as
well as authorized but unissued shares of Company Common Stock, will be
available for issuance without further action by Company stockholders, unless
such action is required by applicable law or the rules of any stock exchange or
automated quotation system on which any class of Company Stock may then be
listed for trading.
Although the Company has no present intention of doing so (other than as
described in the section entitled "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS"), it will be able to issue a series of Company Preferred Stock
that could, depending on its terms, either impede or facilitate the completion
of a merger, tender offer or other takeover attempt. For instance, such new
shares might impede a business combination by including class voting rights
which would enable the holder to block such transaction or facilitate a business
combination by including voting rights which would provide a required percentage
vote of stockholders. The Company Board will make any determination to issue
such shares based on its judgment as to the best interests of the Company and
its then existing stockholders. The Company Board, in so acting, will be able
to issue Company Preferred Stock having terms which would discourage an
acquisition attempt or other transaction that some or a majority of the
stockholders might believe to be in their best interests or in which
stockholders might receive a premium for their stock over the then market price
of such stock.
NEVADA ANTI-TAKEOVER LEGISLATION
Nevada's Combinations with Interested Stockholders statute (NRS Sections
78.411-78.444), which applies to Nevada corporations having at least 200
stockholders, prevents an "interested stockholder" and an applicable Nevada
corporation from entering into a "combination" unless certain conditions are
met. A "combination" means any merger or consolidation with an "interested
stockholder," or any sale, lease exchange, mortgage, pledge, transfer or other
disposition, in one transaction or a series of transactions, with an "interested
stockholder" having: (i) an aggregate market value equal to 5% or more of the
aggregate market value of the assets of the corporation, (ii) an aggregate
market value equal to 5% or more of the aggregate market value of all
outstanding shares of the corporation, or (iii) 10% or more of the earning power
or net income of the corporation. An "interested stockholder" means a person
who, together with affiliates and associates, beneficially owns (or within the
prior three years, did beneficially own) 10% or more of the voting power of the
corporation. A corporation to which this statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares
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unless the combination or purchase is approved by the board of directors before
the interested stockholder acquired such shares. If this approval is not
obtained, then, after the expiration of the three-year period, the business
combination may be consummated with the approval of the board of directors or a
majority of the voting power held by disinterested stockholders, or if the
consideration to be paid by the interested stockholder is at least equal to the
highest of: (i) the highest price per share paid by the interested stockholder
within the three years immediately preceding the date of the announcement of the
combination or in the transaction in which it became an interested stockholder,
whichever is higher; (ii) the market value per share of common stock on the date
of announcement of the combination and the date the interested stockholder
acquired the shares, whichever is higher; or (iii) for holders of preferred
stock, the highest liquidation value of the preferred stock, if it is higher.
Nevada's Acquisition of Controlling Interest statute (NRS Sections
78.378-78.3793) applies only to Nevada corporations with at least 200
stockholders, including at least 100 stockholders of record who are Nevada
residents, and which conduct business directly or indirectly in Nevada. As of
the date of this Information Statement, the Company does not have 100
stockholders of record who are residents of Nevada, although there can be no
assurance that in the future the Acquisition of Controlling Interest statute
will not apply to the Company.
The Acquisition of Controlling Interest statute prohibits an acquirer,
under certain circumstances, from voting its shares of a target corporation's
stock after crossing certain ownership threshold percentages, unless the
acquirer obtains approval of the target corporation's disinterested
stockholders. The statute specifies three thresholds: one-fifth or more but
less than one-third, one-third but less than a majority, and a majority or more,
of the outstanding voting power. Once an acquirer crosses one of the above
thresholds, those shares in an offer or acquisition and acquired within 90 days
thereof become "Control Shares" and such Control Shares are deprived of the
right to vote until disinterested stockholders restore the right. The
Acquisition of Controlling Interest statute also provides that in the event
Control Shares are accorded full voting rights and the acquiring person has
acquired a majority or more of all voting power, all other stockholders who do
not vote in favor of authorizing voting rights to the Control Shares are
entitled to demand payment for the fair value of their shares in accordance with
statutory procedures established for dissenters' rights.
80
<PAGE>
LIABILITY AND INDEMNIFICATION OF
OFFICERS AND DIRECTORS OF THE COMPANY
INDEMNIFICATION FOR DIRECTOR'S AND OFFICER'S LIABILITY
The Company Articles provide that no officer or director will be personally
liable to the Company or any stockholder for damages for breach of fiduciary
duty as a director or officer, except for (i) acts or omissions which involve
intentional misconduct, fraud or a knowing violation of the law, or (ii) the
payment of distributions in violation of NRS Section 78.300.
Additionally, the Company Bylaws limit the liability of its directors and
officers (and, by action of the Company Board, its employees and other persons)
to the fullest extent permitted by Nevada law. If the Nevada law is
subsequently amended to permit further limitation of personal liability of
directors and officers, the liability of the Company's directors and officers
will be eliminated or limited to the fullest extent permitted by Nevada law, as
amended. Nevada law permits corporations to indemnify any person who was or is
a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (except in an action by or in the right of the Company) by reason
of the fact that he is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with the action, suit or proceeding if he acted in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Company and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. This
same permissible indemnification is not allowed as to any action or suit by or
in the right of the Company if the person has been adjudged by a court (after
exhaustion of all appeals) to be liable to the Company or for amounts paid in
settlement to the Company, unless and only to the extent that a court determines
upon application that in view of all the circumstances of the case, the person
is fairly and reasonably entitled to indemnity for such expenses, as the court
deems proper. To the extent that a director, officer, employee or agent of the
Company has been successful n the merits or otherwise in defense of any action,
suit or proceeding described above, or in the defense of any claim, issue or
matter therein, Nevada law requires that he must be indemnified by the Company
against expenses, including attorneys' fees, actually and reasonably incurred by
him in connection with that defense.
The Company Bylaws further provide that the Company may purchase and
maintain insurance or make other financial arrangements for such indemnification
and that such indemnification shall continue as to any indemnitee who has ceased
to be a director or officer and shall inure to the benefit of his heirs,
executors and administrators. See "HEALTHCARE ARTICLES OF INCORPORATION AND
BYLAWS--Indemnification and Advancement of Expenses."
The inclusion of the permissive indemnification provision in the Company Bylaws
may have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though such an
action, if successful, might otherwise have benefited the Company and its
stockholders.
RESTRICTIONS ON INTERESTED TRANSACTIONS
Pursuant to Nevada law, each director and officer is subject to
restrictions relating to the misappropriation of corporate opportunities by such
director or officer or such director's or officer's affiliates. Nevada law
requires that a transaction with the Company in which a director or officer of
the Company has a direct or indirect interest is not voidable by the Company
solely because of the director's or officer's interest in the transaction if:
(i) the material facts of the transaction and the director's or
81
<PAGE>
officer's interest therein are disclosed to or known by the directors or a
committee noted in the minutes, and the transaction is approved, authorized, or
ratified by the disinterested directors, (ii) the material facts of the
transaction and the director's or officer's interest therein are disclosed to or
known by the stockholders entitled to vote and the transaction is approved or
ratified by the stockholders, (iii) the material facts are not disclosed or
known to the director or officer at the time the transaction is brought before
the directors for action, or (iv) the transaction is established to have been
fair to the Company at the time it was authorized or approved.
82
<PAGE>
[LTC LETTERHEAD AND LOGO]
September 9, 1998
To Holders of the Following
Convertible Subordinated Debentures
Issued by LTC Properties, Inc.:
<TABLE>
<CAPTION>
CONVERSION
RATE MATURITY PRICE CUSIP
---- -------- ---------- -----
<S> <C> <C> <C>
8.5% 1/01 $15.50 502175AC6
8.25% 1/99 $15.50 502175AD4
7.75% 1/02 $16.50 502175AE2
8.25% 7/01 $17.25 502175AF9
</TABLE>
The Board of Directors of LTC Properties, Inc. ("LTC") has approved the
distribution ("Distribution") of 1/10 of a share of the common stock of its
subsidiary, LTC Healthcare, Inc. ("Healthcare"), the holders of LTC common
stock through a special dividend. Pursuant to the governing Indenture, the
LTC Board has elected to treat the Debentures as convertible into both shares
of LTC and Healthcare common stock and, in lieu of requiring conversion of
the Debentures in order to participate in the Distribution. LTC will be
distributing to you 1/10 of a share of Healthcare common stock for each share
of LTC common stock into which Debentures are convertible.
As you are aware, LTC is a real estate investment trust. Healthcare was
recently organized to pursue opportunities that are available to those
investors that are not restricted by the tax laws governing REITs. The Board
of Directors of LTC believes that the Distribution is in the best interests
of the LTC stockholders. The completion of the Distribution will permit LTC
to concentrate on its core business. The Board of Directors of LTC believes
that the Distribution also will allow financial markets to better understand
and recognize the merits of the two businesses. The common stock of LTC will
continue to be listed on the New York Stock Exchange. Healthcare has applied
to have the shares of Healthcare common stock listed on the Pacific Exchange.
If you are a holder of record of Debentures at the close of business on
September 15, 1998 (the "Record Date"), you will receive 1/10 of a share of
Healthcare common stock for each share of LTC common stock into which your
Debentures are convertible. Only whole shares of Healthcare common stock will
be issued. Holders of Debentures who would have otherwise received a
fractional share of Healthcare common stock will receive cash in lieu
thereof. The Distribution will be a taxable transaction to the holders of
Debentures. The Distribution is scheduled to be completed on or about
September 30, 1998 (the "Distribution Date"). We expect to mail the
Healthcare common stock certificates and checks for cash in lieu of
fractional shares shortly thereafter. Holders of Debentures on the Record
Date should retain their Debenture certificates. No adjustment will be made
to the conversion price of the Debentures as a result of the Distribution and
the Debentures will continue to be convertible at the conversion prices
indicated above.
The enclosed Information Statement contains information about the
Distribution and about Healthcare. We urge you to read it carefully. Holders
of the Debentures are not required to take any action to participate in the
Distribution.
We appreciate your continued support.
83
<PAGE>
Sincerely,
/s/ ANDRE C. DIMITRIADIS
------------------------
Andre C. Dimitriadis
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
LTC PROPERTIES, INC.
84
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
LTC HEALTHCARE, INC.
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheets as of March 25, 1998 and June 30, 1998. . . . . . . . . F-3
Statement of Income from Inception (March 20, 1998) through
June 30, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Statement of Cash Flows from Inception (March 20, 1998) through
June 30, 1998. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . F-6
LTC HEALTHCARE, INC. ASSET GROUP
FINANCIAL STATEMENTS:
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . F-9
Combined Balance Sheets as of December 31, 1996 and 1997
and June 30, 1998 (unaudited). . . . . . . . . . . . . . . . . . . . F-10
Combined Statements of Income for the years ended December 31, 1995,
1996 and 1997 and the six months ended June 30, 1997 and 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Combined Statements of Changes in LTC Properties, Inc. Net Asset
(Deficit) for the years ended December 31, 1995, 1996 and 1997 and
the six months ended June 30, 1998 (unaudited) . . . . . . . . . . . F-12
Combined Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997 and the six months ended June 30, 1997
and 1998 (unaudited) . . . . . . . . . . . . . . . . . . . . . . . . F-13
Notes to Combined Financial Statements . . . . . . . . . . . . . . . . F-14
FINANCIAL STATEMENT SCHEDULES:
Schedule III - Real Estate and Accumulated Depreciation as of
December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of LTC Healthcare, Inc.
We have audited the accompanying balance sheet of LTC Healthcare, Inc.
(the "Company") as of March 25, 1998. This balance sheet is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this balance sheet based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in
all material respects, the financial position of LTC Healthcare, Inc. at March
25, 1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
May 6, 1998
F-2
<PAGE>
LTC HEALTHCARE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 25, June 30,
1998 1998
---------- ----------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . $ 2,000 $ 100,700
Other receivables . . . . . . . . . . . . . . . . . . . . . . - 12,000
Investment in LTC common stock. . . . . . . . . . . . . . . . - 435,700
Investment in Regent convertible subordinated debentures. . . - 6,500,000
---------- ----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . $ 2,000 $7,048,400
---------- ----------
---------- ----------
LIABILITIES AND EQUITY
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . $ - $ 5,000
Interest payable. . . . . . . . . . . . . . . . . . . . . . . - 98,500
Income taxes payable. . . . . . . . . . . . . . . . . . . . . - 900
Note payable to LTC . . . . . . . . . . . . . . . . . . . . . - 4,939,000
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . - 5,043,400
---------- ----------
Non-voting common stock, $0.01 par value, 4,900,000 shares
authorized, 2 shares outstanding at March 25, 1998; 4002
shares outstanding at June 30, 1998 . . . . . . . . . . . . . - -
Voting common stock, $0.01 par value, 100,000 shares
authorized, 2 shares outstanding at March 25, 1998
and June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . - -
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 2,000 2,002,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . - 3,000
---------- ----------
Total Equity. . . . . . . . . . . . . . . . . . . . . . . . . 2,000 2,005,000
---------- ----------
Total Liabilities and Equity. . . . . . . . . . . . . . . . . $ 2,000 $7,048,400
---------- ----------
---------- ----------
</TABLE>
See accompanying notes
F-3
<PAGE>
LTC HEALTHCARE, INC.
STATEMENT OF INCOME
FROM INCEPTION (MARCH 20, 1998) THROUGH JUNE 30, 1998
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
REVENUES:
Interest income on Regent convertible subordinated debentures $ 105,000
Dividend income on LTC common stock . . . . . . . . . . . . 9,100
Temporary investment income . . . . . . . . . . . . . . . . 900
----------
Total Revenues . . . . . . . . . . . . . . . . . . . . . 115,000
EXPENSES:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . 98,500
General and administrative costs. . . . . . . . . . . . . . 12,600
----------
Total Expenses. . . . . . . . . . . . . . . . . . . . . . 111,100
----------
INCOME BEFORE TAXES . . . . . . . . . . . . . . . . . . . . . 3,900
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . 900
----------
NET INCOME. . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000
----------
----------
</TABLE>
See accompanying notes
F-4
<PAGE>
LTC HEALTHCARE, INC.
STATEMENT OF CASH FLOWS
FROM INCEPTION (MARCH 20, 1998) THROUGH JUNE 30, 1998
(unaudited)
<TABLE>
<CAPTION>
<S> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in other receivable . . . . . . . . . . . . . . . . (12,000)
Increase in accounts payable . . . . . . . . . . . . . . . . 5,000
Increase in income taxes payable . . . . . . . . . . . . . . 900
Increase in interest payable . . . . . . . . . . . . . . . . 98,500
----------
Net cash provided by operating activities. . . . . . . . . 95,400
----------
INVESTING ACTIVITIES:
Investment in Regent convertible subordinated debentures . . (6,500,000)
Investment in LTC common stock . . . . . . . . . . . . . . . (435,700)
----------
Net cash used in investing activities. . . . . . . . . . . . (6,935,700)
----------
FINANCING ACTIVITIES:
Borrowings under note payable to LTC. . . . . . . . . . . . 4,939,000
Issuance of common stock. . . . . . . . . . . . . . . . . . 2,002,000
----------
Net cash provided by financing activities . . . . . . . . 6,941,000
----------
Increase in cash and cash equivalents . . . . . . . . . . 100,700
Cash and cash equivalents, beginning of year. . . . . . . . -
----------
Cash and cash equivalents, end of year. . . . . . . . . . . $ 100,700
----------
----------
Interest paid. . . . . . . . . . . . . . . . . . . . . . . . $ -
----------
</TABLE>
See accompanying notes
F-5
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY
LTC Healthcare, Inc. (the "Company"), a Nevada corporation, was
incorporated on March 20, 1998 to engage in the following activities: (i)
ownership of leveraged properties leased to third parties; (ii) ownership of
secured high yield mortgage loans; (iii) operation of long-term care facilities;
(iv) development of long-term care properties, and (v) ownership of equity
investments in long-term care companies. In connection with the formation of
the Company, on March 25, 1998, LTC Properties, Inc. ("LTC") acquired 2 shares
of non-voting common stock for $1,000 and Christopher T. Ishikawa, Senior Vice
President and Chief Investment Officer of LTC, acquired 2 shares of voting
common stock for $1,000.
2. Summary of Significant Accounting Policies
BASIS OF PRESENTATION. The accompanying financial statements as of June 30,
1998 and for the period from inception through June 30, 1998 are unaudited but
include all adjustments (consisting only of normal recurring adjustments) which
management considers necessary for a fair presentation of the financial
position, results of operations and cash flows for such periods. Interim
results are not necessarily indicative of results for the entire year or future
periods.
CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments
with a maturity of three months or less and are stated at cost which
approximates market.
GENERAL AND ADMINISTRATVIE EXPENSES. The Company anticipates
entering into an agreement with LTC whereby LTC will provide space and
management and administrative services to the Company, including the ability
to use the services of LTC's employees in connection with the Company's
business (the "Administrative Services Agreement"). In exchange for these
services, the Company will pay a monthly fee equal to 25% of the aggregate
amount of all wages, salaries and bonuses paid to LTC employees and the
aggregate amount of rent paid by LTC for rental of its principal corporate
offices. If the Administrative Services Agreement been in effect for the
period from inception (March 20, 1998) through June 30, 1998, the Company
would have incurred costs under the Administrative Services Agreement of
approximately $187,500.
INCOME TAXES. Deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases and book bases of assets
and liabilities at each year end based on enacted laws and statutory tax rates
applicable to the years in which the differences are expected to affect taxable
income.
3. NOTE PAYABLE TO LTC AND ISSUANCE OF NON-VOTING COMMON STOCK
On March 30, 1998, the Company issued 4,000 non-voting shares of common
stock to LTC for $2,000,000 and obtained an $8,000,000 unsecured line of credit
from LTC. On May 19, 1998, the amount available under the unsecured line of
credit was increased to $20,000,000. The line of credit bears interest at 10%
and matures in March 2008. As of June 30, 1998, borrowings of $4,939,000 were
outstanding under the line of credit. Proceeds of $2,000,000 from the issuance
of 4,000 shares of non-voting common stock and borrowings under the line of
credit were used to purchase 23,400 shares of LTC common stock for approximately
$435,700 and $6,500,000 principal amount of convertible subordinated debentures
of Regent Assisted Living, Inc. ("Regent").
4. REGENT CONVERTIBLE SUBORDINATED DEBENTURES
On March 30, 1998, the Company agreed to purchase $10,000,000 principal
amount of convertible subordinated debentures from Regent (the "Regent
Debentures"). The Regent Debentures mature on March 31, 2008, bear interest at
7.5% and are convertible into
F-6
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Regent common stock at $7.50 per share. Regent can require conversion of the
Regent Debentures at such time as the Regent common stock trades at $12.00 per
share or more for 30 consecutive days. As of June 30, 1998, the Company has
completed the purchase of $6,500,000 principal amount of Regent Debentures.
As of June 30, 1998, the purchase price approximated the fair value of the
Regent Debentures. The Company classifies the investment in Regent Debentures
as available for sale with changes in fair value reported as a separate
component of equity and comprehensive income.
As of June 30, 1998, the Company's investment of $6,500,000 in Regent
Debentures represented 92% of the Company's total assets and interest income
on the Regent Debentures represented 91% of the Company's total revenues for
the period from inception (March 20, 1998) through June 30, 1998. The
financial position of the Company may be adversely affected by financial
difficulties experienced by Regent, including bankruptcy, insolvency or
general downturn in business.
Regent is a publicly-traded company and as such, is subject to the
reporting requirements of the Securities and Exchange Commission. The
following table contains summary information (in thousands) for Regent which
was extracted from public reports on file with the Securities and Exchange
Commission and which is not covered by the Report of Independent Auditors
contained herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------- SIX MONTHS ENDED
1996 1997 JUNE 30, 1998
------ ------ ----------------
(UNAUDITED)
<S> <C> <C> <C>
Total assets $33,178 $75,704 $62,836
Total debt 10,132 56,169 42,573
Total stockholders' equity 20,057 15,917 10,686
Total revenues $13,260 $13,958 $ 6,673
Income (loss) before taxes and extraordinary items 135 (3,865) (2,535)
Net income (loss) 24 (3,878) (2,535)
</TABLE>
5. LTC COMMON STOCK
The Company purchased for investment purposes, 23,400 shares of LTC common
stock. The shares were purchased at a weighted average price of $18.62 per
share for a total investment amount of approximately $435,700. As of June 30,
1998, the purchase price approximated the fair market value of such shares of
LTC common stock. The Company classifies its investment in LTC common stock as
available-for-sale with changes in LTC common stock's fair market value reported
as a separate component of equity and comprehensive income.
F-7
<PAGE>
6. SUBSEQUENT EVENTS
Subsequent to June 30, 1998, the Company purchased 73,400 shares of LTC
common stock at a weighted average price of $17.59 per share for a total
investment amount of $1,291,200 and $2,000,000 principal amount of Regent
Debentures. Borrowings under the unsecured line of credit from LTC were used to
fund the purchase of LTC common stock and Regent Debentures. The Company will
purchase an additional $1,500,000 principal amount of Regent Debentures prior to
March 31, 2000 (see Note 4 -- Regent Convertible Subordinated Debentures).
On August 18, 1998, LTC contributed its investment in Missouri River
Corporation, a wholly-owned subsidiary of LTC, ("MRC") of approximately
$39,300,000 to the Company in exchange for 36,000 shares of non-voting common
stock valued at $500 per share ($18,000,000), a note of $3,900,000 from the
Company and $17,400,000 in cash. MRC owns six assisted living facilities
located in Ohio with a book value that approximates the fair value of
$39,300,000. Concurrent with contribution of MRC, the Company obtained a
mortgage loan of $17,400,000 secured by four of the assisted living facilities.
The mortgage loan bears interest at 7.27% and matures 2008. The note of
$3,900,000 is outstanding under the line of credit provided by LTC.
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of LTC Healthcare, Inc.
We have audited the accompanying combined balance sheets of LTC
Healthcare, Inc. Asset Group (the "Portfolio") as of December 31, 1997 and
1996 and the related combined statements of income, changes in LTC
Properties, Inc. net asset (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the index at page F-1. These financial
statements and the financial statement schedule are the responsibility of the
Portfolio's management. Our responsibility is to express an opinion on these
financial statements and the financial statement schedule 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 combined financial position of LTC
Healthcare, Inc. Asset Group at December 31, 1997 and 1996, and the combined
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
May 6, 1998
F-9
<PAGE>
LTC HEALTHCARE, INC. ASSET GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------- ------------
1996 1997 1998
--------- -------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Real Estate:
Buildings and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,195,200 $17,195,200 $17,248,300
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 976,600 976,600 976,600
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,156,800) (2,788,800) (3,105,300)
----------- ----------- -----------
Real Estate Investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,015,000 15,383,000 15,119,600
Rent receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225,100 178,500 220,500
----------- ----------- -----------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,240,100 $15,561,500 $15,340,100
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND LTC PROPERTIES, INC. NET ASSET (DEFICIT)
Mortgage loans payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,389,800 $14,223,400 $23,039,900
Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,000 398,800 409,200
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,900 109,600 109,300
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,700 27,700 111,100
----------- ----------- -----------
Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,865,400 14,759,500 23,669,500
LTC Properties, Inc. net asset (deficit) . . . . . . . . . . . . . . . . . . . . . . 1,374,700 802,000 (8,329,400)
----------- ----------- -----------
Total Liabilities and LTC Properties, Inc. net asset (deficit) . . . . . . . . . . . $16,240,100 $15,561,500 $15,340,100
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes
F-10
<PAGE>
LTC HEALTHCARE, INC. ASSET GROUP
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income. . . . . . . .$2,342,800 $2,348,900 $2,350,400 $ 1,171,000 $1,225,800
EXPENSES:
Interest . . . . . . . . . . - 1,113,700 1,323,000 663,400 833,900
Depreciation . . . . . . . . 632,000 632,000 632,000 316,000 316,500
Other expenses . . . . . . . 83,100 80,900 86,800 36,900 45,100
---------- ---------- ---------- ----------- ----------
Total Expenses. . . . . . 715,100 1,826,600 2,041,800 1,016,300 1,195,500
---------- ---------- ---------- ----------- ----------
INCOME BEFORE TAXES. . . . . . 1,627,700 522,300 308,600 154,700 30,300
Income taxes . . . . . . . . 633,200 203,200 120,000 60,200 11,800
---------- ---------- ---------- ----------- ----------
NET INCOME . . . . . . . . . .$ 994,500 $ 319,100 $ 188,600 $ 94,500 $ 18,500
---------- ---------- ---------- ----------- ----------
---------- ---------- ---------- ----------- ----------
</TABLE>
See accompanying notes
F-11
<PAGE>
LTC HEALTHCARE, INC. ASSET GROUP
COMBINED STATEMENTS OF CHANGES IN
LTC PROPERTIES, INC. NET ASSET (DEFICIT)
<TABLE>
<S> <C>
LTC Properties, Inc. net asset (deficit) at December 31, 1994. . $17,115,900
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 994,500
Net return to LTC Properties, Inc. . . . . . . . . . . . . . . (1,583,200)
------------
LTC Properties, Inc. net asset (deficit) at December 31, 1995. . 16,257,200
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 319,100
Net return to LTC Properties, Inc. . . . . . . . . . . . . . . (15,471,600)
------------
LTC Properties, Inc. net asset (deficit) at December 31, 1996. . 1,374,700
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 188,600
Net return to LTC Properties, Inc. . . . . . . . . . . . . . . (761,300)
------------
LTC Properties, Inc. net asset (deficit) at December 31, 1997. . 802,000
Net income (unaudited) . . . . . . . . . . . . . . . . . . . . 18,500
Net return to LTC Properties, Inc. (unaudited) . . . . . . . . (9,149,900)
------------
LTC Properties, Inc. net asset (deficit) at June 30, 1998
(unaudited). . . . . . . . . . . . . . . . . . . . . . . . . . $(8,329,400)
------------
------------
</TABLE>
See accompanying notes
F-12
<PAGE>
LTC HEALTHCARE, INC. ASSET GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------- -----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . $ 994,500 $ 319,100 $ 188,600 $ 94,500 $ 18,500
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . . 632,000 632,000 632,000 316,000 316,500
(Increase) decrease in rent receivable . . . . . . (126,000) (88,600) 46,600 61,400 (42,000)
Increase in deferred tax liability . . . . . . . . 82,700 100,700 41,800 16,600 10,400
Increase (decrease) in interest payable. . . . . . - 110,900 (1,300) (600) (300)
Increase in other liabilities. . . . . . . . . . . - 7,700 20,000 10,000 83,400
---------- ---------- ---------- ---------- ---------
Net cash provided by operating activities. . . . 1,583,200 1,081,800 927,700 497,900 386,500
INVESTING ACTIVITIES:
Investment in real estate. . . . . . . . . . . . . - - - - (53,100)
---------- ---------- ---------- ---------- ---------
Net cash used in investing activities. . . . . . - - - - (53,100)
FINANCING ACTIVITIES:
Proceeds from mortgage loans . . . . . . . . . . . - 14,505,000 - - 8,926,000
Principal payments on mortgage loans . . . . . . . - (115,200) (166,400) (81,300) (109,500)
Net return to LTC Properties, Inc. . . . . . . . . (1,583,200) (15,471,600) (761,300) (416,600) (9,149,900)
---------- ---------- ---------- ---------- ---------
Net cash used in financing activities. . . . . . (1,583,200) (1,081,800) (927,700) (497,900) (333,400)
---------- ---------- ---------- ---------- ---------
Increase (decrease) in cash and cash equivalents - - - - -
Cash and cash equivalents, beginning of year . . . - - - - -
---------- ---------- ---------- ---------- ---------
Cash and cash equivalents, end of year . . . . . . $ - $ - $ - $ - $ -
---------- ---------- ---------- ---------- ---------
---------- ---------- ---------- ---------- ---------
Interest paid . . . . . . . . . . . . . . . . . . . $ - $1,002,800 $1,324,300 $ 664,000 $ 834,200
</TABLE>
See accompanying notes
F-13
<PAGE>
1. THE COMPANY
LTC Healthcare, Inc. ("Healthcare"), a Nevada corporation, was incorporated
on March 20, 1998 to engage in the following activities: (i) ownership of
leveraged properties leased to third parties; (ii) ownership of secured high
yield mortgage loans; (iii) operation of long-term care facilities;
(iv) development of long-term care properties, and (v) ownership of equity
investments in long-term care companies. LTC Properties, Inc. ("LTC") owns all
of the outstanding non-voting common stock and Christopher T. Ishikawa, Senior
Vice President and Chief Investment Officer of LTC, owns all of the outstanding
voting common stock of Healthcare. LTC intends to transfer certain real estate
assets and certain related liabilities (the "LTC Healthcare, Inc. Asset Group"
or the "Portfolio") to Healthcare. The LTC Healthcare, Inc. Asset Group
consists of four skilled nursing facilities that are leased to third parties
under triple net leases with a book value of $15,119,600 and encumbered by
mortgages of $23,039,900 as of June 30, 1998.
In May 1998, LTC's Board of Directors approved in principle, a plan for the
distribution (the "Distribution") of Healthcare stock to holders of LTC common
stock. As of June 30, 1998, Healthcare has 4,900,000 shares of $0.01 par value
voting common stock and 100,000 shares of $0.01 par value non-voting common
stock authorized. Healthcare's authorized stock will be increased to provide
for the shares to be issued in connection with the Distribution.
The Portfolio's real estate investments utilize a leveraged capital
structure. As a result of such leverage, the Portfolio is subject to the risks
normally associated with debt financing, including the risk that cash flow from
operations will be insufficient to meet required payments of principal and
interest and the risk that existing debt will not be able to be refinanced or
that the terms of such refinancings will not be as favorable to the Portfolio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying financial statements present the
financial position, results of operations and cash flows of the Portfolio as if
it were a separate entity of LTC for all periods presented. The assets and
liabilities in the accompanying financial statements are reflected at LTC's
historical basis. Changes in the investment by LTC represent the net income of
the Portfolio plus the net change in cash and non-cash items transferred between
the Portfolio and LTC. The accompanying financial statements as of June 30,
1998 and for the six months ended June 30, 1998 and 1997 are unaudited but
include all adjustments (consisting only of normal recurring adjustments) which
management considers necessary for a fair presentation of the financial
position, results of operations and cash flows for such periods. Interim
results are not necessarily indicative of results for the entire year or future
periods.
USE OF ESTIMATES. The preparation of the combined financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Actual results could differ from
those estimates.
REAL ESTATE. Land and buildings and improvements are recorded at cost.
Effective January 1, 1996, the Portfolio adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF." Accordingly,
impairment losses are recorded when events or changes in circumstances indicate
the asset is impaired and the undiscounted cash flows estimated to be generated
by the asset are less than the carrying amount. Impairment losses are measured
as the amount by which the carrying amount of the real estate exceeds the fair
value. Management assesses the recoverability of the carrying value of its
assets on a property by
F-14
<PAGE>
LTC HEALTHCARE, INC. ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
property basis. Depreciation is provided on a straight-line basis over the
estimated useful lives of 7 years for equipment and 35 years for buildings
REVENUE RECOGNITION. Base rental revenue is recognized using the
straight-line method by averaging annual minimum rents over the terms of the
leases. Contingent rental income, which is generated by a percentage of
increased revenue over a specified base period revenue of the long-term care
facilities, is recognized as earned.
GENERAL AND ADMINISTRATIVE EXPENSES. LTC provides various administrative
services to the Portfolio including, but not limited to, legal and accounting
assistance. Identifiable costs have been charged to the Portfolio and are
reflected in the accompanying statements of operations. Indirect costs have
been allocated to the Portfolio based on its proportionate share of LTC's
adjusted gross real estate investment portfolio. Indirect general and
administrative costs allocated to the Portfolio for the years ended December 31,
1995, 1996 and 1997 were $83,100, $78,400 and $79,900, respectively. Indirect
general and administrative costs allocated to the Portfolio for the six months
ended June 30, 1997 and 1998 were $34,100 and $37,600, respectively.
INCOME TAXES. The Portfolio's income tax provision is determined as if the
Portfolio had paid income tax on taxable income on a separate company basis.
Current income taxes are charged directly against the investment by LTC.
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases and book bases of assets and liabilities at
each year end based on enacted laws and statutory tax rates applicable to the
years in which the differences are expected to affect taxable income.
NEW ACCOUNTING PRONOUNCEMENTS. During 1997, the Financial Accounting
Standards Board issued SFAS No. 128, "EARNINGS PER SHARE", SFAS No. 129,
"DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE", SFAS No. 130, "REPORTING
COMPREHENSIVE INCOME" and SFAS No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION". SFAS No. 128 and SFAS No. 129 are
effective for fiscal years ending after December 15, 1997 and SFAS No. 130 and
SFAS No. 131 are effective for fiscal years beginning after December 15, 1997.
Adoption of SFAS No. 128, SFAS No. 129, SFAS No. 130 and SFAS No. 131 would not
have a material impact on the Portfolio's financial statements or related
disclosures.
CONCENTRATION OF CREDIT RISKS. As of June 30, 1998, Integrated Health
Services, Inc. ("IHS") leased two facilities and a wholly-owned subsidiary of
Sun Healthcare Group, Inc. ("Sun") leased two facilities representing 34% and
66%, respectively, of the Portfolio's base rental revenue. As of December 31,
1996 and 1997 and June 30, 1998, approximately 37% and 63% of the Portfolio's
total real estate investments were leased to IHS and Sun, respectively. The
financial position of the Portfolio may be adversely affected by financial
difficulties experienced by IHS or Sun, including bankruptcy, insolvency or
general downturn in business, or in the event IHS or Sun does not renew and/or
extend its lease with the Portfolio as it expires.
IHS and Sun are publicly-traded companies and as such, have financial and
other information on file with the Securities and Exchange Commission. The
following table contains summary information (in thousands) for IHS and Sun
which was extracted from public reports on file with the Securities and Exchange
Commission and which is not covered by the Report of Independent Auditors
contained herein.
F-15
<PAGE>
LTC HEALTHCARE, INC. ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ------------ ------------- --------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
SUN
Total assets N/A $1,229,426 $2,579,236 N/A $2,687,986
Total debt N/A 512,435 1,626,842 N/A 1,694,638
Total stockholders' equity N/A 572,137 617,053 N/A 639,550
Total revenues $1,135,508 $1,316,308 $2,010,820 $398,636 $741,490
Income before taxes
and extraordinary items 12,794 52,466 95,882 26,127 31,977
Net income (loss) (23,751) 21,536 34,801 15,937 18,387
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
----------------------------------------- ----------------------
1995 1996 1997 1997 1998
----------- ------------ ------------- --------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
IHS
Total assets N/A $1,993,107 $5,063,144 N/A $5,398,583
Total debt N/A 1,054,747 3,238,233 N/A 3,184,153
Total stockholders' equity N/A 534,865 1,088,161 N/A 1,469,401
Total revenues $1,178,888 $1,434,695 $1,993,197 $918,916 $1,671,554
Income (loss) before taxes
and extraordinary items (42,259) 111,480 13,326 46,384 134,877
Net income (loss) (27,002) 46,334 (33,505) 10,126 79,577
</TABLE>
3. REAL ESTATE
As of June 30, 1998, the Portfolio consisted of two skilled nursing
facilities with 236 beds in New Mexico and two skilled nursing facilities with
393 beds in Arizona.
All of the Portfolio's leases are triple-net leases that require the
payment of all taxes, insurance, maintenance and other costs of the facilities
by the lessee. All of the leases contain renewal options and none of the leases
contain an option to purchase the facility; however, one of the leases contains
a right of first refusal. The leases provide for a fixed minimum base rent
during the initial and renewal periods. Two of the leases provide for annual
fixed rent increases and three of the leases provide for additional rent through
participation in incremental revenues generated by the facilities, over a
defined base period, effective at various times during the term of the lease.
Contingent rent income for the years ended December 31, 1995, 1996 and 1997
was $31,600, $37,700 and $34,400, respectively. Contingent rent income for the
six months ended June 30, 1997 and 1998 was $15,400 and $13,800, respectively.
Non-cash rental income recognized as a result of accounting under the
straight-line method for the years ended December 31, 1995, 1996 and 1997 was
$94,000, $51,000 and $25,100, respectively. Non-cash rental income recognized
as a result of accounting under the straight-line method for the six months
ended June 30, 1997 and 1998 was $13,200 and $50,500, respectively. As of
December 31, 1996 and 1997 and June 30, 1998 straight-line rent receivable was
$144,900, $170,000 and $220,500, respectively. As of December 31, 1996 and 1997
and June 30, 1998 contingent rent receivable was $80,200, $8,500 and $0,
respectively.
F-16
<PAGE>
LTC HEALTHCARE, INC. ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Future minimum base rents receivable under the remaining non-cancelable
terms of operating leases are: $1,176,800 for the remaining six months of 1998
and $2,368,600, $2,409,100, $2,450,700, $2,433,400 and $5,018,000 for the years
ending December 31, 1999, 2000, 2001, 2002 and thereafter.
4. MORTGAGE LOANS PAYABLE
All of the Portfolio's facilities are encumbered by non-recourse mortgage
loans that bear interest at a weighted average rate of 8.77% and are secured by
first mortgages on the facilities. Total annual debt service on the mortgage
loans is approximately $2,277,000. As of June 30, 1998, mortgage loans with an
aggregate outstanding principal balance of $14,125,900 may be prepaid, in whole
or in part, at anytime without prepayment penalty and mortgage loans with an
aggregate outstanding principal balance of $8,914,000 may be prepaid, in whole
or in part, at any time subject to a yield maintenance penalty.
Aggregate scheduled principal payments are: $122,100 for the remaining six
months of 1998 and $278,800, $304,700, $332,900, $363,800 and $21,637,600 for
the years ending December 31, 1999, 2000, 2001, 2002 and thereafter.
5. INCOME TAXES
The provisions for income taxes consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
----------- ------------ ------------- --------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Current:
Federal $ 450,000 $ 76,600 $ 61,500 $ 36,200 $ 1,400
State 100,500 25,900 16,700 7,400 -
--------- --------- -------- ------- -------
Total current 550,500 102,500 78,200 43,600 1,400
--------- --------- -------- ------- -------
Deferred:
Federal 60,000 85,700 33,600 12,400 8,100
State 22,700 15,000 8,200 4,200 2,300
--------- --------- -------- ------- -------
Total deferred 82,700 100,700 41,800 16,600 10,400
--------- --------- -------- ------- -------
$ 633,200 $203,200 $120,000 $60,200 $11,800
--------- --------- -------- ------- -------
--------- --------- -------- ------- -------
</TABLE>
F-17
<PAGE>
LTC HEALTHCARE, INC. ASSET GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation of income to continuing operations computed at the U.S.
Federal statutory tax rates to income tax expense is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1995 1996 1997
------------------- ------------------ -------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates $553,400 34.0% $177,600 34.0% $104,900 34.0%
State income taxes net of
federal tax benefits 79,800 4.9% 25,600 4.9% 15,100 4.9%
------------------- ------------------- -------------------
$633,200 38.9% $203,200 38.9% $120,000 38.9%
------------------- ------------------- -------------------
------------------- ------------------- -------------------
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------------------------
1997 1998
-------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
-------------------- -------------------
<S> <C> <C> <C> <C>
Tax and U.S. statutory rates $52,600 34.0% $10,300 34.0%
State income taxes net of
federal tax benefits 7,600 4.9% 1,500 4.9%
------------------- -------------------
$60,200 38.9% $11,800 38.9%
------------------- -------------------
------------------- -------------------
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Portfolio's deferred tax liabilities and assets for the following years
are as follows:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
1996 1997 1998
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
--------- --------- ---------
Deferred Liabilities:
Straight Line Rent $ 60,100 $ 70,500 $ 91,500
Depreciation 333,800 369,100 371,800
--------- --------- ---------
Total Deferred Tax
Liabilities 393,900 439,600 463,300
--------- --------- ---------
Deferred Tax Assets:
State Tax 10,200 7,100 3,600
Tax Credit - AMT 2,600 6,800 8,200
NOL Carryover - - 14,600
Other 24,100 26,900 27,700
--------- --------- ---------
Total Deferred Tax Assets 36,900 40,800 54,100
--------- --------- ---------
Net Deferred Tax Liabilities $ 357,000 $ 398,800 $ 409,200
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
LTC HEALTHCARE, INC. ASSET GROUP
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
AS OF DECEMBER 31, 1997
<TABLE>
<CAPTION>
Construction/
Buildings and Accumulated Renovation Acquisition
Encumbrances Land Improvements Total (1) Depreciation Date Date
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Phoenix, AZ $7,707,400 $431,800 $ 6,764,100 $ 7,195,900 $ 902,600 1985/1992 1994
Tucson, AZ 6,516,000 145,600 3,931,600 4,077,200 638,900 1985 1993
Alamagordo, NM - 314,200 3,567,300 3,881,500 612,100 1985 1993
Roswell, NM - 85,000 2,932,200 3,017,200 635,200 1979 1992
-------------------------------------------------------------
$14,223,400 $976,600 $17,195,200 $18,171,800 $2,788,800
-------------------------------------------------------------
-------------------------------------------------------------
</TABLE>
(1) The aggregate cost for federal income tax purposes.
Activity for the years ended December 31, 1995, 1996 and 1997 is as follows:
<TABLE>
<CAPTION>
Real Estate and Accumulated
Equipment Depreciation
---------------------------------
<S> <C> <C>
Balance at December 31, 1994 $18,171,800 $ 892,800
Additions - 632,000
Cost of real estate sold - -
-------------- ----------
Balance at December 31, 1995 18,171,800 1,524,800
Additions - 632,000
Cost of real estate sold - -
-------------- ----------
Balance at December 31, 1996 18,171,800 2,156,800
Additions - 632,000
Cost of real estate sold - -
-------------- ----------
Balance at December 31, 1997 $18,171,800 $2,788,800
-------------- ----------
-------------- ----------
</TABLE>
F-19
<PAGE>
ANNEX I
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
LTC HEALTHCARE, INC.
Pursuant to the provisions of Nevada Revised Statutes ("NRS") Section
78.403, the Articles of Incorporation of the above-referenced corporation are
hereby amended and restated as follows:
ARTICLE I
NAME
The name of the corporation shall be LTC Healthcare, Inc. (the
"Corporation").
ARTICLE II
CAPITAL STOCK
Section 1. AUTHORIZED SHARES. The total number of shares of stock
which the Corporation shall have authority to issue is fifty million
(50,000,000) shares, consisting of two classes to be designated, respectively,
"Common Stock" and "Preferred Stock," with all of such shares having a par value
of $.01 per share. The total number of shares of Common Stock which the
Corporation shall have authority to issue is forty million (40,000,000) shares.
The total number of shares of Preferred Stock which the Corporation shall have
authority to issue is ten million (10,000,000) shares. The Preferred Stock may
be issued in one or more series, each series to be appropriately designated by a
distinguishing letter or title, prior to the issue of any shares thereof. The
voting powers, designations, preferences, limitations, restrictions, and
relative, participating, optional and other rights, and the qualifications,
limitations, or restrictions thereof, of the Preferred Stock shall hereinafter
be prescribed by resolution of the Board of Directors pursuant to Section 3 of
this Article II.
Section 2. COMMON STOCK.
(a) DIVIDEND RATE. Subject to the rights of holders of any
Preferred Stock having preference as to dividends, the holders of Common Stock
shall be entitled to receive dividends when, as and if declared by the Board of
Directors out of assets legally available therefor.
(b) VOTING RIGHTS. The holders of the issued and outstanding
shares of Common Stock shall be entitled to one vote for each share of Common
Stock.
(c) LIQUIDATION RIGHTS. In the event of liquidation,
dissolution, or winding up of the affairs of the Corporation, whether voluntary
or involuntary, subject to the prior rights of holders of Preferred Stock to
share ratably in the Corporation's assets, the Common Stock and any shares of
Preferred Stock which are not entitled to any preference in liquidation shall
share equally and ratably in the Corporation's assets available for distribution
after giving effect to any liquidation preference of any shares of Preferred
Stock.
(d) NO CUMULATIVE VOTING, CONVERSION, REDEMPTION, OR PREEMPTIVE
RIGHTS. The holders of Common Stock shall not have any cumulative voting,
conversion, redemption, or preemptive rights.
(e) CONSIDERATION FOR SHARES. The Common Stock authorized by
this Article shall be issued for such consideration as shall be fixed, from time
to time, by the Board of Directors.
I-1
<PAGE>
Section 3. PREFERRED STOCK.
(a) CONSIDERATION. The Board of Directors is hereby vested with
the authority from time to time to provide by resolution for the issuance of
shares of Preferred Stock in one or more series not exceeding the aggregate
number of shares of Preferred Stock authorized by these Amended and Restated
Articles of Incorporation, as amended from time to time (hereinafter, the
"Articles"), and to determine with respect to each such series the voting
powers, if any (which voting powers if granted may be full or limited),
designations, preferences, and relative, participating, optional, or other
special rights, and the qualifications, limitations, or restrictions relating
thereto, including without limiting the generality of the foregoing, the voting
rights relating to shares of Preferred Stock of any series (which may vary over
time and which may be applicable generally only upon the happening and
continuance of stated facts or events or ascertained outside the Articles), the
rate of dividend to which holders of Preferred Stock of any series may be
entitled (which may be cumulative or noncumulative), the rights of holders of
Preferred Stock of any series in the event of liquidation, dissolution, or
winding up of the affairs of the Corporation, the rights, if any, of holders of
Preferred Stock of any series to convert or exchange such shares of Preferred
Stock of such series for shares of any other class or series of capital stock or
for any other securities, property, or assets of the Corporation or any
subsidiary (including the determination of the price or prices or the rate or
rates applicable to such rights to convert or exchange and the adjustment
thereof, the time or times during which the right to convert or exchange shall
be applicable, and the time or times during which a particular price or rate
shall be applicable).
(b) CERTIFICATE. Before the Corporation shall issue any shares
of Preferred Stock of any series, a certificate setting forth a copy of the
resolution or resolutions of the Board of Directors, fixing the voting powers,
designations, preferences, the relative, participating, optional, or other
rights, if any, and the qualifications, limitations, and restrictions, if any,
relating to the shares of Preferred Stock of such series, and the number of
shares of Preferred Stock of such series authorized by the Board of Directors to
be issued shall be made and signed by, acknowledged and filed in the manner
prescribed by the NRS. The Board of Directors is further authorized to increase
or decrease (but not below the number of such shares of such series then
outstanding) the number of shares of any series subsequent to the issuance of
shares of that series.
Section 4. NON-ASSESSMENT OF STOCK. The capital stock of the
Corporation, after the amount of the subscription price has been paid in money,
property or services, as the directors shall determine, shall not be subject to
assessment to pay the debts of the Corporation, nor for any other purpose, and
no stock issued as fully paid shall ever be assessable or assessed, and the
Articles shall not be amended in this particular. No stockholder of the
Corporation is individually liable for the debts or liabilities of the
Corporation.
ARTICLE III
STOCKHOLDERS
Section 1. SPECIAL MEETINGS OF STOCKHOLDERS. Special meetings of
stockholders of the Corporation for any purpose or purposes may be called only
in the manner provided in the Bylaws.
Section 2. ACTION OF STOCKHOLDERS. No action shall be taken by
the stockholders except at a duly called annual or special meeting of
stockholders. The stockholders may not take action by written consent.
ARTICLE IV
DIRECTORS AND OFFICERS
Section 1. NUMBER OF DIRECTORS. The members of the governing
board of the Corporation are styled as directors. The Board of Directors of the
Corporation shall consist of at least one (1) individual who shall be elected in
such manner as shall be provided in the Bylaws of the Corporation. The number
of directors may be changed from time to time in such manner as shall be
provided in the Bylaws of the Corporation.
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Section 2. CURRENT DIRECTORS. The names and post office boxes or
street addresses of each of the four (4) directors constituting the current
Board of Directors are:
<TABLE>
<CAPTION>
NAME ADDRESS
---- ---------
<S> <C>
Andre C. Dimitriadis 300 Esplanade Drive, Suite 1860
Oxnard, CA 93030
James J. Pieczynski 300 Esplanade Drive, Suite 1860
Oxnard, CA 93030
Steven Stuart 31 West 52nd Street
New York, NY 10019
Bary G. Bailey 12225 El Camino Real
San Diego, CA 92130
</TABLE>
Section 3. STOCKHOLDER NOMINATION OF DIRECTOR CANDIDATES. Advance
notice of nominations for the election of directors, other than by the Board of
Directors or a duly authorized committee thereof or any authorized officer of
the Corporation to whom the Board of Directors or such committee shall have
delegated such authority, and information concerning nominees, shall be given in
the manner provided in the Bylaws.
Section 4. NEWLY CREATED DIRECTORSHIPS AND VACANCIES. Except as
otherwise fixed pursuant to the provisions of Article II hereof relating to the
rights of the holders of Preferred Stock, newly created directorships resulting
from any increase in the authorized number of directors and any vacancies on the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause shall be filled by a
majority vote of the directors then in office, and directors so chosen shall
hold office for a term expiring at the next annual meeting of stockholders at
which the term of the class to which they have been elected expires. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
Section 5. LIMITATION OF PERSONAL LIABILITY. No director or
officer of the Corporation shall be personally liable to the Corporation or its
stockholders for damages for breach of fiduciary duty as a director or officer;
PROVIDED, HOWEVER, that the foregoing provision does not eliminate or limit the
liability of a director or officer of the Corporation for:
(a) Acts or omissions which involve intentional misconduct,
fraud or a knowing violation of law; or
(b) The payment of distributions in violation of NRS 78.300.
Section 6. PAYMENT OF EXPENSES. In addition to any other rights
of indemnification permitted by the laws of the State of Nevada as may be
provided for by the Corporation in its Bylaws or by agreement, the expenses of
officers and directors incurred in defending a civil or criminal action, suit or
proceeding, involving alleged acts or omissions of such officer or director in
his or her capacity as an officer or director of the Corporation, must be paid
by the Corporation or through insurance purchased and maintained by the
Corporation or through other financial arrangements made by the Corporation, as
they are incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by a court of
competent jurisdiction that he or she is not entitled to be indemnified by the
Corporation.
Section 7. REPEAL AND CONFLICTS. Any repeal or modification of
Sections 5 or 6 above approved by the stockholders of the Corporation shall be
prospective only. In the event of any conflict between Sections 5 or 6 of this
Article and any other Article of the Articles, the terms and provisions of
Sections 5 or 6 of this Article shall control.
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ARTICLE V
VOTING ON CERTAIN TRANSACTIONS
Section 1. MERGER, SALE. The affirmative vote of the holders of
sixty-six and two-thirds percent (66-2/3%) of the outstanding stock of the
Corporation entitled to vote shall be required for:
(a) Any merger, exchange or consolidation to which the
Corporation is a party and which requires stockholder approval under the NRS;
and
(b) Any sale or other disposition by the Corporation of all or
substantially all of its assets.
Section 2. AMENDMENT OF ARTICLES. The Corporation reserves the
right to amend, alter, change or repeal any provision contained in the Articles,
in the manner now or hereafter prescribed by the NRS, and all rights conferred
on stockholders herein are granted subject to this reservation; PROVIDED,
HOWEVER, that no amendment, alteration, change or repeal may be made to: (i)
Section 2 of Article III or (ii) this Article V without the affirmative vote of
the holders of at least sixty-six and two-thirds percent (66-2/3%) of the
outstanding voting stock of the Corporation, voting together as a single class.
Section 3. AMENDMENT OF BYLAWS.
(a) BOARD OF DIRECTORS. In furtherance and not in limitation of
the powers conferred by statute, the Board of Directors is expressly authorized
to adopt, repeal, alter, amend and rescind the Bylaws of the Corporation.
(b) STOCKHOLDERS. Notwithstanding Section 3(a) of this Article
V, the Bylaws may be rescinded, altered, amended or repealed in any respect by
the affirmative vote of the holders of at least sixty-six and two-thirds percent
(66-2/3%) of the outstanding voting stock of the Corporation, voting together as
a single class.
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ANNEX II
AMENDED AND RESTATED BYLAWS
OF
LTC HEALTHCARE, INC.
ARTICLE I
OFFICES
SECTION 1.01 REGISTERED OFFICE. The registered office of the corporation
shall be in the City of Las Vegas, County of Clark, State of Nevada. The
corporation may, from time to time, in the manner provided by law, change the
registered office within the State of Nevada.
SECTION 1.02 OTHER OFFICES. The corporation may also maintain an office
or offices at such other places within or without the State of Nevada as the
Board of Directors may form time to time determine or the business of the
corporation may require.
ARTICLE II
STOCKHOLDERS
SECTION 2.01 ANNUAL MEETING. The annual meeting of stockholders shall be
held each year on a date and time designated by the Board of Directors. Any
previously scheduled annual meeting of the stockholders may be postponed by
resolution of the Board of Directors upon public notice given prior to the date
previously scheduled for such annual meeting of the stockholders.
SECTION 2.02 SPECIAL MEETINGS.
(a) Except as otherwise required by law and subject to the rights of
the holders of Preferred Stock, special meetings of stockholders may be called
only by the Board of Directors pursuant to a resolution approved by a majority
of the entire Board of Directors, the chairman of the board, chief executive
officer, or president. Each special meeting shall be held at such date, time
and place either within or without the State of Nevada as shall be designated by
the Board of Directors at least ten (10) days prior to such meeting.
(b) No business shall be acted upon at a special meeting except as
set forth in the notice calling the meeting, unless one of the conditions for
the holding of a meeting without notice set forth in Section 2.05 shall be
satisfied, in which case any business (except as noted in Section 2.12
immediately below) may be transacted and the meeting shall be valid for all
purposes.
SECTION 2.03 PLACE OF MEETINGS. Any meeting of the stockholders of the
corporation may be held at its registered office in the State of Nevada or at
such other place in or out of the United States as the Board of Directors may
designate. A waiver of notice signed by stockholders entitled to vote may
designate any place for the holding of such meeting.
SECTION 2.04 NOTICE OF MEETINGS.
(a) The president, a vice president, the secretary, an assistant
secretary or any other individual designated by the Board of Directors shall
sign and deliver written notice of any meeting at least ten (10) days, but not
more than sixty (60) days, before the date of such meeting to each stockholder
of record entitled to vote at the meeting. In addition, a copy of such notice
shall be delivered to the Pacific Exchange at least ten (10) days prior to the
date of such meeting. The notice shall state the place, date and time of the
meeting and the purpose or purposes for which the meeting is called.
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(b) In the case of an annual meeting, subject to Section 2.12, any
proper business may be presented for action, except that action on any of the
following items shall be taken only if the general nature of the proposal is
stated in the notice:
(1) Action with respect to any contract or transaction between
the corporation and one or more of its directors or officers or between the
corporation and any corporation, firm or association in which one or more of the
corporation's directors or officers is a director or officer or is financially
interested;
(2) Adoption of amendments to the Articles of Incorporation; or
(3) Action with respect to a merger, share exchange,
reorganization, partial or complete liquidation, or dissolution of the
corporation.
(c) A copy of the notice shall be personally delivered or mailed
postage prepaid to each stockholder of record entitled to vote at the meeting at
the address appearing on the records of the corporation, and the notice shall be
deemed delivered the date the same is deposited in the United States mail for
transmission to such stockholder. If the address of any stockholder does not
appear upon the records of the corporation, it will be sufficient to address any
notice to such stockholder at the registered office of the corporation.
(d) The written certificate of the individual signing a notice of
meeting, setting forth the substance of the notice or having a copy thereof
attached, the date the notice was mailed or personally delivered to the
stockholders and the addresses to which the notice was mailed, shall be prima
facie evidence of the manner and fact of giving such notice.
(e) Any stockholder may waive notice of any meeting by a signed
writing, either before or after the meeting.
SECTION 2.05 MEETING WITHOUT NOTICE.
(a) Whenever all persons entitled to vote at any meeting consent,
either by:
(1) A writing on the records of the meeting or filed with the
secretary; or
(2) Presence at such meeting and oral consent entered on the
minutes; or
(3) Taking part in the deliberations at such meeting without
objection;
The doings of such meeting shall be as valid as if had at a meeting regularly
called and noticed.
(b) At such meeting any business may be transacted which is not
excepted from the written consent or to the consideration of which no objection
for want of notice is made at the time.
(c) If any meeting be irregular for want of notice or of such
consent, provided a quorum was present at such meeting, the proceedings of the
meeting may be ratified and approved and rendered likewise valid and the
irregularity or defect therein waived by a writing signed by all parties having
the right to vote at such meeting.
(d) Such consent or approval may be by proxy or power of attorney,
but all such proxies and powers of attorney must be in writing.
SECTION 2.06 DETERMINATION OF STOCKHOLDERS OF RECORD.
(a) For the purpose of determining the stockholders entitled to
notice of and to vote at any meeting of stockholders or any adjournment thereof,
or entitled to receive payment of any distribution or the allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion,
or exchange of stock or for the purpose of any other lawful action, the
directors may fix, in advance, a record date, which shall not be
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more than sixty (60) days nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
(b) If no record date is fixed, the record date for determining
stockholders: (i) entitled to notice of and to vote at a meeting of stockholders
shall be at the close of business on the day next preceding the day on which
notice is given, or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held and (ii) for any other
purpose shall be at the close of business on the day on which the Board of
Directors adopts the resolution relating thereto. A determination of
stockholders of record entitled to notice of or to vote at any meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
SECTION 2.07 QUORUM; ADJOURNED MEETINGS.
(a) Unless the Articles of Incorporation provide for a different
proportion, stockholders holding at least a majority of the voting power of the
corporation's stock, represented in person or by proxy, are necessary to
constitute a quorum for the transaction of business at any meeting. If, on any
issue, voting by classes is required by the laws of the State of Nevada, the
Articles of Incorporation or these Bylaws, at least a majority of the voting
power within each such class is necessary to constitute a quorum of each such
class.
(b) If a quorum is not represented, a majority of the voting power so
represented may adjourn the meeting from time to time until holders of the
voting power required to constitute a quorum shall be represented. At any such
adjourned meeting at which a quorum shall be represented, any business may be
transacted which might have been transacted as originally called. When a
stockholders' meeting is adjourned to another time or place hereunder, notice
need not be given of the adjourned meeting if the time and place thereof are
announced at the meeting at which the adjournment is taken. The stockholders
present at a duly convened meeting may continue to transact business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave less
than a quorum of the voting power.
SECTION 2.08 VOTING.
(a) Unless otherwise provided in the Articles of Incorporation, or in
the resolution providing for the issuance of the stock adopted by the Board of
Directors pursuant to authority expressly vested in it by the provisions of the
Articles of Incorporation, each stockholder of record, or such stockholder's
duly authorized proxy or attorney-in-fact, shall be entitled to one (1) vote for
each share of voting stock standing registered in such stockholder's name on the
record date. No stockholder of the corporation shall be entitled to cumulative
voting for the election of directors.
(b) Except as otherwise provided herein, all votes with respect to
shares standing in the name of an individual on the record date (included
pledged shares) shall be cast only by that individual or such individual's duly
authorized proxy, attorney-in-fact, or voting trustee(s) pursuant to a voting
trust. With respect to shares held by a representative of the estate of a
deceased stockholder, guardian, conservator, custodian or trustee, votes may be
cast by such holder upon proof of capacity, even though the shares do not stand
in the name of such holder. In the case of shares under the control of a
receiver, the receiver may cast votes carried by such shares even though the
shares do not stand in the name of the receiver; provided, that the order of the
court of competent jurisdiction which appoints the receiver contains the
authority to cast votes carried by such shares. If shares stand in the name of
a minor, votes may be cast only by the duly appointed guardian of the estate of
such minor if such guardian has provided the corporation with written proof of
such appointment.
(c) With respect to shares standing in the name of another
corporation, partnership, limited liability company or other legal entity on the
record date, votes may be cast: (i) in the case of a corporation, by such
individual as the bylaws of such other corporation prescribe, by such individual
as may be appointed by resolution of the board of directors of such other
corporation or by such individual (including the officer making the
authorization) authorized in writing to do so by the chairman of the board of
directors, president or any vice-president of such corporation and (ii) in the
case of a partnership, limited liability company or other legal entity, by an
individual representing such stockholder upon presentation to the corporation of
satisfactory evidence of his authority to do so.
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(d) Notwithstanding anything to the contrary herein contained, no
votes may be cast for shares owned by this corporation or its subsidiaries, if
any. If shares are held by this corporation or its subsidiaries, if any, in a
fiduciary capacity, no votes shall be cast with respect thereto on any matter
except to the extent that the beneficial owner thereof possesses and exercises
either a right to vote or to give the corporation holding the same binding
instructions on how to vote.
(e) Any holder of shares entitled to vote on any matter may cast a
portion of the votes in favor of such matter and refrain from casting the
remaining votes or cast the same against the proposal, except in the case of
elections of directors. If such holder entitled to vote fails to specify the
number of affirmative votes, it will be conclusively presumed that the holder is
casting affirmative votes with respect to all shares held.
(f) With respect to shares standing in the name of two or more
persons, whether fiduciaries, members of a partnership, joint tenants, tenants
in common, husband and wife as community property, tenants by the entirety,
voting trustees, persons entitled to vote under a stockholder voting agreement
or otherwise and shares held by two or more persons (including proxy holders)
having the same fiduciary relationship in respect to the same shares, votes may
be cast in the following manner:
(1) If only one person votes, the vote of such person binds all.
(2) If more than one person casts votes, the act of the majority
so voting binds all.
(3) If more than one person casts votes, but the vote is evenly
split on a particular matter, the votes shall be deemed cast proportionately, as
split.
(g) If a quorum is present, unless the Articles of Incorporation
provide for a different proportion, the affirmative vote of holders of at least
a majority of the voting power represented at the meeting and entitled to vote
on any matter shall be the act of the stockholders, unless voting by classes is
required for any action of the stockholders by the laws of the State of Nevada,
the Articles of Incorporation or these Bylaws, in which case the affirmative
vote of holders of a least a majority of the voting power of each such class
shall be required.
SECTION 2.09 PROXIES. At any meeting of stockholders, any holder of
shares entitled to vote may designate, in a manner permitted by the laws of the
State of Nevada, another person or persons to act as a proxy or proxies. No
proxy is valid after the expiration of six (6) months from the date of its
creation, unless it is coupled with an interest or unless otherwise specified in
the proxy. In no event shall the term of a proxy exceed seven (7) years from
the date of its creation. Every proxy shall continue in full force and effect
until its expiration or revocation in a manner permitted by the laws of the
State of Nevada.
SECTION 2.10 ORDER OF BUSINESS. At the annual stockholder's meeting, the
regular order of business shall be as follows:
1. Determination of stockholders present and existence of quorum, in
person or by proxy;
2. Reading and approval of the minutes of the previous meeting or
meetings;
3. Reports of the Board of Directors, and, if any, the president,
treasurer and secretary of the corporation;
4. Reports of committees;
5. Election of directors;
6. Unfinished business;
7. New business;
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8. Adjournment.
SECTION 2.11 ABSENTEES' CONSENT TO MEETINGS. Transactions of any meeting
of the stockholders are as valid as though had at a meeting duly held after
regular call and notice if a quorum is represented, either in person or by
proxy, and if, either before or after the meeting, each of the persons entitled
to vote, not represented in person or by proxy (and those who, although present,
either object at the beginning of the meeting to the transaction of any business
because the meeting has not been lawfully called or convened or expressly object
at the meeting to the consideration of matters not included in the notice which
are legally required to be included therein), signs a written waiver of notice
and/or consent to the holding of the meeting or an approval of the minutes
thereof. All such waivers, consents, and approvals shall be filed with the
corporate records and made a part of the minutes of the meeting. Attendance of
a person at a meeting shall constitute a waiver of notice of such meeting,
except when the person objects at the beginning of the meeting to the
transaction of any business because the meeting is not lawfully called or
convened and except that attendance at a meeting is not a waiver of any right to
object to the consideration of matters not properly included in the notice if
such objection is expressly made at the time any such matters are presented at
the meeting. Neither the business to be transacted at nor the purpose of any
regular or special meeting of stockholders need be specified in any written
waiver of notice or consent, except as otherwise provided in Section 2.04(a) and
(b) or Section 2.12 (if applicable) of these Bylaws.
SECTION 2.12 BUSINESS TO BE CONDUCTED AT MEETING. At an annual or
special meeting of the stockholders, only such business shall be conducted as
shall have been properly brought before the meeting. To be properly brought
before a meeting, business must be (a) specified in the notice of meeting (or
any supplement thereto) given by or at the direction of the Board of Directors,
(b) brought before the meeting by or at the direction of the Board of Directors,
(c) properly brought before an annual meeting by a stockholder, or (d) if, and
only if, the notice of a special meeting provides for business to be brought
before the meeting by stockholders, properly brought before the meeting by a
stockholder who is a stockholder of record at the time of serving of the notice
pursuant to Section 2.04, who shall be entitled to vote at such meeting and who
complies with the notice procedures set forth in this Section 2.12. For
business to be properly brought before a meeting by a stockholder pursuant to
the preceding clauses (c) or (d), the stockholder must have given timely notice
thereof in writing to the secretary of the corporation. To be timely, a
stockholder's notice must be delivered to, or mailed and received by, the
secretary at the principal executive office of the corporation not less than
thirty-five (35) days prior to the meeting; PROVIDED, HOWEVER, that in the event
less than forty-five (45) days notice or public disclosure of the date of the
meeting is given or made to the stockholders, notice by the stockholder to be
timely must be so received not later than the fifth (5th) day following the day
on which such notice of the date of the meeting was mailed or such disclosure
was made. In no event shall the public disclosure of an adjournment of an
annual or special meeting commence a new time period for the giving of
stockholder's notice as described above. A stockholder's notice to the
secretary shall set forth as to each matter the stockholder proposes to bring
before the meeting (a) a brief description of the business desired to be brought
before the meeting and the reasons for conducting such business at the meeting,
(b) the name and address, as they appear on the corporation's books, of the
stockholder proposing such business, and the name and address of the beneficial
owner, if any, on whose behalf the proposal is made, (c) the class and number of
shares of the corporation which are owned beneficially and of record by such
stockholder of record and by the beneficial owner, if any, on whose behalf the
proposal is made, and (d) any material interest of such stockholder of record
and the beneficial owner, if any, on whose behalf the proposal is made in such
business. Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at a meeting except in accordance with the procedures set
forth in this Section 2.12. The presiding officer at the meeting shall, if the
facts warrant, determine and declare to the meeting that business was not
brought in accordance with this Section 2.12, and if he should so determine, he
shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted. Notwithstanding the foregoing
provisions of this Section 2.12, a stockholder shall also comply with all
applicable requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations therunder with respect to the
matters set forth herein. As used herein, "public disclosure" shall mean
disclosure in a press release reported by the Dow Jones News Association, the
Associated Press, or comparable news service or in a document publicly filed
with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d)
of the Exchange Act.
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SECTION 2.13 NO STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.
Stockholders may take action only at a regular or special meeting of
stockholders.
ARTICLE III
DIRECTORS
SECTION 3.01 NUMBER, ELECTION, TENURE, AND QUALIFICATIONS. Except as
otherwise fixed by resolution of the Board of Directors pursuant to the Articles
of Incorporation relating to the authorization of the Board of Directors to
provide by resolution for the issuance of Preferred Stock and to determine the
rights of the holders of such Preferred Stock to elect directors, the Board of
Directors shall consist of at least one (1) individual who shall be elected at
the annual meeting of the stockholders of the corporation and who shall hold
office for one (1) year or until his or her successor is elected and qualify. A
director need not be a stockholder of the corporation.
SECTION 3.02 CHANGE IN NUMBER. Subject to any limitation in the laws of
the State of Nevada, the Articles of Incorporation or these Bylaws, the number
of directors may be changed from time to time by resolution adopted by the Board
of Directors.
SECTION 3.03 REDUCTION IN NUMBER. No reduction in the number of
directors shall have the effect of removing any director prior to the expiration
of his term in office.
SECTION 3.04 NOMINATION OF DIRECTORS. Except as otherwise fixed by
resolution of the Board of Directors pursuant to the Articles of Incorporation
relating to the authorization of the Board of Directors to provide by resolution
for the issuance of Preferred Stock and to determine the rights of the holders
of such Preferred Stock to elect directors, nominations for the election of
directors may be made by the Board of Directors, by a committee appointed by the
board of directors, or by any stockholder of record at the time of giving of
notice provided for herein. However, any stockholder entitled to vote in the
election of directors as provided herein may nominate one or more persons for
election as directors at a meeting only if written notice of such stockholder's
intent to make such nomination or nominations has been delivered to or mailed
and received by the secretary of the corporation not later than, (a) with
respect to an election to be held at an annual meeting of stockholders, 120
calendar days in advance of the first anniversary of the date the corporation's
proxy statement was released to security holders in connection with the
preceding year's annual meeting; PROVIDED, HOWEVER, that in the event that the
date of the annual meeting is changed by more than thirty (30) days from such
anniversary date, notice by the stockholder to be timely must be received not
later than the close of business on the tenth (10th) day following the earlier
of the day on which notice of the date of the meeting was mailed or public
disclosure was made, and (b) with respect to an election to be held at a special
meeting of stockholders for the election of directors, not earlier than the
close of business on the 90th day prior to such special meeting and not later
than the close of business on the later of the 60th day prior to such special
meeting or the tenth (10th) day following the day on which public disclosure is
first made of the date of the special meeting and the nominees proposed by the
board of directors to be elected at such a meeting. Notwithstanding any of the
foregoing to the contrary, in the event that the number of directors to be
elected by the Board of Directors of the corporation is increased and there is
no public disclosure by the corporation naming the nominees for director or
specifying the size of the increased Board of Directors at least seventy (70)
days prior to the first anniversary of the date of the preceding year's annual
meeting, a stockholder's notice required hereunder shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal executive
office of the corporation not later than the close of business on the tenth
(10th) day following the earlier of day on which notice of the meeting is mailed
or such public disclosure is first made by the corporation. In no event shall
the public announcement of an adjournment of an annual or special meeting
commence a new time period for the giving of a stockholder's notice as describe
above. Each such notice shall set forth: (a) the name and address of the
stockholder who intends to make the nomination and of the person or perons to be
nominated; (b) a representation that the stockholder is a holder of record of
stock of the corporation entitled to vote at such meeting and intends to appear
in person or by proxy at the meeting to nominate the person or persons specified
in the notice; (c) the class and number of shares of the corporation which are
beneficially owned by such stockholder and also which are owned of record by
such stockholder; (d) as to the beneficial owner, if any, on whose behalf the
nomination is made, (i) the name and address of such person and (ii) the class
and number of shares of the corporation which are beneficially owned by such
person; (e) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or
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persons) pursuant to which the nomination or nominations are to be made by the
stockholder; (f) such other information regarding each nominee proposed by such
stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission, had such
nominee been nominated, or intended to be nominated, by the Board of Directors;
and (g) the written consent of each nominee to being named as nominee in the
proxy statement and to serving as a director of the corporation if so elected.
At the request of the Board of Directors, any person nominated by the Board of
Directors for election as a director shall furnish to the secretary of the
corporation, that information required to be set forth in a stockholder's notice
of nomination which pertains to the nominee. The presiding officer of the
meeting may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure. As used herein, "public disclosure"
shall have the meaning set forth in Section 2.12. No person shall be eligible
to serve as a director of the corporation unless nominated in accordance with
the procedures set forth in this Section 3.04. The presiding officer at the
meting shall, if the facts warrant, determine and declare to the meeting that a
nomination was not made in accordance with the procedures prescribed by this
Section 3.04, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded. Notwithstanding the
foregoing provisions hereof, a stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth herein.
SECTION 3.05 VACANCIES; NEWLY CREATED DIRECTORSHIPS. Except as otherwise
fixed by resolution of the Board of Directors pursuant to the Articles of
Incorporation relating to the authorization of the Board of Directors to provide
by resolution for the issuance of Preferred Stock and to determine the rights of
the holders of such Preferred Stock to elect directors, any vacancies on the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office, or other cause, and newly created
directorships resulting from any increase in the authorized number of directors,
may be filled only by a majority vote of the directors then in office, though
less than a quorum, or by a sole remaining director, and the director(s) so
chosen shall hold office (i) in the case of the replacement of a director,
during the remainder of the term of office of the replaced director and (ii) in
the case of an increase in the number of directors, until the next annual
meeting of stockholders at which directors are elected, unless sooner displaced.
SECTION 3.06. REMOVAL OF DIRECTORS. Subject to any rights of the holders
of Preferred Stock, any director may be removed from office by the affirmative
vote of the holders of at least two-thirds (2/3rds) of the voting power of all
shares of the corporation entitled to vote generally in the election of
directors (voting as a single class).
SECTION 3.07 ANNUAL AND REGULAR MEETINGS. Immediately following the
adjournment of, and at the same place as, the annual or any special meeting of
the stockholders at which directors are elected other than pursuant to Section
3.06 of this Article, the Board of Directors, including directors newly elected,
shall hold its annual meeting without notice, other than this provision, to
elect officers and to transact such further business as may be necessary or
appropriate. The Board of Directors may provide by resolution the place, date,
and hour for holding regular meetings between annual meetings.
SECTION 3.08 SPECIAL MEETINGS. Except as otherwise required by law, and
subject to the rights, if any, of the holders of Preferred Stock, special
meetings of the Board of Directors may be called by the chairman, or if there be
no chairman, by the president or secretary and shall be called by the chairman,
the president or the secretary upon the request of any two (2) directors. If
the chairman, or if there be no chairman both the president and secretary,
refuses or neglects to call such special meeting, a special meeting may be
called by notice signed by any two (2) directors.
SECTION 3.09 PLACE OF MEETINGS. Any regular or special meeting of the
directors of the corporation may be held at such place as the Board of
Directors, or in the absence of such designation, as the notice calling such
meeting, may designate. A waiver of notice signed by directors may designate
any place for the holding of such meeting.
SECTION 3.10 NOTICE OF MEETINGS. Except as otherwise provided in Section
3.07, there shall be delivered to all directors, at least forty-eight (48) hours
before the time of such meeting, a copy of a written notice of any meeting by
delivery of such notice personally by mailing such notice postage prepaid or by
telegram. Such
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notice shall be addressed in the manner provided for notice to stockholders in
Section 2.04(c). If mailed, the notice shall be deemed delivered two (2)
business days following the date the same is deposited in the United States
mail, postage prepaid. Any director may waive notice of any meeting, and the
attendance of a director at a meeting and oral consent entered on the minutes of
the meeting or taking part in deliberations of the meeting without objection
shall constitute a waiver of notice of such meeting. Attendance for the express
purpose of objecting to the transaction of business thereat because the meeting
is not properly called or convened shall not constitute presence nor a waiver of
notice for purposes hereof.
SECTION 3.11 QUORUM; ADJOURNED MEETINGS.
(a) A majority of the directors in office, at a meeting duly
assembled, is necessary to constitute a quorum for the transaction of business.
(b) At any meeting of the Board of Directors where a quorum is not
present, a majority of those present may adjourn, from time to time, until a
quorum is present, and no notice of such adjournment shall be required. At any
adjourned meeting where a quorum is present, any business may be transacted
which could have been transacted at the meeting originally called.
SECTION 3.12 BOARD OF DIRECTORS' DECISIONS. The affirmative vote of a
majority of the directors present at a meeting at which a quorum is present is
the act of the Board of Directors.
SECTION 3.13 TELEPHONIC MEETINGS. Members of the Board of Directors or
of any committee designated by the Board of Directors may participate in a
meeting of the Board of Directors or committee by means of a telephone
conference or similar method of communication by which all persons participating
in such meeting can hear each other. Participation in a meeting pursuant to
this Section 3.13 constitutes presence in person at the meeting.
SECTION 3.14 ACTION WITHOUT MEETING. Any action required or permitted to
be taken at a meeting of the Board of Directors or of a committee thereof may be
taken without a meeting if, before or after the action, a written consent
thereto is signed by all of the members of the Board of Directors or the
committee. The written consent may be signed in counterparts and must be filed
with the minutes of the proceedings of the Board of Directors or committee.
SECTION 3.15 POWERS AND DUTIES.
(a) Except as otherwise restricted in the laws of the State of Nevada
or the Articles of Incorporation, the Board of Directors has full control over
the affairs of the corporation. The Board of Directors may delegate any of its
authority to manage, control or conduct the business of the corporation to any
standing or special committee, as more fully set forth in Article V of these
Bylaws, or to any officer or agent and to appoint any persons to be agents of
the corporation with such powers, including the power to subdelegate, and upon
such terms as may be deemed fit.
(b) The Board of Directors may present to the stockholders at annual
meetings of the stockholders, and when called for by a majority vote of the
stockholders at an annual meeting or, subject to Section 2.12, a special meeting
of the stockholders shall so present, a full and clear report of the condition
of the corporation.
(c) The Board of Directors, in its discretion, or the officer of the
corporation presiding at a meeting of stockholders, in his discretion, may
require that any votes cast at such meeting shall be cast by written ballot and
may submit any contract or act for approval or ratification at any annual
meeting of the stockholders or any special meeting properly called for the
purpose of considering any such contract or act, provided a quorum is present.
SECTION 3.16. COMPENSATION. The directors shall be paid their expenses of
attendance at each meeting of the board of directors and any applicable
committee and may be paid a fixed fee for attendance at each meeting of the
board of directors and any applicable committee or a stated salary as director
and member of an applicable
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committee. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
SECTION 3.17 BOARD OF DIRECTORS' OFFICERS.
(a) At its annual meeting, the Board of Directors shall elect, from
among its members, a chairman who shall preside at meetings of the Board of
Directors and the stockholders. The Board of Directors may also elect such
other officers of the Board of Directors and for such term as it may, from time
to time, determine advisable.
(b) Any vacancy in any office of the Board of Directors because of
death, resignation, removal or otherwise may be filled by the Board of Directors
for the unexpired portion of the term of such office.
SECTION 3.18 ORDER OF BUSINESS. The order of business at any meeting of
the Board of Directors shall be as follows:
1. Determination of members present and existence of quorum;
2. Reading and approval of the minutes of any previous meeting or
meetings;
3. Reports of officers and committeemen;
4. Election of officers (annual meeting);
5. Unfinished business;
6. New business;
7. Adjournment.
ARTICLE IV
COMMITTEES
SECTION 4.01 STANDING COMMITTEES. The Board of Directors shall designate
an audit committee and a compensation committee, each committee to consist of
two or more directors to serve at the pleasure of the Board. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the board of directors to act at the meeting in the place of any such absent or
disqualified member. The committees shall keep regular minutes of their
proceedings and report the same to the Board when required
(a) AUDIT COMMITTEE. The audit committee will review the annual
audits of the corporation's independent public accountants, review and evaluate
internal accounting controls, recommend the selection of the corporation's
independent public accountants, review and pass upon (or ratify) related party
transactions, and conduct such reviews and examinations as it deems necessary
with respect to the practices and policies of, and the relationship between, the
corporation and its independent public accountants.
(b) COMPENSATION COMMITTEE. The Compensation Committee will review
salaries, bonuses and stock options of senior officers of the corporation and
administer the corporation's executive compensation policies and stock option
plan.
SECTION 4.02 SPECIAL COMMITTEES. In addition to the standing committees
provided in Section 4.01 above, the Board of Directors may, by resolution passed
by a majority of the whole board, designate one or more
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special committees, each committee to consist of one or more of the directors of
the corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. In the absence or disqualification of a member of
a committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Such committee
or committees shall have such name or names as may be determined from time to
time by resolution adopted by the Board of Directors. The committees shall keep
regular minutes of their proceedings and report the same to the Board when
required. Subject to applicable law and to the extent provided in the
resolution of the Board of Directors, any committee designated hereunder shall
have and may exercise all the powers of the Board of Directors, except with
respect to: (i) the approval of any action which, under Chapter 78 of the
Nevada Revised Statutes, also requires the approval of the full Board of
Directors, or the stockholders of the outstanding shares; (ii) the filling of
vacancies on the Board of Directors or in any committee; (iii) the amendment or
repeal of bylaws or the adoption of new bylaws; (iv) the amendment or repeal of
any resolution of the Board of Directors which by its express terms is not so
amendable or repealable; (v) a distribution to the stockholders of the
corporation, except at a rate or in a periodic amount or within a price range
determined by the Board of Directors; or (vi) the appointment of any other
committees of the Board of Directors or the members thereof.
SECTION 4.03 MEETINGS AND ACTIONS OF COMMITTEES. Meetings and actions of
committees shall be governed by, and held and taken in accordance with Sections
3.07 (annual and regular meetings), 3.08 (special meetings), 3.09 (place of
meetings). 3.10 (notice of meetings), 3.11 (quorum and adjourned meetings), 3.13
(telephonic meetings), and 3.13 (action without a meeting) of these Bylaws, with
such changes in the context of those bylaws as are necessary to substitute the
committee and its members for the Board of Directors, and notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.
ARTICLE V
OFFICERS
SECTION 5.01 ELECTION. The Board of Directors, at its annual meeting,
shall elect a president, a secretary and a treasurer to hold office for a term
of one (1) year or until their successors are chosen and qualify. Any
individual may hold two or more offices. The Board of Directors may, from time
to time, by resolution, elect one or more vice-presidents, assistant
secretaries, assistant treasurers or other officers, and appoint agents of the
corporation, prescribe their duties and fix their compensation.
SECTION 5.02 REMOVAL; RESIGNATION. Any officer or agent elected or
appointed by the Board of Directors may be removed by it with or without cause.
Any officer may resign at any time upon written notice to the corporation. Any
such removal or resignation shall be subject to the rights, if any, of the
respective parties under any contract between the corporation and such officer
or agent.
SECTION 5.03 VACANCIES. Any vacancy in any office because of death,
resignation, removal or otherwise may be filled by the Board of Directors for
the unexpired portion of the term of such office.
SECTION 5.04 CHAIRMAN OF THE BOARD. The chairman shall be the chief
executive officer of the corporation and shall, subject to the control of the
Board of Directors, have general supervision, direction and control of the
business and affairs of the corporation and shall preside at meetings of the
stockholders and the Board of Directors.
SECTION 5.05 PRESIDENT.
(a) The president shall be the chief operations officer of the
corporation, subject to the supervision and control of the Board of Directors,
and shall direct the corporate affairs, with full power to execute all
resolutions and orders of the Board of Directors not expressly delegated to some
other officer or agent of the corporation. If the chairman of the Board of
Directors elects not to preside or is absent, the president shall preside at
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meetings of the stockholders and Board of Directors and perform such other
duties as shall be prescribed by the Board of Directors.
(b) The president shall have full power and authority on behalf of
the corporation to attend and to act and to vote, or designate such other
officer or agent of the corporation to attend and to act and to vote, at any
meetings of the stockholders of any corporation in which the corporation may
hold stock and, at any such meetings, shall possess and may exercise any and all
rights and powers incident to the ownership of such stock. The Board of
Directors, by resolution from time to time, may confer like powers on any person
or persons in place of the president to exercise such powers for these purposes.
SECTION 5.06 VICE-PRESIDENTS. The Board of Directors may elect one or
more vice-presidents who shall be vested with all the powers and perform all the
duties of the president whenever the president is absent or unable to act and
such other duties as shall be prescribed by the Board of Directors or the
president.
SECTION 5.07 SECRETARY. The secretary shall keep, or cause to be kept,
the minutes of proceedings of the stockholders and the Board of Directors in
books provided for that purpose. The secretary shall attend to the giving and
service of all notices of the corporation, may sign with the president in the
name of the corporation all contracts in which the corporation is authorized to
enter, shall have the custody or designate control of the corporate seal, shall
affix the corporate seal to all certificates of stock duly issued by the
corporation, shall have charge or designate control of stock certificate books,
transfer books and stock ledgers, and such other books and papers as the Board
of Directors or appropriate committee may direct, and shall, in general, perform
all duties incident to the office of the secretary.
SECTION 5.08 ASSISTANT SECRETARIES. The Board of Directors may appoint
one or more assistant secretaries who shall have such powers and perform such
duties as may be prescribed by the Board of Directors or the secretary.
SECTION 5.09 TREASURER. The treasurer shall be subject to the
supervision and control of the Board of Directors, and shall have custody of all
the funds and securities of the corporation. When necessary or proper, the
treasurer shall endorse on behalf of the corporation for collection checks,
notes, and other obligations, and shall deposit all moneys to the credit of the
corporation in such bank or banks or other depository as the Board of Directors
may designate, and shall sign all receipts and vouchers for payments made by the
corporation. Unless otherwise specified by the Board of Directors, the
treasurer may sign with the president all bills of exchange and promissory notes
of the corporation, shall also have the care and custody of the stocks, bonds,
certificates, vouchers, evidence of debts, securities, and such other property
belonging to the corporation as the Board of Directors shall designate, and
shall sign all papers required by law, by these Bylaws, or by the Board of
Directors to be signed by the treasurer. The treasurer shall enter, or cause to
be entered, regularly in the financial records of the corporation, to be kept
for that purpose, full and accurate accounts of all moneys received and paid on
account of the corporation and, whenever required by the Board of Directors, the
treasurer shall render a statement of any or all accounts. The treasurer shall
at all reasonable times exhibit the books of account to any director of the
corporation and shall perform all acts incident to the position of treasurer
subject to the control of the Board of Directors.
The treasurer shall, if required by the Board of Directors, give bond to
the corporation in such sum and with such security as shall be approved by the
Board of Directors for the faithful performance of all the duties of treasurer
and for restoration to the corporation, in the event of the treasurer's death,
resignation, retirement or removal from office, of all books, records, papers,
vouchers, money and other property in the treasurer's custody or control and
belonging to the corporation. The expense of such bond shall be borne by the
corporation.
SECTION 5.10 ASSISTANT TREASURERS. The Board of Directors may appoint
one or more assistant treasurers who shall have such powers and perform such
duties as may be prescribed by the Board of Directors or the treasurer. The
Board of Directors may require an assistant treasurer to give a bond to the
corporation in such sum and with such security as it may approve, for the
faithful performance of the duties of assistant treasurer, and for restoration
to the corporation, in the event of the assistant treasurer's death,
resignation, retirement or removal from office, of all books, records, papers,
vouchers, money and other property in the assistant treasurer's custody or
control and belonging to the corporation. The expense of such bond shall be
borne by the corporation.
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ARTICLE VI
CAPITAL STOCK
SECTION 6.01 ISSUANCE. Shares of the corporation's authorized stock
shall, subject to any provisions or limitations of the laws of the State of
Nevada, the Articles of Incorporation or any contracts or agreements to which
the corporation may be a party, be issued in such manner, at such times, upon
such conditions and for such consideration as shall be prescribed by the Board
of Directors.
SECTION 6.02 CERTIFICATES. Ownership in the corporation shall be
evidenced by certificates for shares of stock in such form as shall be
prescribed by the Board of Directors, shall be under the seal of the corporation
and shall be manually signed by the president or a vice-president and also by
the secretary or an assistant secretary; provided, however, whenever any
certificate is countersigned or otherwise authenticated by a transfer agent or
transfer clerk, and by a registrar, then a facsimile of the signatures of said
officers may be printed or lithographed upon the certificate in lieu of the
actual signatures. If the Corporation uses facsimile signatures of its officers
on its stock certificates, it shall not act as registrar of its own stock, but
its transfer agent and registrar may be identical if the institution acting in
those dual capacities countersigns any stock certificates in both capacities.
Each certificate shall contain the name of the record holder, the number,
designation, if any, class or series of shares represented, a statement or
summary of any applicable rights, preferences, privileges or restrictions
thereon, and a statement, if applicable, that the shares are assessable. All
certificates shall be consecutively numbered. If provided by the stockholder,
the name, address and federal tax identification number of the stockholder, the
number of shares, and the date of issue shall be entered in the stock transfer
records of the corporation.
SECTION 6.03 SURRENDERED; LOST OR DESTROYED CERTIFICATES. All
certificates surrendered to the corporation, except those representing shares of
treasury stock, shall be canceled and no new certificate shall be issued until
the former certificate for a like number of shares shall have been canceled,
except that in case of a lost, stolen, destroyed or mutilated certificate, a new
one may be issued therefor. However, any stockholder applying for the issuance
of a stock certificate in lieu of one alleged to have been lost, stolen,
destroyed or mutilated shall, prior to the issuance of a replacement, provide
the corporation with his, her or its affidavit of the facts surrounding the
loss, theft, destruction or mutilation and, if required by the Board of
Directors, an indemnity bond in an amount not less than twice the current market
value of the stock, and upon such terms as the treasurer or the Board of
Directors shall require which shall indemnify the corporation against any loss,
damage, cost or inconvenience arising as a consequence of the issuance of a
replacement certificate.
SECTION 6.04 REPLACEMENT CERTIFICATE. When the Articles of Incorporation
are amended in any way affecting the statements contained in the certificates
for outstanding shares of capital stock of the corporation or it becomes
desirable for any reason, in the discretion of the Board of Directors,
including, without limitation, the merger of the corporation with another
corporation or the reorganization of the corporation, to cancel any outstanding
certificate for shares and issue a new certificate therefor conforming to the
rights of the holder, the Board of Directors may order any holders of
outstanding certificates for shares to surrender and exchange the same for new
certificates within a reasonable time to be fixed by the Board of Directors.
The order may provide that a holder of any certificate(s) ordered to be
surrendered shall not be entitled to vote, receive distributions or exercise any
other rights of stockholders of record until the holder has complied with the
order, but the order operates to suspend such rights only after notice and until
compliance.
SECTION 6.05 TRANSFER OF SHARES. Upon surrender to the corporation, or
the transfer agent of the corporation, of a certificate or shares duly endorsed
or accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and the record the
transaction upon its books.
SECTION 6.06 TRANSFER AGENT; REGISTRARS. The Board of Directors may
appoint one or more transfer agents, transfer clerk and registrars of transfer
and may require all certificates for shares of stock to bear the signature of
such transfer agent, transfer clerk and/or registrar of transfer.
SECTION 6.07 STOCK TRANSFER RECORDS. The stock transfer records shall be
closed for a period of at least ten (10) days prior to all meetings of the
stockholders and shall be closed for the payment of distributions as
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provided in Article VII hereof and during such periods as, from time to time,
may be fixed by the Board of Directors, and, during such periods, no stock shall
be transferable for purposes of Article VII and no voting rights shall be deemed
transferred during such periods. Subject to the forgoing limitations, nothing
contained herein shall cause transfers during such periods to be void or
voidable.
SECTION 6.08 MISCELLANEOUS. The Board of Directors shall have the power
and authority to make such rules and regulations not inconsistent herewith as it
may deem expedient concerning the issue, transfer, and registration of
certificates for shares of the corporation's stock.
ARTICLE VII
DISTRIBUTIONS
SECTION 7.01 Distributions may be declared, subject to the provisions of
the laws of the State of Nevada and the Articles of Incorporation, by the Board
of Directors at any regular or special meeting and may be paid in cash,
property, shares of corporate stock, or any other medium. The Board of
Directors may fix in advance a record date, as provided in Section 2.06, prior
to the distribution for the purpose of determining stockholders entitled to
receive any distribution. The Board of Directors may close the stock transfer
books for such purpose for a period of not more than ten (10) days prior to the
date of such distribution.
ARTICLE VIII
RECORDS; REPORTS; SEAL; AND FINANCIAL MATTERS
SECTION 8.01 RECORDS. All original records of the corporation, shall be
kept by or under the direction of the secretary or at such places as may be
prescribed by the Board of Directors.
SECTION 8.02 DIRECTORS' AND OFFICERS' RIGHT OF INSPECTION. Every
director and officer shall have the absolute right at any reasonable time for a
purpose reasonably related to the exercise of such individual's duties to
inspect and copy all of the corporation's books, records, and documents of every
kind and to inspect the physical properties of the corporation and/or its
subsidiary corporations. Such inspection may be made in person or by agent or
attorney.
SECTION 8.03 CORPORATE SEAL. The Board of Directors may, by resolution,
authorize a seal, and the seal may be used by causing it, or a facsimile, to be
impressed or affixed or reproduced or otherwise. Except when otherwise
specifically provided herein, any officer of the corporation shall have the
authority to affix the seal to any document requiring it.
SECTION 8.04 FISCAL YEAR-END. The fiscal year-end of the corporation
shall be such date as may be fixed from time to time by resolution of the Board
of Directors.
SECTION 8.05 RESERVES. The Board of Directors may create, by resolution,
such reserves as the directors may, from time to time, in their discretion,
think proper to provide for contingencies, or to equalize distributions or to
repair or maintain any property of the corporation, or for such other purpose as
the Board of Directors may deem beneficial to the corporation, and the directors
may modify or abolish any such reserves in the manner in which they were
created.
ARTICLE IX
INDEMNIFICATION
SECTION 9.01 INDEMNIFICATION AND INSURANCE.
(a) INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(i) For purposes of this Article, (A) "Indemnitee" shall mean
each director or officer who was or is a party to, or is threatened to be made a
party to, or is otherwise involved in, any Proceeding (as hereinafter defined),
by reason of the fact that he or she is or was
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a director or officer of the corporation or is or was serving in any capacity at
the request of the corporation as a director, officer, employee, agent, partner,
or fiduciary of, or in any other capacity for, another corporation or any
partnership, joint venture, trust, or other enterprise; and (B) "Proceeding"
shall mean any threatened, pending, or completed action, or suit (including
without limitation an action, suit or proceeding by or in the right of the
corporation), whether civil, criminal, administrative, or investigative.
(ii) Each Indemnitee shall be indemnified and held harmless by
the corporation for all actions taken by him or her and for all omissions
(regardless of the date of any such action or omission), to the fullest extent
permitted by Nevada law, against all expense, liability and loss (including
without limitation attorneys' fees, judgments, fines, taxes, penalties, and
amounts paid or to be paid in settlement) reasonably incurred or suffered by the
Indemnitee in connection with any Proceeding.
(iii) Indemnification pursuant to this Section shall continue as
to an Indemnitee who has ceased to be a director or officer and shall inure to
the benefit of his or her heirs, executors and administrators.
(b) INDEMNIFICATION OF EMPLOYEES AND OTHER PERSONS.
The corporation may, by action of its Board of Directors and to
the extent provided in such action, indemnify employees and other persons as
though they were Indemnitees.
(c) NON-EXCLUSIVITY OF RIGHTS.
The rights to indemnification provided in this Article shall not
be exclusive of any other rights that any person may have or hereafter acquire
under any statute, provision of the corporation's Articles of Incorporation or
Bylaws, agreement, vote of stockholders or directors, or otherwise.
(d) INSURANCE.
The corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise for any
liability asserted against him or her and liability and expenses incurred by him
or her in his or her capacity as a director, officer, employee or agent, or
arising out of his or her status as such, whether or not the corporation has the
authority to indemnify him or her against such liability and expenses.
(e) OTHER FINANCIAL ARRANGEMENTS.
The other financial arrangements which may be made by the
corporation may include the following (i) the creation of a trust fund; (ii) the
establishment of a program of self-insurance; (iii) the securing of its
obligation of indemnification by granting a security interest or other lien on
any assets of the corporation; (iv) the establishment of a letter of credit,
guarantee or surety. No financial arrangement made pursuant to this subsection
may provide protection for a person adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable for
intentional misconduct, fraud, or a knowing violation of law, except with
respect to advancement of expenses or indemnification ordered by a court.
(f) OTHER MATTERS RELATING TO INSURANCE OR FINANCIAL ARRANGEMENTS.
Any insurance or other financial arrangement made on behalf of a
person pursuant to this section may be provided by the corporation or any other
person approved by the Board of Directors, even if all or part of the other
person's stock or other securities is owned by the corporation. In the absence
of fraud:
(i) the decision of the Board of Directors as to the propriety
of the terms and conditions of any insurance or other financial arrangement made
pursuant to this section and the choice of the person to provide the insurance
or other financial arrangement is conclusive; and
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(ii) the insurance or other financial arrangement:
(A) is not void or voidable; and
(B) does not subject any director approving it to
personal liability for his action,
even if a director approving the insurance or other financial arrangement is a
beneficiary of the insurance or other financial arrangement.
SECTION 9.02 AMENDMENT. The provisions of this Article IX relating to
indemnification shall constitute a contract between the corporation and each of
its directors and officers which may be modified as to any director or officer
only with that person's consent or as specifically provided in this Section.
Notwithstanding any other provision of these Bylaws relating to their amendment
generally (including, without limitation, Article X below), any repeal or
amendment of this Article IX which is adverse to any director or officer shall
apply to such director or officer only on a prospective basis, and shall not
limit the rights of an Indemnitee to indemnification with respect to any action
or failure to act occurring prior to the time of such repeal or amendment.
Notwithstanding any other provision of these Bylaws, no repeal or amendment of
these Bylaws shall affect any or all of this Article IX so as to limit or reduce
the indemnification in any manner unless adopted by (a) the unanimous vote of
the directors of the corporation then serving, or (b) by the stockholders as set
forth in Article X hereof; provided that no such amendment shall have a
retroactive effect inconsistent with the preceding sentence.
ARTICLE X
AMENDMENT OR REPEAL
SECTION 10.01. AMENDMENT OF BYLAWS. These Bylaws or any provision hereof
may be amended, altered, or repealed (a) by the Board of Directors at an annual
meeting thereof without prior notice or at any special meeting thereof if notice
of such proposed amendment, alteration or repeal is contained in the notice of
such special meeting or (b) by the affirmative vote of at least sixty-six and
two thirds percent (66-2/3%) of the voting power of all the then outstanding
shares of capital stock entitled to vote at any meeting of the stockholders at
which a quorum is present, if notice of such proposed amendment, alteration or
repeal is contained in the notice of such meeting.
SECTION 10.02. ADDITIONAL BYLAWS. Additional bylaws not inconsistent
herewith may be adopted by the Board of Directors. Any bylaws so adopted shall
be subject to alteration, amendment or repeal by the stockholders in accordance
with Section 10.01 of these Bylaws.
ARTICLE XI
CHANGES IN NEVADA LAW
SECTION 11.01 CHANGES IN NEVADA LAW. References in these Bylaws to
Nevada law or to any provision thereof shall be to such law as it existed on the
date these Bylaws were adopted or as such law thereafter may be changed;
provided that (a) in the case of any change which expands the liability of
directors or officers or limits the indemnification rights or the rights to
advancement of expenses which the corporation may provide in Article IX hereof,
the rights to limited liability, to indemnification and to the advancement of
expenses provided in the corporation's Articles of Incorporation and/or these
Bylaws shall continue as theretofore to the extent permitted by law; and (b) if
such change permits the corporation, without the requirement of any further
action by stockholders or directors, to limit further the liability of directors
or officers or to provide broader indemnification rights or rights to the
advancement of expenses than the corporation was permitted to provide prior to
such change, then liability thereupon shall be so limited and the rights to
indemnification and the advancement of expenses shall be so broadened to the
extent permitted by law.
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ANNEX III
THE 1998 EQUITY PARTICIPATION PLAN
OF
LTC HEALTHCARE, INC.
LTC Healthcare, Inc., a Nevada corporation, has adopted The 1998 Equity
Participation Plan of LTC Healthcare, Inc. (the "Plan"), effective
______________, 1998, for the benefit of its eligible employees, consultants and
directors.
The purposes of the Plan are as follows:
(1) To provide an additional incentive for directors, key Employees (as
such term is defined below) and consultants to further the growth, development
and financial success of the Company by personally benefiting through the
ownership of Company stock and/or rights which recognize such growth,
development and financial success.
(2) To enable the Company to obtain and retain the services of directors,
key Employees and consultants considered essential to the long range success of
the Company by offering them an opportunity to own stock in the Company and/or
rights which will reflect the growth, development and financial success of the
Company.
ARTICLE I
DEFINITIONS
Wherever the following terms are used in the Plan they shall have the
meanings specified below, unless the context clearly indicates otherwise.
"ADMINISTRATOR" shall mean the entity that conducts the general
administration of the Plan as provided in Article X. With reference to the
administration of the Plan with respect to Options granted to Independent
Directors, the term "Administrator" shall refer to the Board. With reference to
the administration of the Plan with respect to any other Award, the term
"Administrator" shall refer to the Committee unless the Board has assumed the
authority for administration of the Plan generally as provided in Section 10.2.
"AWARD" shall mean an Option, a Restricted Stock award, a Performance
Award, a Dividend Equivalents award, a Deferred Stock award, a Stock Payment
award or a Stock Appreciation Right which may be awarded or granted under the
Plan (collectively, "Awards").
"AWARD AGREEMENT" shall mean a written agreement executed by an authorized
officer of the Company and the Holder which shall contain such terms and
conditions with respect to an Award as the Administrator shall determine,
consistent with the Plan.
"AWARD LIMIT" shall mean seventy-five thousand (75,000) shares of Common
Stock, as adjusted pursuant to Section 11.3 of the Plan.
"BOARD" shall mean the Board of Directors of the Company.
"CHANGE IN CONTROL" shall mean a change in ownership or control of the
Company effected through any of the following transactions:
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(a) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange
Act) of securities of the Company representing forty percent (40%) or more
of the total combined voting power of the Company's then outstanding
securities; or
(b) the stockholders of the Company approve a merger or consolidation
of the Company with any other corporation (or other entity), other than a
merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 66-2/3% of the combined
voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation;
PROVIDED, HOWEVER, that a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no person
acquires more than 40% of the combined voting power of the Company's then
outstanding securities shall not constitute a Change in Control; or
(c) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale of disposition by
the Company of all or substantially all of the Company's assets, or
(d) a majority of the members of the Board cease to be, as of any
date of determination, members of the Board who were members of the Board
as of the date the Plan was approved by the stockholders of the Company or
was nominated for election or elected to the Board with the approval of a
majority of the members of the Board at the time of such nomination or
election.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMITTEE" shall mean the Compensation Committee of the Board, or another
committee or subcommittee of the Board, appointed as provided in Section 10.1.
"COMMON STOCK" shall mean the common stock of the Company, par value $.01
per share, and any equity security of the Company issued or authorized to be
issued in the future, but excluding any preferred stock and any warrants,
options or other rights to purchase Common Stock. Debt securities of the
Company convertible into Common Stock shall be deemed equity securities of the
Company.
"COMPANY" shall mean LTC Healthcare, Inc., a Nevada corporation.
"CORPORATE TRANSACTION" shall mean any of the following
stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated, form a holding
company or effect a similar reorganization as to form whereupon the Plan
and all Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than forty percent (40%) of the
total combined voting power of the
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Company's outstanding securities are transferred or issued to a person or
persons different from those who held such securities immediately prior to
such merger.
"CSAR" shall mean a Coupled Stock Appreciation Right.
"DEFERRED STOCK" shall mean Common Stock awarded under Article VIII of the
Plan.
"DIRECTOR" shall mean a member of the Board.
"DIVIDEND EQUIVALENT" shall mean a right to receive the equivalent value
(in cash or Common Stock) of dividends paid on Common Stock, awarded under
Article VIII of the Plan.
"EMPLOYEE" shall mean any officer or other employee (as defined in
accordance with Section 3401(c) of the Code) of the Company, or of any
corporation which is a Subsidiary.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended.
"FAIR MARKET VALUE" of a share of Common Stock as of a given date shall be
(i) the closing price of a share of Common Stock on the principal exchange on
which shares of Common Stock are then trading, if any (or as reported on any
composite index which includes such principal exchange), on the trading day
previous to such date, or if shares were not traded on the trading day previous
to such date, then on the next preceding date on which a trade occurred, or (ii)
if Common Stock is not traded on an exchange but is quoted on NASDAQ or a
successor quotation system, the mean between the closing representative bid and
asked prices for the Common Stock on the trading day previous to such date as
reported by NASDAQ or such successor quotation system; or (iii) if Common Stock
is not publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the Fair Market Value of a share of Common Stock as
established by the Administrator acting in good faith.
"GRANTEE" shall mean an Employee, Independent Director or consultant
granted a Performance Award, Dividend Equivalent, Stock Payment or Stock
Appreciation Right, or an award of Deferred Stock, under the Plan.
"HOLDER" shall mean a person who has been granted or awarded an Award.
"INCENTIVE STOCK OPTION" shall mean an option which conforms to the
applicable provisions of Section 422 of the Code and which is designated as an
Incentive Stock Option by the Committee.
"INDEPENDENT DIRECTOR" shall mean a member of the Board who is not an
Employee of the Company.
"ISAR" shall mean an independent stock appreciation right.
"NON-QUALIFIED STOCK OPTION" shall mean an Option which is not designated
as an Incentive Stock Option by the Committee.
"OPTION" shall mean a stock option granted under Article IV of the Plan.
An Option granted under the Plan shall, as determined by the Committee, be
either a Non-Qualified Stock Option or an Incentive Stock Option; PROVIDED,
HOWEVER, that Options granted to Independent Directors and consultants shall be
Non-Qualified Stock Options.
"OPTIONEE" shall mean an Employee, consultant or Independent Director
granted an Option under the Plan.
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"PERFORMANCE AWARD" shall mean a cash bonus, stock bonus or other
performance or incentive award that is paid in cash, Common Stock or a
combination of both, awarded under Article VIII of the Plan.
"PERFORMANCE CRITERIA" shall mean the following business criteria with
respect to the Company or any Subsidiary: (i) net income, (ii) investments,
(iii) cash flow, (iv) earnings per share, (v) return on equity, (vi) return on
invested capital or assets, (vii) cost reductions or savings, (viii) funds from
operations, (ix) appreciation in the fair market value of Common Stock and (x)
earnings before any one or more of the following items: interest, depreciation
or amortization.
"PLAN" shall mean The 1998 Equity Participation Plan of LTC Healthcare,
Inc.
"QDRO" shall mean a qualified domestic relations order as defined by the
Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
"RESTRICTED STOCK" shall mean Common Stock awarded under Article VII of the
Plan.
"RESTRICTED STOCKHOLDER" shall mean an Employee, Independent Director or
consultant granted an award of Restricted Stock under Article VII of the Plan.
"RULE 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as
such Rule may be amended from time to time.
"SECTION 162(m) PARTICIPANT" shall mean any key Employee designated by the
Committee as a key Employee whose compensation for the fiscal year in which the
key Employee is so designated or a future fiscal year may be subject to the
limit on deductible compensation imposed by Section 162(m) of the Code.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
"STOCK APPRECIATION RIGHT" shall mean a stock appreciation right granted
under Article IX of the Plan.
"STOCK PAYMENT" shall mean (i) a payment in the form of shares of Common
Stock, or (ii) an option or other right to purchase shares of Common Stock, as
part of a deferred compensation arrangement, made in lieu of all or any portion
of the compensation, including without limitation, salary, bonuses and
commissions, that would otherwise become payable to a key Employee or consultant
in cash or director fees that would otherwise be paid to an Independent Director
in cash, awarded under Article VIII of the Plan.
"SUBSIDIARY" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
"TERMINATION OF CONSULTANCY" shall mean the time when the engagement of a
Holder as a consultant to the Company or a Subsidiary is terminated for any
reason, with or without cause and with or without notice, including, but not by
way of limitation, by resignation, discharge, death or retirement; but excluding
terminations where there is a simultaneous commencement of employment with the
Company or any Subsidiary. The Committee, in its absolute discretion, shall
determine the effect of all matters and questions relating to Termination of
Consultancy, including, but not by way of limitation, the question of whether a
Termination of Consultancy resulted from a discharge for good cause, and all
questions of whether a particular leave of absence constitutes a Termination of
Consultancy. Notwithstanding any other provision of the Plan, the Company or
any Subsidiary has an absolute and unrestricted right to terminate a
consultant's service at any time for any reason whatsoever, with or without
cause and with or without notice, except to the extent expressly provided
otherwise in writing.
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"TERMINATION OF DIRECTORSHIP" shall mean the time when a Holder who is an
Independent Director ceases to be a Director for any reason, including, but not
by way of limitation, a termination by resignation, failure to be elected, death
or retirement. The Board, in its sole and absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Directorship
with respect to Independent Directors.
"TERMINATION OF EMPLOYMENT" shall mean the time when the employee-employer
relationship between a Holder and the Company or any Subsidiary is terminated
for any reason, with or without cause and with or without notice, including, but
not by way of limitation, a termination by resignation, discharge, death,
disability or retirement; but excluding (i) terminations where there is a
simultaneous reemployment or continuing employment of a Holder by the Company or
any Subsidiary, (ii) at the discretion of the Committee, terminations which
result in a temporary severance of the employee-employer relationship, and (iii)
at the discretion of the Committee, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Company or a
Subsidiary with the former employee. The Committee, in its absolute discretion,
shall determine the effect of all matters and questions relating to Termination
of Employment, including, but not by way of limitation, the question of whether
a Termination of Employment resulted from a discharge for good cause, and all
questions of whether a particular leave of absence constitutes a Termination of
Employment; PROVIDED, HOWEVER, that, with respect to Incentive Stock Options,
unless otherwise determined by the Committee in its discretion, a leave of
absence, change in status from an employee to an independent contractor or other
change in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that, such leave of absence, change in status
or other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then applicable regulations and revenue rulings under said
Section. Notwithstanding any other provision of the Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause and with
or without notice, except to the extent expressly provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 SHARES SUBJECT TO PLAN.
(a) The shares of stock subject to Awards shall be Common Stock,
initially shares of the Company's Common Stock, par value $.01 per share.
The aggregate number of such shares which may be issued upon exercise of
such Options or rights or upon any such awards under the Plan shall not
exceed Five Hundred Thousand (500,000). The shares of Common Stock
issuable upon exercise of such Options or rights or upon any such awards
may be either previously authorized but unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Awards,
granted under the Plan to any individual in any calendar year shall not
exceed the Award Limit. To the extent required by Section 162(m) of the
Code, shares subject to Options which are canceled continue to be counted
against the Award Limit and if, after grant of an Option, the price of
shares subject to such Option is reduced, the transaction is treated as a
cancellation of the Option and a grant of a new Option and both the Option
deemed to be canceled and the Option deemed to be granted are counted
against the Award Limit. Furthermore, to the extent required by Section
162(m) of the Code, if, after grant of a Stock Appreciation Right, the base
amount on which stock appreciation is calculated is reduced to reflect a
reduction in the Fair Market Value of the Common Stock, the transaction is
treated as a cancellation of the Stock Appreciation Right and a grant of a
new Stock Appreciation Right and both the Stock Appreciation Right deemed
to be canceled and the Stock Appreciation Right deemed to be granted are
counted against the Award Limit.
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2.2 ADD-BACK OF OPTIONS AND OTHER RIGHTS. If any Option, or other right
to acquire shares of Common Stock under any other Award under the Plan, expires
or is canceled without having been fully exercised, or is exercised in whole or
in part for cash as permitted by the Plan, the number of shares subject to such
Option or other right but as to which such Option or other right was not
exercised prior to its expiration, cancellation or exercise may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Furthermore, any shares subject to Awards which are adjusted pursuant to
Section 11.3 and become exercisable with respect to shares of stock of another
corporation shall be considered canceled and may again be optioned, granted or
awarded hereunder, subject to the limitations of Section 2.1. Shares of Common
Stock which are delivered by the Holder or withheld by the Company upon the
exercise of any Award under the Plan, in payment of the exercise price thereof
or tax withholding thereon, may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. If any share of Restricted Stock is
forfeited by the Holder or repurchased by the Company pursuant to Section 7.5
hereof, such share may again be optioned, granted or awarded hereunder, subject
to the limitations of Section 2.1. Notwithstanding the provisions of this
Section 2.2, no shares of Common Stock may again be optioned, granted or awarded
if such action would cause an Incentive Stock Option to fail to qualify as an
incentive stock option under Section 422 of the Code.
ARTICLE III
GRANTING OF AWARDS
3.1 AWARD AGREEMENT. Each Award shall be evidenced by an Award
Agreement. Award Agreements evidencing Awards intended to qualify as
performance-based compensation as described in Section 162(m)(4)(C) of the Code
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code. Award Agreements
evidencing Incentive Stock Options shall contain such terms and conditions as
may be necessary to meet the applicable provisions of Section 422 of the Code.
3.2 PROVISIONS APPLICABLE TO SECTION 162(m) PARTICIPANTS.
(a) The Committee, in its discretion, may determine whether an Award
is to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code.
(b) Notwithstanding anything in the Plan to the contrary, the
Committee may grant any Award to a Section 162(m) Participant, including
Restricted Stock the restrictions with respect to which lapse upon the
attainment of performance goals which are related to one or more of the
Performance Criteria and any performance or incentive award described in
Article VIII that vests or becomes exercisable or payable upon the
attainment of performance goals which are related to one or more of the
Performance Criteria.
(c) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with respect
to any Award granted under Articles VII and VIII which may be granted to
one or more Section 162(m) Participants, no later than ninety (90) days
following the commencement of any fiscal year in question or any other
designated fiscal period or period of service (or such other time as may be
required or permitted by Section 162(m) of the Code), the Committee shall,
in writing, (i) designate one or more Section 162(m) Participants, (ii)
select the Performance Criteria applicable to the fiscal year or other
designated fiscal period or period of service, (iii) establish the various
performance targets, in terms of an objective formula or standard, and
amounts of Restricted Stock or bonus amounts, as applicable, which may be
earned for such fiscal year or other designated fiscal period or period of
service and (iv) specify the relationship between Performance Criteria and
the performance targets and the amounts of Restricted Stock or bonus
amounts, as applicable, to be earned by each Section 162(m) Participant for
such fiscal year or other
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designated fiscal period or period of service. Following the completion of
each fiscal year or other designated fiscal period or period of service,
the Committee shall certify in writing whether the applicable performance
targets have been achieved for such fiscal year or other designated fiscal
period or period of service. In determining the amount earned by a Section
162(m) Participant, the Committee shall have the right to reduce (but not
to increase) the amount payable at a given level of performance to take
into account additional factors that the Committee may deem relevant to the
assessment of individual or corporate performance for the fiscal year or
other designated fiscal period or period of service.
3.3 CONSIDERATION. In consideration of the granting of an Award under the
Plan, the Holder shall agree, in the Award Agreement, to remain in the employ of
(or to consult for or to serve as an Independent Director of, as applicable) the
Company or any Subsidiary for a period of at least one year (or such shorter
period as may be fixed in the Award Agreement or by action of the Administrator
following grant of the Award) after the Award is granted (or, in the case of an
Independent Director, until the next annual meeting of stockholders of the
Company).
3.4 AT-WILL EMPLOYMENT. Nothing in the Plan or in any Award Agreement
hereunder shall confer upon any Holder any right to continue in the employ of,
or as a consultant for, the Company or any Subsidiary, or as a director of the
Company, or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Holder at any time for any reason whatsoever, with or without cause and with
or without notice, except to the extent expressly provided otherwise in a
written employment agreement between the Holder and the Company and any
Subsidiary.
ARTICLE IV
GRANTING OF OPTIONS TO EMPLOYEES,
CONSULTANTS AND INDEPENDENT DIRECTORS
4.1. ELIGIBILITY. Any Employee or consultant selected by the Committee
pursuant to Section 4.4(a)(i) shall be eligible to be granted an Option. Each
Independent Director of the Company shall be eligible to be granted Options at
the times and in the manner set forth in Sections 4.5 and 4.6.
4.2. DISQUALIFICATION FOR STOCK OWNERSHIP. No person may be granted an
Incentive Stock Option under the Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing Subsidiary or parent corporation (within the meaning of Section
422 of the Code) unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
4.3. QUALIFICATION OF INCENTIVE STOCK OPTIONS. No Incentive Stock Option
shall be granted to any person who is not an Employee.
4.4. GRANTING OF OPTIONS TO EMPLOYEES AND CONSULTANTS.
(a) The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of the Plan:
(i) Determine which Employees are key Employees and
select from among the key Employees or consultants (including
Employees or consultants who have previously received Awards
under the Plan) such of them as in its opinion should be granted
Options;
(ii) Subject to the Award Limit, determine the number of
shares to be subject to such Options granted to the selected key
Employees or consultants;
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(iii) Subject to Section 4.3, determine whether such
Options are to be Incentive Stock Options or Non-Qualified Stock
Options and whether such Options are to qualify as
performance-based compensation as described in Section
162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with the Plan; PROVIDED, HOWEVER, that the terms and
conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code
shall include, but not be limited to, such terms and conditions
as may be necessary to meet the applicable provisions of Section
162(m) of the Code.
(b) Upon the selection of a key Employee or consultant to be granted
an Option, the Committee shall instruct the Secretary of the Company to
issue the Option and may impose such conditions on the grant of the Option
as it deems appropriate. Without limiting the generality of the preceding
sentence, the Committee may, in its discretion and on such terms as it
deems appropriate, require as a condition on the grant of an Option to an
Employee or consultant that the Employee or consultant surrender for
cancellation some or all of the unexercised Options, any other Award or
other rights which have been previously granted to him/her under the Plan
or otherwise. An Option, the grant of which is conditioned upon such
surrender, may have an Option price lower (or higher) than the exercise
price of such surrendered Option or other award, may cover the same (or a
lesser or greater) number of shares as such surrendered Option or other
award, may contain such other terms as the Committee deems appropriate, and
shall be exercisable in accordance with its terms, without regard to the
number of shares, price, exercise period or any other term or condition of
such surrendered Option or other award.
(c) Any Incentive Stock Option granted under the Plan may be modified
by the Committee, with the consent of the Optionee, to disqualify such
Option from treatment as an "incentive stock option" under Section 422 of
the Code.
4.5. GRANTING OF OPTIONS TO INDEPENDENT DIRECTORS.
(a) During the term of the Plan, a person who is initially elected to
the Board and who is an Independent Director at the time of such initial
election automatically shall be granted an Option to purchase _____________
(________) shares of Common Stock (subject to adjustment as provided in
Section 11.3) on the date of such initial election. Members of the Board
who are employees of the Company who subsequently retire from the Company
and remain on the Board will not receive an initial Option grant pursuant
to the preceding sentence.
(b) The Board shall from time to time, in its absolute discretion,
and subject to applicable limitations of the Plan determine (i) which
Independent Directors, if any, should, in its opinion, be granted
Non-Qualified Stock Options, (ii) subject to the Award Limit, determine the
number of number of shares to be subject to such Options, and (iii) the
terms and conditions of such Options, consistent with the Plan.
4.6. OPTIONS IN LIEU OF CASH COMPENSATION. Options may be granted under
the Plan to Employees and consultants in lieu of cash bonuses which would
otherwise be payable to such Employees and consultants and to Independent
Directors in lieu of directors' fees which would otherwise be payable to such
Independent Directors, pursuant to such policies which may be adopted by the
Administrator from time to time.
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ARTICLE V
TERMS OF OPTIONS
5.1 OPTION PRICE. The price per share of the shares subject to each
Option granted to Employees and consultants shall be set by the Committee;
PROVIDED, HOWEVER, that such price shall be no less than the par value of a
share of Common Stock, unless otherwise permitted by applicable state law, and
(i) in the case of Options intended to qualify as performance-based compensation
as described in Section 162(m)(4)(C) of the Code, such price shall not be less
than 100% of the Fair Market Value of a share of Common Stock on the date the
Option is granted; (ii) in the case of Incentive Stock Options such price shall
not be less than 100% of the Fair Market Value of a share of Common Stock on the
date the Option is granted (or the date the Option is modified, extended or
renewed for purposes of Section 424(h) of the Code); and (iii) in the case of
Incentive Stock Options granted to an individual then owning (within the meaning
of Section 424(d) of the Code) more than 10% of the total combined voting power
of all classes of stock of the Company or any Subsidiary or parent corporation
thereof (within the meaning of Section 422 of the Code), such price shall not be
less than 110% of the Fair Market Value of a share of Common Stock on the date
the Option is granted (or the date the Option is modified, extended or renewed
for purposes of Section 424(h) of the Code).
5.2 OPTION TERM. The term of an Option granted to an Employee or
consultant shall be set by the Committee in its discretion; PROVIDED, HOWEVER,
that, in the case of Incentive Stock Options, the term shall not be more than
ten (10) years from the date the Incentive Stock Option is granted, or five (5)
years from such date if the Incentive Stock Option is granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code). Except as limited by requirements of Section 422 of the Code and
regulations and rulings thereunder applicable to Incentive Stock Options, the
Committee may extend the term of any outstanding Option in connection with any
Termination of Employment or Termination of Consultancy of the Optionee, or
amend any other term or condition of such Option relating to such a termination.
5.3 OPTION VESTING.
(a) The period during which the right to exercise, in whole or in
part, an Option granted to an Employee or a consultant vests in the
Optionee shall be set by the Committee in its sole and absolute discretion
and the Committee may determine that an Option may not be exercised in
whole or in part for a specified period after it is granted; PROVIDED,
HOWEVER, that, unless the Committee otherwise provides in the terms of the
Award Agreement or otherwise, no Option shall be exercisable by any
Optionee who is then subject to Section 16 of the Exchange Act within the
period ending six months and one day after the date the Option is granted.
At any time after grant of an Option, the Committee may, in its sole and
absolute discretion and subject to whatever terms and conditions it
selects, accelerate the period during which an Option granted to an
Employee or consultant vests.
(b) No portion of an Option granted to an Employee or consultant
which is unexercisable at Termination of Employment or Termination of
Consultancy, as applicable, shall thereafter become exercisable, except as
may be otherwise provided by the Committee either in the Award Agreement or
by action of the Committee following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year
(under the Plan and all other incentive stock option plans of the Company
and any parent or subsidiary corporation (within the meaning of Section 422
of the Code) of the Company) exceeds $100,000, such Options shall be
treated as Non-Qualified Options to the extent required by Section 422 of
the Code.
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The rule set forth in the preceding sentence shall be applied by taking
Options into account in the order in which they were granted. For purposes
of this Section 5.3(c), the Fair Market Value of stock shall be determined
as of the time the Option with respect to such stock is granted.
5.4 TERMS OF OPTIONS GRANTED TO INDEPENDENT DIRECTORS. The price per
share of the shares subject to each Option granted to an Independent Director
shall equal 100% of the Fair Market Value of a share of Common Stock on the date
the Option is granted. Subject to Section 6.6, each Option granted to an
Independent Director pursuant to Section 4.5 shall become exercisable in
cumulative annual installments of 33-1/3% on each of the first, second and third
anniversaries of the date of grant and shall expire on the earlier of the
seventh anniversary of the date of vesting or one year following an Independent
Director's Termination of Directorship for any reason; PROVIDED that no Option
shall vest more than one year following an Independent Director's Termination of
Directorship.
ARTICLE VI
EXERCISE OF OPTIONS
6.1 PARTIAL EXERCISE. An exercisable Option may be exercised in whole or
in part. However, an Option shall not be exercisable with respect to fractional
shares and the Administrator may require that, by the terms of the Option, a
partial exercise be with respect to a minimum number of shares.
6.2 MANNER OF EXERCISE. All or a portion of an exercisable Option shall
be deemed exercised upon delivery of all of the following to the Secretary of
the Company or his/her office:
(a) A written notice complying with the applicable rules established
by the Administrator stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion of the Option;
(b) Such representations and documents as the Administrator, in its
absolute discretion, deems necessary or advisable to effect compliance with
all applicable provisions of the Securities Act and any other federal or
state securities laws or regulations. The Administrator may, in its
absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation,
placing legends on share certificates and issuing stop-transfer notices to
agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 11.1 by any person or persons other than the Optionee, appropriate
proof of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised.
However, the Administrator, may in its discretion (i) allow a delay in
payment up to thirty (30) days from the date the Option, or portion
thereof, is exercised; (ii) allow payment, in whole or in part, through the
delivery of shares of Common Stock owned by the Optionee, duly endorsed for
transfer to the Company with a Fair Market Value on the date of delivery
equal to the aggregate exercise price of the Option or exercised portion
thereof; (iii) allow payment, in whole or in part, through the surrender of
shares of Common Stock then issuable upon exercise of the Option having a
Fair Market Value on the date of Option exercise equal to the aggregate
exercise price of the Option or exercised portion thereof; (iv) allow
payment, in whole or in part, through the delivery of property of any kind
which constitutes good and valuable consideration; (v) allow payment, in
whole or in part, through the delivery of a full recourse promissory note
bearing interest (at no less than such rate as shall then preclude the
imputation of interest under the Code) and payable upon such terms as may
be prescribed by the Committee or the
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Board; (vi) allow payment, in whole or in part, through the delivery of a
notice that the Optionee has placed a market sell order with a broker with
respect to shares of Common Stock then issuable upon exercise of the
Option, and that the broker has been directed to pay a sufficient portion
of the net proceeds of the sale to the Company in satisfaction of the
Option exercise price; or (vii) allow payment through any combination of
the consideration provided in the foregoing subparagraphs (ii), (iii),
(iv), (v) and (vi). In the case of a promissory note, the Administrator
may also prescribe the form of such note and the security to be given for
such note. The Option may not be exercised, however, by delivery of a
promissory note or by a loan from the Company when or where such loan or
other extension of credit is prohibited by law.
6.3 CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES. The Company shall not
be required to issue or deliver any certificate or certificates for shares of
stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body which the Administrator shall, in its absolute discretion,
deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Administrator shall, in its
absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of Options
granted to Independent Directors) may establish from time to time for
reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax, which in the
discretion of the Committee or the Board may be in the form of
consideration used by the Optionee to pay for such shares under Section
6.2(d).
6.4 RIGHTS AS STOCKHOLDERS/ DIVIDEND EQUIVALENTS. Optionees shall not be,
nor have any of the rights or privileges of, stockholders of the Company in
respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates representing such shares have been issued by the
Company to such Optionees. Notwithstanding the foregoing, any Optionee may be
granted Dividend Equivalents based on the dividends declared on Common Stock, to
be credited as of dividend payment dates, during the period between the date an
Option is granted, and the date such Option is exercised, vests or expires, as
determined by the Committee (or the Board, with respect to Independent
Directors). Such Dividend Equivalents shall be converted to cash or additional
shares of Common Stock by such formula and at such time and subject to such
limitations as may be determined by the Committee (or the Board, with respect to
Independent Directors). With respect to Dividend Equivalents granted with
respect to Options intended to be qualified performance-based compensation for
purposes of Section 162(m) of the Code, such Dividend Equivalents shall be
payable as of dividend payment dates regardless of whether such Option is
exercised.
6.5 OWNERSHIP AND TRANSFER RESTRICTIONS. The Administrator, in its
absolute discretion, may impose such restrictions on the ownership and
transferability of the shares purchasable upon the exercise of an Option as it
deems appropriate. Any such restriction shall be set forth in the respective
Award Agreement and may be referred to on the certificates evidencing such
shares. The Committee may require the Employee to give the Company prompt
notice of any disposition of shares of Common Stock acquired by exercise of an
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Incentive Stock Option within (i) two years from the date of granting (including
the date the Option is modified, extended or renewed for purposes of Section
424(h) of the Code) such Option to such Employee or (ii) one year after the
transfer of such shares to such Employee. The Committee may direct that the
certificates evidencing shares acquired by exercise of any such Option refer to
such requirement to give prompt notice of disposition.
6.6 ADDITIONAL LIMITATIONS ON EXERCISE OF OPTIONS. Optionees may be
required to comply with any timing or other restrictions with respect to the
settlement or exercise of an Option, including a window-period limitation, as
may be imposed in the discretion of the Administrator.
ARTICLE VII
AWARD OF RESTRICTED STOCK
7.1 ELIGIBILITY. Subject to the Award Limit, Restricted Stock may be
awarded to any Employee who the Committee determines is a key Employee, any
consultant who the Committee determines should receive such an Award or any
Independent Director who the Board determines should receive such an Award.
7.2 AWARD OF RESTRICTED STOCK.
(a) The Committee (or the Board, with respect to Independent
Directors) may from time to time, in its absolute discretion:
(i) Determine which Employees are key Employees and
select from among the key Employees, Independent Directors or
consultants (including Employees, Independent Directors or
consultants who have previously received other awards under the
Plan) such of them as in its opinion should be awarded Restricted
Stock; and
(ii) Determine the purchase price, if any, and other terms
and conditions applicable to such Restricted Stock, consistent
with the Plan.
(b) The Committee (or the Board, with respect to Independent
Directors) shall establish the purchase price, if any, and form of payment
for Restricted Stock.
(c) Upon the selection of a key Employee, Independent Director or
consultant to be awarded Restricted Stock, the Committee (or the Board,
with respect to Independent Directors) shall instruct the Secretary of the
Company to issue such Restricted Stock and may impose such conditions on
the issuance of such Restricted Stock as it deems appropriate.
7.3 RIGHTS AS STOCKHOLDERS. Subject to Section 7.4, upon delivery of the
shares of Restricted Stock to the escrow holder pursuant to Section 7.6, the
Restricted Stockholder shall have, unless otherwise provided by the Committee
(or the Board, with respect to Independent Directors), all the rights of a
stockholder with respect to said shares, subject to the restrictions in his/her
Award Agreement, including the right to receive all dividends and other
distributions paid or made with respect to the shares; PROVIDED, HOWEVER, that
in the discretion of the Committee (or the Board, with respect to Independent
Directors), any extraordinary distributions with respect to the Common Stock
shall be subject to the restrictions set forth in Section 7.4.
7.4 RESTRICTION. All shares of Restricted Stock issued under the Plan
(including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Award Agreement, be
subject to
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such restrictions as the Committee (or the Board, with respect to Independent
Directors) shall provide, which restrictions may include, without limitation,
restrictions concerning voting rights and transferability and restrictions based
on duration of employment with the Company, Company performance and individual
performance; PROVIDED, HOWEVER, that, except with respect to shares of
Restricted Stock granted to Section 162(m) Participants, by action taken after
the Restricted Stock is issued, the Committee may, on such terms and conditions
as it may determine to be appropriate, remove any or all of the restrictions
imposed by the terms of the Award Agreement. Restricted Stock may not be sold
or encumbered until all restrictions are terminated or expire. If no
consideration was paid by the Restricted Stockholder upon issuance, a Restricted
Stockholder's rights in unvested Restricted Stock shall lapse upon Termination
of Employment or, if applicable, upon Termination of Consultancy or Termination
of Directorship with the Company; PROVIDED, HOWEVER, that the Committee in its
sole and absolute discretion may provide that such rights shall not lapse in the
event of a Termination of Employment following a "change of ownership control"
(within the meaning of Treasury Regulation Section 1.62-27(e)(2)(v) or any
successor regulation thereto) of the Company or because of the Restricted
Stockholder's death or disability; PROVIDED, FURTHER, except with respect to
shares of Restricted Stock granted to Section 162(m) Participants, the Committee
in its sole and absolute discretion may provide that no such right of repurchase
shall exist in the event of a Termination of Employment, or a Termination of
Consultancy, without cause or following any Change in Control of the Company or
because of the Restricted Stockholder's retirement, or otherwise.
7.5 REPURCHASE OF RESTRICTED STOCK. The Committee (or the Board, with
respect to Independent Directors) shall provide in the terms of each individual
Award Agreement that the Company shall have the right to repurchase from the
Restricted Stockholder the Restricted Stock then subject to restrictions under
the Award Agreement immediately upon a Termination of Employment or, if
applicable, upon a Termination of Consultancy between the Restricted Stockholder
and the Company, at a cash price per share equal to the price paid by the
Restricted Stockholder for such Restricted Stock; PROVIDED, HOWEVER, that the
Committee in its sole and absolute discretion may provide that no such right of
repurchase shall exist in the event of a Termination of Employment following a
"change of ownership or control" (within the meaning of Treasury Regulation
Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company or
because of the Restricted Stockholder's death or disability; PROVIDED, FURTHER,
that, except with respect to shares of Restricted Stock granted to Section
162(m) Participants, the Committee in its sole and absolute discretion may
provide that no such right of repurchase shall exist in the event of a
Termination of Employment or a Termination of Consultancy without cause or
following any Change in Control of the Company or because of the Restricted
Stockholder's retirement, or otherwise.
7.6 ESCROW. The Secretary of the Company or such other escrow holder as
the Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Award Agreement with respect to the shares evidenced by such certificate expire
or shall have been removed.
7.7 LEGEND. In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Committee (or the Board, with respect to
Independent Directors) shall cause a legend or legends to be placed on
certificates representing all shares of Restricted Stock that are still subject
to restrictions under Award Agreements, which legend or legends shall make
appropriate reference to the conditions imposed thereby.
7.8 SECTION 83(b) ELECTION. If a Restricted Stockholder makes an election
under Section 83(b) of the Code, or any successor section thereto, to be taxed
with respect to the Restricted Stock as of the date of transfer of the
Restricted Stock rather than as of the date or dates upon which the Restricted
Stockholder would otherwise be taxable under Section 83(a) of the Code, the
Restricted Stockholder shall deliver a copy of such election to the Company
immediately after filing such election with the Internal Revenue Service.
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7.9 RESTRICTED STOCK IN LIEU OF CASH COMPENSATION. Restricted Stock may
be awarded under the Plan to Employees and consultants in lieu of cash bonuses
which would otherwise be payable to such Employees and consultants and to
Independent Directors in lieu of directors' fees which would otherwise be
payable to such Independent Directors, pursuant to such policies which may be
adopted by the Administrator from time to time.
ARTICLE VIII
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, DEFERRED STOCK,
STOCK PAYMENTS
8.1 ELIGIBILITY. Subject to the Award Limit, one or more Performance
Awards, Dividend Equivalents, awards of Deferred Stock, and/or Stock Payments
may be granted to any Employee who the Committee determines is a key Employee,
any consultant who the Committee determines should receive such an Award or any
Independent Director who the Board determines should receive such an Award.
8.2 PERFORMANCE AWARDS. Any key Employee or consultant selected by the
Committee or any Independent Director selected by the Board may be granted one
or more Performance Awards. The value of such Performance Awards may be linked
to any one or more of the Performance Criteria or other specific performance
criteria determined appropriate by the Committee (or the Board, with respect to
Independent Directors), in each case on a specified date or dates or over any
period or periods determined by the Committee (or the Board, with respect to
Independent Directors). In making such determinations, the Committee (or the
Board, with respect to Independent Directors) shall consider (among such other
factors as it deems relevant in light of the specific type of award) the
contributions, responsibilities and other compensation of the particular key
Employee, Independent Director or consultant.
8.3 DIVIDEND EQUIVALENTS. Any key Employee or consultant selected by the
Committee or any Independent Director selected by the Board may be granted
Dividend Equivalents based on the dividends declared on Common Stock, to be
credited as of dividend payment dates, during the period between the date a
Stock Appreciation Right, Deferred Stock or Performance Award is granted, and
the date such Stock Appreciation Right, Deferred Stock or Performance Award is
exercised, vests or expires, as determined by the Committee (or the Board, with
respect to Independent Directors). Such Dividend Equivalents shall be converted
to cash or additional shares of Common Stock by such formula and at such time
and subject to such limitations as may be determined by the Committee (or the
Board, with respect to Independent Directors).
8.4 STOCK PAYMENTS. Any key Employee or consultant selected by the
Committee or any Independent Director selected by the Board may receive Stock
Payments in the manner determined from time to time by the Committee (or the
Board, with respect to Independent Directors). The number of shares shall be
determined by the Committee (or the Board, with respect to Independent
Directors) and may be based upon the Performance Criteria or other specific
performance criteria determined appropriate by the Committee (or the Board, with
respect to Independent Directors), determined on the date such Stock Payment is
made or on any date thereafter.
8.5 DEFERRED STOCK. Any key Employee or consultant selected by the
Committee or any Independent Director selected by the Board may be granted an
award of Deferred Stock in the manner determined from time to time by the
Committee (or the Board, with respect to Independent Directors). The number of
shares of Deferred Stock shall be determined by the Committee (or the Board,
with respect to Independent Directors) and may be linked to the Performance
Criteria or other specific performance criteria determined to be appropriate by
the Committee (or the Board, with respect to Independent Directors), in each
case on a specified date or dates or over any period or periods determined by
the Committee (or the Board, with respect to Independent Directors). Common
Stock underlying a Deferred Stock award will not be issued
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until the Deferred Stock award has vested, pursuant to a vesting schedule or
performance criteria set by the Committee (or the Board, with respect to
Independent Directors). Unless otherwise provided by the Committee (or the
Board, with respect to Independent Directors), a Holder of Deferred Stock shall
have no rights as a Company stockholder with respect to such Deferred Stock
until such time as the Award has vested and the Common Stock underlying the
Award has been issued.
8.6 TERM. The term of a Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment shall be set by the Committee (or the Board,
with respect to Independent Directors) in its discretion.
8.7 EXERCISE OR PURCHASE PRICE. The Committee (or the Board, with respect
to Independent Directors) may establish the exercise or purchase price of a
Performance Award, shares of Deferred Stock, or shares received as a Stock
Payment.
8.8 EXERCISE UPON TERMINATION OF EMPLOYMENT, TERMINATION OF DIRECTORSHIP
OR TERMINATION OF CONSULTANCY. A Performance Award, Dividend Equivalent, award
of Deferred Stock and/or Stock Payment is exercisable or payable only while the
Holder is an Employee, Independent Director or consultant; PROVIDED, HOWEVER,
that the Committee in its sole and absolute discretion may provide that the
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment may be exercised or paid subsequent to a Termination of Employment
following a "change of control or ownership" (within the meaning of Section
1.162-27(e)(2)(v) or any successor regulation thereto) of the Company; PROVIDED,
FURTHER, that except with respect to Performance Awards granted to Section
162(m) Participants, the Committee in its sole and absolute discretion may
provide that the Performance Awards may be exercised or paid following a
Termination of Employment or a Termination of Consultancy without cause, or
following a Change in Control of the Company, or because of the Grantee's
retirement, death or disability, or otherwise.
8.9 PAYMENT ON EXERCISE. Payment of the amount determined under Section
8.1 or 8.2 above shall be in cash, in Common Stock or a combination of both, as
determined by the Committee (or the Board, with respect to Independent
Directors). To the extent any payment under this Article VIII is effected in
Common Stock, it shall be made subject to satisfaction of all provisions of
Section 6.3.
8.10 PERFORMANCE AWARD, DIVIDEND EQUIVALENT, DEFERRED STOCK AND/OR STOCK
PAYMENT IN LIEU OF CASH COMPENSATION. Performance Awards, Dividend Equivalents,
Deferred Stock and/or Stock Payments may be awarded under the Plan to Employees
and consultants in lieu of cash bonuses which would otherwise be payable to such
Employees and consultants and to Independent Directors in lieu of directors'
fees which would otherwise be payable to such Independent Directors, pursuant to
such policies which may be adopted by the Administrator from time to time.
ARTICLE IX
STOCK APPRECIATION RIGHTS
9.1 GRANT OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right may be
granted to any key Employee or consultant selected by the Committee or any
Independent Director selected by the Board. A Stock Appreciation Right may be
granted (i) in connection and simultaneously with the grant of an Option,
(ii) with respect to a previously granted Option, or (iii) independent of an
Option. A Stock Appreciation Right shall be subject to such terms and
conditions not inconsistent with the Plan as the Committee (or the Board, with
respect to Independent Directors) shall impose and shall be evidenced by an
Award Agreement. Without limiting the generality of the foregoing, the
Committee (or the Board, with respect to Independent Directors) may, in its
discretion and on such terms as it deems appropriate, require as a condition of
the grant of a Stock Appreciation Right to an Employee, Independent Director or
consultant that the Employee, Independent Director or consultant surrender for
cancellation some or all of the unexercised Options, awards of Restricted
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Stock or Deferred Stock, Performance Awards, Stock Appreciation Rights, Dividend
Equivalents or Stock Payments, or other rights which have been previously
granted to him/her under the Plan or otherwise. A Stock Appreciation Right, the
grant of which is conditioned upon such surrender, may have an exercise price
lower (or higher) than the exercise price of the surrendered Option or other
award, may cover the same (or a lesser or greater) number of shares as such
surrendered Option or other award, may contain such other terms as the Committee
(or the Board, with respect to Independent Directors) deems appropriate, and
shall be exercisable in accordance with its terms, without regard to the number
of shares, price, exercise period or any other term or condition of such
surrendered Option or other award.
9.2 COUPLED STOCK APPRECIATION RIGHTS.
(a) A CSAR shall be related to a particular Option and shall be
exercisable only when and to the extent the related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number
of shares subject to the simultaneously or previously granted Option to
which it is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to the Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the
extent then exercisable pursuant to its terms) and to receive from the
Company in exchange therefor an amount determined by multiplying the
difference obtained by subtracting the Option exercise price from the Fair
Market Value of a share of Common Stock on the date of exercise of the CSAR
by the number of shares of Common Stock with respect to which the CSAR
shall have been exercised, subject to any limitations the Committee (or the
Board, with respect to Independent Directors) may impose.
9.3 INDEPENDENT STOCK APPRECIATION RIGHTS.
(a) An ISAR shall be unrelated to any Option and shall have a term
set by the Committee (or the Board, with respect to Independent Directors).
An ISAR shall be exercisable in such installments as the Committee (or the
Board, with respect to Independent Directors) may determine. An ISAR shall
cover such number of shares of Common Stock as the Committee (or the Board,
with respect to Independent Directors) may determine. The exercise price
per share of Common Stock subject to each ISAR shall be set by the
Committee (or the Board, with respect to Independent Directors). An ISAR
is exercisable only while the Grantee is an Employee, Independent Director
or consultant; provided that the Committee (or the Board, with respect to
Independent Directors) may determine that the ISAR may be exercised
subsequent to Termination of Employment, Termination of Directorship or
Termination of Consultancy without cause, or following a Change in Control
of the Company, or because of the Grantee's retirement, death or
disability, or otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to the Plan) to exercise all or a specified
portion of the ISAR (to the extent then exercisable pursuant to its terms)
and to receive from the Company an amount determined by multiplying the
difference obtained by subtracting the exercise price per share of the ISAR
from the Fair Market Value of a share of Common Stock on the date of
exercise of the ISAR by the number of shares of Common Stock with respect
to which the ISAR shall have been exercised, subject to any limitations the
Committee (or the Board, with respect to Independent Directors) may impose.
9.4 PAYMENT AND LIMITATIONS ON EXERCISE.
(a) Payment of the amount determined under Section 9.2(c) and 9.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as
of the date the Stock Appreciation Right is
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exercised) or a combination of both, as determined by the Committee (or the
Board, with respect to Independent Directors). To the extent such payment
is effected in Common Stock it shall be made subject to satisfaction of all
provisions of Section 6.3 above pertaining to Options.
(b) Grantees of Stock Appreciation Rights may be required to comply
with any timing or other restrictions with respect to the settlement or
exercise of a Stock Appreciation Right, including a window-period
limitation, as may be imposed in the discretion of the Committee (or the
Board, with respect to Independent Directors).
ARTICLE X
ADMINISTRATION
10.1 COMPENSATION COMMITTEE. The Compensation Committee (or another
committee or a subcommittee of the Board assuming the functions of the Committee
under the Plan) shall consist solely of two or more Independent Directors
appointed by and holding office at the pleasure of the Board, each of whom is
both a "non-employee director" as defined by Rule 16b-3 and an "outside
director" for purposes of Section 162(m) of the Code. Appointment of Committee
members shall be effective upon acceptance of appointment. Committee members
may resign at any time by delivering written notice to the Board. Vacancies in
the Committee may be filled by the Board.
10.2 DUTIES AND POWERS OF COMMITTEE. It shall be the duty of the Committee
to conduct the general administration of the Plan in accordance with its
provisions. The Committee shall have the power to interpret the Plan and the
agreements pursuant to which Awards are granted or awarded, and to adopt such
rules for the administration, interpretation, and application of the Plan as are
consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. Any such grant or award
under the Plan need not be the same with respect to each Holder. Any such
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under the Plan except with respect to matters
which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or
rules issued thereunder, are required to be determined in the sole discretion of
the Committee.
10.3 MAJORITY RULE; UNANIMOUS WRITTEN CONSENT. The Committee shall act by
a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
10.4 COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS. Members of
the Committee shall receive such compensation for their services as may be
determined by the Board. All expenses and liabilities which members of the
Committee incur in connection with the administration of the Plan shall be borne
by the Company. The Committee may, with the approval of the Board, employ
attorneys, consultants, accountants, appraisers, brokers, or other persons. The
Committee, the Company and the Company's officers and Directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee or the Board in good faith shall be final and binding upon all
Holders, the Company and all other interested persons. No members of the
Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or Awards, and all
members of the Committee and the Board shall be fully protected by the Company
in respect of any such action, determination or interpretation.
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ARTICLE XI
MISCELLANEOUS PROVISIONS
11.1 NOT TRANSFERABLE. No Award under the Plan may be sold, pledged,
assigned or transferred in any manner other than by will or the laws of descent
and distribution or, subject to the consent of the Administrator, pursuant to a
QDRO, unless and until such Award has been exercised, or the shares underlying
such Award have been issued, and all restrictions applicable to such shares have
lapsed. No Option, Restricted Stock award, Deferred Stock award, Performance
Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment or
interest or right therein shall be liable for the debts, contracts or
engagements of the Holder or his/her successors in interest or shall be subject
to disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
During the lifetime of the Holder, only he may exercise an Option or other
Award (or any portion thereof) granted to him/her under the Plan, unless it has
been disposed of pursuant to a QDRO. After the death of the Holder, any
exercisable portion of an Option or other Award may, prior to the time when such
portion becomes unexercisable under the Plan or the applicable Award Agreement,
be exercised by his/her personal representative or by any person empowered to do
so under the deceased Holder's will or under the then applicable laws of descent
and distribution.
11.2 AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN. Except as otherwise
provided in this Section 11.2, the Plan may be wholly or partially amended or
otherwise modified, suspended or terminated at any time or from time to time by
the Board or the Committee. However, without approval of the Company's
stockholders given within twelve months before or after the action by the Board
or the Committee, no action of the Board or the Committee may, except as
provided in Section 11.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under the Plan. No amendment,
suspension or termination of the Plan shall, without the consent of the Holder
alter or impair any rights or obligations under any Award theretofore granted or
awarded, unless the Award itself otherwise expressly so provides. No Awards may
be granted or awarded during any period of suspension or after termination of
the Plan, and in no event may any Incentive Stock Option be granted under the
Plan after the first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 11.4.
In addition, if the Board determines that Awards other than Options or
Stock Appreciation Rights which may be granted to Section 162(m) Participants
should continue to be eligible to qualify as performance-based compensation
under Section 162(m)(4)(C) of the Code, the Performance Criteria must be
disclosed to and approved by the Company's stockholders no later than the first
stockholder meeting that occurs in the fifth year following the year in which
the Company's stockholders previously approved the Performance Criteria.
11.3 CHANGES IN COMMON STOCK OR ASSETS OF THE COMPANY, ACQUISITION OR
LIQUIDATION OF THE COMPANY, CHANGE IN CONTROL AND OTHER CORPORATE EVENTS.
(a) Subject to Section 11.3(d), in the event that the Administrator
determines that any dividend or other distribution (whether in the form of
cash, Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, liquidation,
dissolution, or sale, transfer,
III-18
<PAGE>
exchange or other disposition of all or substantially all of the assets of
the Company (including, but not limited to, a Corporate Transaction), or
exchange of Common Stock or other securities of the Company, issuance of
warrants or other rights to purchase Common Stock or other securities of
the Company, or other similar corporate transaction or event, in the
Administrator's opinion, affects the Common Stock such that an adjustment
is determined by the Administrator to be appropriate in order to prevent
dilution or enlargement of the benefits or potential benefits intended to
be made available under the Plan or with respect to an Award, then the
Administrator shall, in such manner as it may deem equitable, adjust any or
all of:
(i) the number and kind of shares of Common Stock (or
other securities or property) with respect to which Awards may be
granted or awarded (including, but not limited to, adjustments of
the limitations in Section 2.1 on the maximum number and kind of
shares which may be issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or
other securities or property) subject to outstanding Options,
Performance Awards, Stock Appreciation Rights, Dividend
Equivalents, or Stock Payments, and in the number and kind of
shares of outstanding Restricted Stock or Deferred Stock, and
(iii) the grant or exercise price with respect to any
Award.
(b) Subject to Sections 11.3(b)(vii) and 11.3(d), in the event of any
Corporate Transaction or other transaction or event described in Section
11.3(a) or any unusual or nonrecurring transactions or events affecting the
Company, any affiliate of the Company, or the financial statements of the
Company or any affiliate, or of changes in applicable laws, regulations, or
accounting principles, the Administrator, in its sole and absolute
discretion, and on such terms and conditions as it deems appropriate,
either by the terms of the Award or by action taken prior to the occurrence
of such transaction or event and either automatically or upon the Holder's
request, is hereby authorized to take any one or more of the following
actions whenever the Administrator determines that such action is
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with
respect to any Award under the Plan, to facilitate such transactions or
events or to give effect to such changes in laws, regulations or
principles:
(i) To provide for either the purchase of any such Award
for an amount of cash equal to the amount that could have been
attained upon the exercise of such Award or realization of the
Holder's rights had such Award been currently exercisable or
payable or fully vested or the replacement of such Award with
other rights or property selected by the Administrator in its
sole discretion;
(ii) To provide that the Award cannot vest, be exercised
or become payable after such event;
(iii) To provide that such Award shall be exercisable as to
all shares covered thereby, notwithstanding anything to the
contrary in (i) Section 5.3 or 5.4 or (ii) the provisions of such
Award;
(iv) To provide that such Award be assumed by the
successor or survivor corporation, or a parent or subsidiary
thereof, or shall be substituted for by similar options, rights
or awards covering the stock of the successor or survivor
corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices;
III-19
<PAGE>
(v) To make adjustments in the number and type of shares
of Common Stock (or other securities or property) subject to
outstanding Awards, and in the number and kind of outstanding
Restricted Stock or Deferred Stock and/or in the terms and
conditions of (including the grant or exercise price), and the
criteria included in, outstanding options, rights and awards and
options, rights and awards which may be granted in the future.;
(vi) To provide that, for a specified period of time prior
to such event, the restrictions imposed under an Award Agreement
upon some or all shares of Restricted Stock or Deferred Stock may
be terminated, and, in the case of Restricted Stock, some or all
shares of such Restricted Stock may cease to be subject to
repurchase under Section 7.5 or forfeiture under Section 7.4
after such event; and
(vii) None of the foregoing discretionary actions taken
under this Section 11.3(b) shall be permitted with respect to
Options granted under Section 4.5 to Independent Directors to the
extent that such discretion would be inconsistent with the
applicable exemptive conditions of Rule 16b-3. In the event of a
Change in Control or a Corporate Transaction, to the extent that
the Board does not have the ability under Rule 16b-3 to take or
to refrain from taking the discretionary actions set forth in
Section 11.3(b)(iii) above, each Option granted to an Independent
Director shall be exercisable as to all shares covered thereby
upon such Change in Control or during the five days immediately
preceding the consummation of such Corporate Transaction and
subject to such consummation, notwithstanding anything to the
contrary in Section 5.4 or the vesting schedule of such Options.
In the event of a Corporate Transaction, to the extent that the
Board does not have the ability under Rule 16b-3 to take or to
refrain from taking the discretionary actions set forth in
Section 11.3(b)(ii) above, no Option granted to an Independent
Director may be exercised following such Corporate Transaction
unless such Option is, in connection with such Corporate
Transaction, either assumed by the successor or survivor
corporation (or parent or subsidiary thereof) or replaced with a
comparable right with respect to shares of the capital stock of
the successor or survivor corporation (or parent or subsidiary
thereof).
(c) Subject to Section 11.3(d) and 11.8, the Administrator may, in
its discretion, include such further provisions and limitations in any
Award, agreement or certificate, as it may deem equitable and in the best
interests of the Company.
(d) With respect to Awards described in Article VII or VIII which are
granted to Section 162(m) Participants and are intended to qualify as
performance-based compensation under Section 162(m)(4)(C), no adjustment or
action described in this Section 11.3 or in any other provision of the Plan
shall be authorized to the extent that such adjustment or action would
cause such Award to fail to so qualify under Section 162(m)(4)(C), or any
successor provisions thereto. No adjustment or action described in this
Section 11.3 or in any other provision of the Plan shall be authorized to
the extent that such adjustment or action would cause the Plan to violate
Section 422(b)(1) of the Code. Furthermore, no such adjustment or action
shall be authorized to the extent such adjustment or action would result in
short-swing profits liability under Section 16 or violate the exemptive
conditions of Rule 16b-3 unless the Administrator determines that the Award
is not to comply with such exemptive conditions. The number of shares of
Common Stock subject to any Award shall always be rounded to the next whole
number.
11.4 APPROVAL OF PLAN BY STOCKHOLDERS. The Plan will be submitted for the
approval of the Company's stockholders within twelve months after the date of
the Board's initial adoption of the Plan.
III-20
<PAGE>
Awards may be granted or awarded prior to such stockholder approval; PROVIDED
that such Awards shall not be exercisable nor shall such Awards vest prior to
the time when the Plan is approved by the stockholders; and PROVIDED FURTHER,
that if such approval has not been obtained at the end of said twelve-month
period, all Awards previously granted or awarded under the Plan shall thereupon
be canceled and become null and void.
11.5 TAX WITHHOLDING. The Company shall be entitled to require payment in
cash or deduction from other compensation payable to each Holder of any sums
required by federal, state or local tax law to be withheld with respect to the
issuance, vesting, exercise or payment of any Award. The Administrator may in
its discretion and in satisfaction of the foregoing requirement allow such
Holder to elect to have the Company withhold shares of Common Stock otherwise
issuable under such Award (or allow the return of shares of Common Stock) having
a Fair Market Value equal to the sums required to be withheld.
11.6 LOANS. The Committee may, in its discretion, extend one or more loans
to key Employees, Independent Directors or Consultants in connection with the
exercise or receipt of an Award granted or awarded under the Plan, or the
issuance of Restricted Stock or Deferred Stock awarded under the Plan. The
terms and conditions of any such loan shall be set by the Committee.
11.7 FORFEITURE PROVISIONS. Pursuant to its general authority to determine
the terms and conditions applicable to Awards under the Plan, the Administrator
shall have the right (to the extent consistent with the applicable exemptive
conditions of Rule 16b-3) to provide, in the terms of Awards made under the
Plan, or to require a Holder to agree by separate written instrument, that (i)
any proceeds, gains or other economic benefit actually or constructively
received by the Holder upon any receipt or exercise of the Award, or upon the
receipt or resale of any Common Stock underlying the Award, must be paid to the
Company, and (ii) the Award shall terminate and any unexercised portion of the
Award (whether or not vested) shall be forfeited, if (a) a Termination of
Employment, Termination of Consultancy or Termination of Directorship occurs
prior to a specified date, or within a specified time period following receipt
or exercise of the Award, or (b) the Holder at any time, or during a specified
time period, engages in any activity in competition with the Company, or which
is inimical, contrary or harmful to the interests of the Company, as further
defined by the Committee (or the Board, as applicable) or the Holder incurs a
Termination of Employment, Termination of Consultancy or Termination of
Directorship for cause.
11.8 LIMITATIONS APPLICABLE TO SECTION 16 PERSONS AND PERFORMANCE-BASED
COMPENSATION. Notwithstanding any other provision of the Plan, the Plan, and
any Award granted or awarded to any individual who is then subject to Section 16
of the Exchange Act, shall be subject to any additional limitations set forth in
any applicable exemptive rule under Section 16 of the Exchange Act (including
any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the
application of such exemptive rule. To the extent permitted by applicable law,
the Plan and Awards granted or awarded hereunder shall be deemed amended to the
extent necessary to conform to such applicable exemptive rule. Furthermore,
notwithstanding any other provision of the Plan or any Award described in
Article VII or VIII which is granted to a Section 162(m) Participant and is
intended to qualify as performance-based compensation as described in
Section 162(m)(4)(C) of the Code shall be subject to any additional limitations
set forth in Section 162(m) of the Code (including any amendment to Section
162(m) of the Code) or any regulations or rulings issued thereunder that are
requirements for qualification as performance-based compensation as described in
Section 162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the
extent necessary to conform to such requirements.
11.9 EFFECT OF PLAN UPON OPTIONS AND COMPENSATION PLANS. The adoption of
the Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary. Nothing in the Plan shall be construed to
limit the right of the Company (i) to establish any other forms of incentives or
compensation for Employees, Independent Directors or consultants of the Company
or any Subsidiary or (ii) to grant or assume options or other rights or awards
otherwise than under the Plan in connection with any proper corporate purpose
including but not by way of limitation, the grant or assumption of options in
connection with
III-21
<PAGE>
the acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, limited liability
company, firm or association.
11.10 COMPLIANCE WITH LAWS. The Plan, the granting and vesting of
Awards under the Plan and the issuance and delivery of shares of Common Stock
and the payment of money under the Plan or under Awards granted or awarded
hereunder are subject to compliance with all applicable federal and state laws,
rules and regulations (including but not limited to state and federal securities
law and federal margin requirements) and to such approvals by any listing,
regulatory or governmental authority as may, in the opinion of counsel for the
Company, be necessary or advisable in connection therewith. Any securities
delivered under the Plan shall be subject to such restrictions, and the person
acquiring such securities shall, if requested by the Company, provide such
assurances and representations to the Company as the Company may deem necessary
or desirable to assure compliance with all applicable legal requirements. To
the extent permitted by applicable law, the Plan and Awards granted or awarded
hereunder shall be deemed amended to the extent necessary to conform to such
laws, rules and regulations.
11.11 TITLES. Titles are provided herein for convenience only and are
not to serve as a basis for interpretation or construction of the Plan.
11.12 GOVERNING LAW. The Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Nevada without regard to conflicts of laws thereof.
III-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Form 10 to be signed on its behalf
by the undersigned, thereunto duly authorized.
LTC HEALTHCARE, INC.
Dated: September 9, 1998 By: /s/ Andre C. Dimitriadis
---------------------------------
Andre C. Dimitriadis
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<S> <C>
3.1 Form of Amended and Restated Articles of Incorporation of LTC
Healthcare, Inc. (included as Annex I to Information Sheet). (3)
3.2 Form of Amended and Restated Bylaws of LTC Healthcare, Inc.
(included as Annex II to Information Statement). (3)
4.1 Form of Common Stock Certificate. (2)
10.1 Form of 1998 Equity Participation Plan of LTC Healthcare, Inc.
(included as Annex III to Information Statement). (3)
10.2 Form of Intercompany Agreement. (2)
10.3 Form of Distribution Agreement. (2)
10.4 Form of Administrative Services Agreement. (2)
10.5 Form of Tax Sharing Agreement. (2)
10.6 Form of Indemnity Agreement. (2)
10.7 Amended and Restated Promissory Note, dated as of May 19, 1998,
between LTC Healthcare, Inc. and LTC Properties, Inc. (3)
10.8 Lease and Sublease Agreement, dated as of April 21, 1998, between
LTC-Ohio, Inc., a Delaware corporation, as Lessor and Sublessor
and Karrington Operating Company, Inc., an Ohio corporation, as
Lessee and Sublessee. (2)
10.9 Lease Agreement (Erie, Pennsylvania), dated as of June 30, 1998,
between Missouri River Corporation, a Delaware corporation, as
Lessor and Karrington Operating Company, Inc., an Ohio
corporation, as Lessee. (2)
10.10 Lease Agreement (Rocky River), dated as of May 21, 1998, between
LTC-Ohio, Inc., a Delaware corporation, doing business in Ohio as
LTC Properties-Ohio, Inc., as Lessor and Karrington Operating
Company, Inc., an Ohio corporation, as Lessee. (2)
10.11 Lease Agreement, dated as of December 18, 1987, by and between
Phoenix Nursing Home Partnership, an Illinois limited
partnership, and Horizon Healthcare Corporation, a Delaware
corporation. (2)
10.12 Amendment to Lease Agreement, dated as of August 30, 1991, by and
between Phoenix Nursing Home Limited Partnership, an Illinois
limited partnership, and Horizon Healthcare Corporation, a
Delaware corporation and Sunrise Healthcare Corporation, a New
Mexico corporation. (2)
10.13 Lease Agreement, dated as of August 30, 1991, by and between
Phoenix Nursing Home Limited Partnership II, an Illinois limited
partnership, and Sunrise Healthcare Corporation, a New Mexico
corporation, and Andrew Turner and Nora Turner. (2)
10.14 First Amendment to Lease Agreement, dated as of February 1, 1993,
by and between Phoenix Nursing Home Limited Partnership
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<S> <C>
II, an Illinois limited partnership, and Sunrise Healthcare
Corporation, a New Mexico corporation, and Andrew Turner and Nora
Turner. (2)
10.15 Convertible Subordinated Note Purchase Agreement, dated as of
March 30, 1998, by and between Regent Assisted Living, Inc. and
LTC Healthcare, Inc. (formerly known as LTC Equity Holding
Company, Inc.). (2)
10.16 Registration Rights Agreement, dated as of March 30, 1998, by and
between Regent Assisted Living, Inc. and LTC Healthcare, Inc.
(formerly known as LTC Equity Holding Company, Inc.). (2)
21.1 Subsidiaries of LTC Healthcare, Inc. (2)
23.1 Consent of Ernst & Young LLP. (3)
27.1 Financial Data Schedule. (2)
27.2 Financial Data Schedule. (2)
</TABLE>
-----------------------
(1) To be filed by amendment.
(2) Previously filed.
(3) Filed herewith.
<PAGE>
EXHIBIT 10.7
AMENDED AND RESTATED PROMISSORY NOTE
$20,000,000.00 Date: May 19, 1998
Oxnard, California
THIS AMENDED AND RESTATED PROMISSORY NOTE (THIS "NOTE") SUPERSEDES AND
REPLACES THAT CERTAIN PROMISSORY NOTE DATED MARCH 30, 1998 MADE BY LTC
HEALTHCARE, INC. (FORMERLY KNOWN AS LTC EQUITY HOLDING COMPANY, INC.), AS MAKER,
IN FAVOR OF LTC PROPERTIES, INC., AS PAYEE, IN THE MAXIMUM PRINCIPAL AMOUNT OF
EIGHT MILLION DOLLARS ($8,000,000.00) (THE "ORIGINAL NOTE").
In installments as herein stated, for value received, LTC HEALTHCARE, INC.,
a Nevada corporation (formerly known as LTC Equity Holding Company, Inc.)
("Maker"), hereby promises to pay to the order of LTC PROPERTIES, INC., a
Maryland corporation ("Payee"), at Payee's principal place of business in
Oxnard, California, or such other place as Payee may from time to time
designate, the principal sum of Twenty Million Dollars ($20,000,000.00), or so
much thereof as may have been advanced, with interest accruing on the principal
amount from time to time outstanding from the date hereof to and including the
Maturity Date (as defined below) at a rate equal to the lesser of (i) Ten
Percent (10%) per annum, or (ii) the Highest Lawful Rate (defined in Section 11,
below). Principal and interest shall be payable as more particularly set forth
below. All principal and accrued but unpaid interest shall be due on or before
April 1, 2008 (the "Maturity Date"). Principal, interest and all other sums due
hereunder shall be payable in lawful money of the United States.
Maker desires to obtain an unsecured line of credit from Payee to enable
Maker to borrow, from time to time, sums up to, but not exceeding, in the
aggregate the principal sum of Twenty Million Dollars ($20,000,000.00).
Accordingly, this Note represents funds that will be advanced to Maker in a
series of disbursements that will be made, from time to time, up to, but not
exceeding, in the aggregate the principal amount of Twenty Million Dollars
($20,000,000.00). As a condition to Payee's obligation to make each and every
disbursement hereunder, Payee shall receive a request for advance setting forth
the desired amount of the advance and specifying the wiring instructions to
which the advance should be sent (or other method of delivery) not later than
two (2) business days prior to the date on which Maker wishes to receive the
funds. No request for any such advance shall be for an amount less than One
Hundred Thousand Dollars ($100,000.00).
1. PAYMENTS.
(a) PAYMENTS OF INTEREST. Payments of interest only under this Note
shall be made in arrears in bi-annual installments, without set-off, deduction,
demand or notice of any kind or nature whatsoever, on the 1st day of April and
the 1st day of October of each and every calendar year (each a "Payment Date")
in an amount equal to the accrued but unpaid interest for
1
<PAGE>
the immediately preceding six-month period on the principal amount
outstanding from time to time. Notwithstanding the foregoing, Maker
acknowledges and agrees that Maker shall pay to Payee on the first (1st)
Payment Date (I.E., October 1, 1998) the accrued but unpaid interest on
advances made from and including March 30, 1998 to and including September
30, 1998, including, but not limited to, accrued but unpaid interest on
advances made under the Original Note.
(b) PAYMENTS ON MATURITY DATE. Assuming no acceleration by Payee and
no prepayment in full of the Loan by Maker, on the Maturity Date, Maker shall
pay to Payee the entire outstanding principal balance, accrued and unpaid
interest and any and all other outstanding charges, fees or amounts owing to
Payee by Maker under this Note. Maker acknowledges and agrees that the
outstanding principal balance under this Note includes, without limitation, the
principal sum of Four Million Nine Hundred Thirty-Nine Thousand Dollars
($4,939,000.00) advanced by Payee to Maker between March 30, 1998 and May 18,
1998 under the Original Note.
2. PREPAYMENTS. Maker shall have the right to prepay all or any part of
the principal balance of this Note at any time without premium, penalty, or
charge of any kind whatsoever; provided, however, there shall be no discount of
any kind for any prepayment.
3. LATE PAYMENT CHARGE; NO WAIVER. MAKER ACKNOWLEDGES THAT LATE PAYMENT
TO PAYEE OF ANY SUMS DUE HEREUNDER WILL CAUSE PAYEE TO INCUR COSTS NOT
CONTEMPLATED HEREUNDER, THE EXACT AMOUNT OF WHICH WILL BE IMPRACTICABLE OR
EXTREMELY DIFFICULT TO ASCERTAIN. SUCH COSTS INCLUDE, BUT ARE NOT LIMITED TO,
PROCESSING AND ACCOUNTING CHARGES. ACCORDINGLY, IF ANY INSTALLMENT IS NOT
RECEIVED BY PAYEE WHEN DUE, OR IF ANY REMAINING PRINCIPAL AND ACCRUED BUT UNPAID
INTEREST OWING UNDER THIS NOTE IS NOT PAID IN FULL ON THE MATURITY DATE, MAKER
SHALL THEN PAY TO PAYEE AN ADDITIONAL SUM OF FIVE PERCENT (5%) OF THE OVERDUE
AMOUNT AS A LATE CHARGE. THE PARTIES HEREBY AGREE THAT LATE CHARGE REPRESENTS A
FAIR AND REASONABLE ESTIMATE OF THE COSTS PAYEE WILL INCUR BY REASON OF LATE
PAYMENT. THIS PROVISION SHALL NOT, HOWEVER, BE CONSTRUED AS EXTENDING THE TIME
FOR PAYMENT OF ANY AMOUNT HEREUNDER, AND ACCEPTANCE OF SUCH LATE CHARGE BY PAYEE
SHALL IN NO EVENT CONSTITUTE A WAIVER OF MAKER'S DEFAULT WITH RESPECT TO SUCH
OVERDUE AMOUNT NOR PREVENT PAYEE FROM EXERCISING ANY OF ITS OTHER RIGHTS AND
REMEDIES WITH RESPECT TO SUCH DEFAULT.
INITIAL:
-------
MAKER
4. DEFAULT. The occurrence of any of the following shall constitute an
event of default ("Event of Default") under this Note:
2
<PAGE>
(a) failure to make any payment of principal, interest, or any
other sums due hereunder within five (5) business days of the date due;
(b) the occurrence of any breach or default of any other
obligation of Maker, monetary or otherwise, hereunder, which breach or default
shall continue for more than sixty (60) calendar days after Maker has received
written notice thereof from Payee.
5. ACCELERATION RIGHTS. Upon the occurrence of an Event of Default
hereunder, Payee may, in its sole discretion, declare the entire balance of
principal and interest hereon immediately due and payable, together with all
costs of collection, including reasonable attorneys' fees and all other costs
and expenses incurred.
6. ATTORNEYS' FEES AND COSTS. In the event it becomes necessary for
Payee to utilize legal counsel for the enforcement of this Note or any of its
terms, if Payee is successful in such enforcement by legal proceedings or
otherwise, Payee shall be reimbursed immediately by Maker for all reasonable
attorneys' fees and other costs and expenses.
7. WAIVERS. Maker of this Note hereby waives diligence, demand,
presentment for payment, exhibition of this Note, notice of non-payment or
dishonor, protest and notice of protest, notice of demand, notice of election of
any right of holder hereof, any and all exemption rights against this
indebtedness, and expressly agrees that, at Payee's election, the time for
performance of any obligation under this Note may be extended from time to time,
without notice and that no such extension, renewal, or partial release shall
release Maker from its obligation of payment of this Note or any installment
hereof, and consents to offset of any sums owed to Maker by the holder hereof at
any time.
8. ASSIGNMENT/TRANSFER BY PAYEE. Payee, in Payee's sole and absolute
discretion, and without notice to Maker, shall have the absolute right to sell,
assign, gift, transfer, convey, encumber or otherwise dispose of all or a
portion of the holder's rights in this Note or any other agreement related
thereto. Maker may not assign, gift, transfer, convey, encumber or otherwise
dispose of all or a portion of its rights, nor delegate its duties or
obligations under this Note or any other agreement related thereto.
9. GOVERNING LAW. This Note shall in all respects be interpreted,
enforced, and governed by and under the internal laws of the State of California
without resort to choice of law principles.
10. SEVERABILITY. Every provision hereof is intended to be several. If
any provision of this Note is determined by a court of competent jurisdiction to
be illegal, invalid or unenforceable, such illegality, invalidity or
unenforceability shall not affect the other provisions hereof, which shall
remain binding and enforceable.
11. COMPLIANCE WITH USURY LAWS. It is the intention of the parties
hereto to conform strictly to applicable usury laws regarding the use,
forbearance or detention of the
3
<PAGE>
indebtedness evidenced by this Note, whether such laws are now or hereafter
in effect, including the laws of the United States of America or any other
jurisdiction whose laws are applicable, and including subsequent revisions to
or judicial interpretations of those laws, in each case to the extent they
are applicable to this Note (the "Applicable Usury Laws"); provided, however,
if such laws shall hereafter permit higher rates of interest, then the
Applicable Usury Laws shall be the laws allowing the higher rate of interest.
Accordingly, the following shall apply:
(a) if any acceleration of the Maturity Date of this Note or any
payment by Maker or any other person or entity results in the amount of interest
contracted for, charged, taken, reserved, received by or paid by Maker or such
other person or entity on the principal amount outstanding, from time to time,
on the Note being deemed to have been in excess of the Maximum Amount, as
hereinafter defined, or if any transaction contemplated hereby would otherwise
be usurious under any Applicable Usury Laws, then, in that event,
notwithstanding anything to the contrary in this Note, it is agreed as follows:
(i) the provisions of this Section 11 shall govern and control; (ii) the
aggregate of all interest under Applicable Usury Laws that is contracted for,
charged, taken, reserved or received under this Note, or under any of the other
aforesaid agreements or instruments or otherwise shall under no circumstances
exceed the Maximum Amount, and any excess shall either be refunded to Maker or
applied in reduction of principal, if permitted by California law, in the sole
discretion of Payee; (iii) neither Maker nor any other person or entity shall
obligated to pay the amount of such interest to the extent it is in excess of
the Maximum Amount; (iv) any interest contracted for, charged, reserved, taken
or received in excess of the Maximum Amount shall be deemed an accidental or
bona fide error and canceled automatically to the extent of such excess; and (v)
the effective rate of interest on the Loan shall be IPSO FACTO reduced to the
Highest Lawful Rate (defined below), and the provision of this Note shall be
deemed reformed, without the necessity of the execution of any new document, so
as to comply with all Applicable Usury Laws. All sums paid, or agreed to be
paid, to Payee for the use, forbearance, or the detention of the indebtedness of
Maker to Payee evidenced by this Note shall, to the fullest extent permitted by
the Applicable Usury Laws, be amortized, pro-rated, allocated and spread
throughout the full term of the indebtedness evidenced by this Note so that the
actual rate of interest does not exceed the Highest Lawful Rate in effect at any
particular time during the full term thereof. As used herein, the term "Maximum
Amount" means the maximum non-usurious amount of interest which may be lawfully
contracted for, charged, reserved, taken or received by Payee in connection with
the indebtedness evidenced by this Note under all applicable Usury Laws.
(b) If at any time interest on the Loan, together with any fees
and additional amounts payable hereunder or under any other agreements or
instruments that are deemed to constitute interest under Applicable Usury
Laws (the "Additional Interest"), exceeds the Highest Lawful Rate, then the
amount of interest to accrue pursuant to this Note shall be limited,
notwithstanding anything to the contrary in this Note, or any other agreement
or instrument, to the amount of interest that would accrue at the Highest
Lawful Rate; provided, however, that to the fullest extent permitted by
Applicable Usury Laws, any subsequent reductions in the interest rate shall
not reduce the interest to accrue pursuant to this Note below the Highest
Lawful Rate until the aggregate amount of interest actually accrued pursuant
to this Note, together with all Additional Interest, equals the amount of
interest which would have accrued if the Highest
4
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Lawful Rate had at all times been in effect and such Additional Interest, if
any, had been paid in full.
For purposes of this Note, the term "Highest Lawful Rate" means the
maximum rate of interest and other charges (if any such maximum exists) for
the forbearance of the payment of monies, if any that may be charged,
contracted for, reserved, taken or received under all Applicable Usury Laws
on the principal balance of this Note from time to time outstanding.
IN WITNESS WHEREOF, the Maker has caused this Note to be executed as of
the date first above written.
MAKER:
LTC HEALTHCARE, INC.,
A NEVADA CORPORATION
By:
---------------------------------
Name:
-------------------------------
Its:
--------------------------------
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EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report dated May 6, 1998 on the balance
sheet of LTC Healthcare, Inc. as of March 25, 1998 and of our report dated
May 6, 1998 on the combined financial statements of LTC Healthcare Asset
Group as of December 31, 1997 and 1996 and for each of the three years in the
period ended December 31, 1997, each included in the Registration Statement,
as amended (Form 10) of LTC Healthcare, Inc. dated September 9, 1998.
/s/ ERNST & YOUNG LLP
Los Angeles, California
September 9, 1998
