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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 1-14151
LTC HEALTHCARE, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 91-1895305
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 981-8655
Securities registered pursuant to Section 12(b) of the Act:
Title of Stock Name of each exchange on which registered
-------------- -----------------------------------------
Common stock, $.01 Par Value Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this 10-K or
any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Company is approximately $4,537,000 as of March 19, 1999.
2,731,432
(Number of shares of common stock outstanding as of March 19, 1999)
Part III is incorporated by reference from the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held
on May 25, 1999.
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ITEM 1. BUSINESS
GENERAL
LTC Healthcare, Inc. (the "Company"), a Nevada corporation, was incorporated
on March 20, 1998 and began operations on March 25, 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. The
Company was originally a preferred stock subsidiary of LTC Properties, Inc.
("LTC"), a Maryland corporation and real estate investment trust ("REIT"). On
September 30, 1998, concurrently with the conversion of all shares of Company
non-voting common stock held by LTC into voting common stock of the Company,
LTC completed the spin-off of Company common stock through a taxable dividend
to holders of LTC common stock, convertible subordinated debentures and
Series C Preferred Stock (the "Distribution"). Upon completion of the
Distribution, the Company began operating as a separate public company.
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. See "Item 2.
- -Properties" for a discussion of the Company's investment in real estate
properties and health care related debt and equity securities as of December
31, 1998.
THE DISTRIBUTION. During the period from March 25, 1998 to
September 30, 1998, LTC acquired 4,002 shares of Company non-voting common
stock for $2,001,000. In addition, LTC contributed equity investments with a
book value of $788,000, 13 real estate properties with a gross book value of
$65,182,000 (net book value of $61,462,000) that were encumbered by
$29,263,000 of mortgage debt on seven of the properties and a minority
interest liability of $3,461,000, and other related assets and liabilities
with a book value of $93,000 to the Company in exchange for an additional
36,000 shares of Company non-voting common stock and borrowings by the
Company under an unsecured line of credit provided by LTC of $21,396,000.
Subsequent to the contribution of the above assets and liabilities by the LTC
to the Company, the Company obtained mortgage financing of $17,400,000 from a
third-party lender on four of the unencumbered properties. The Company
utilized proceeds from the mortgage debt and cash on hand to repay borrowings
of $17,668,000 under the unsecured line of credit provided by LTC.
On September 30, 1998, the 40,002 shares of Company non-voting common stock
held by the LTC were converted into 3,335,882 shares of Company voting common
stock. Concurrently, LTC completed the spin-off of all Company voting common
stock through a taxable dividend distribution to the holders of LTC common
stock, convertible subordinated debentures and Series C Preferred Stock.
INVESTMENT AND OTHER POLICIES
INVESTMENT POLICIES. In addition to the long-term care properties acquired in
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.
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DEVELOPMENT. The Company may undertake, directly or through a joint-venture,
development projects that have the potential for substantial gains but which
may take several years to fully develop. In the event that the Company
undertakes a joint-venture development project, the joint-venture developer
will most likely assume the majority of the economic risks associated with
construction, development and the initial stabilization of the properties.
The Company may purchase the developed property and lease it back to the
joint-venture developer or make a loan to the developer with an option to
purchase the property upon completion of the project.
ACQUISITION OF PROPERTIES SUBJECT TO LONG-TERM LEASES. The Company may
acquire real-estate properties in sale/lease-back transactions that can be
highly leveraged with fixed rate debt that amortizes over the term of the
property's tenant lease. The Company's profits can be enhanced when the
property acquired subject to the above investment strategy is encumbered by
fixed rate debt that carries an interest rate below the initial purchase
capitalization rate.
RESTRUCTURING IN ORDER TO CREATE SIGNIFICANT VALUE. The Company may engage in
selective restructuring and development activities such as changing the use
or focus of a property as opportunities arise and when justified by projected
returns. The Company believes that appropriate, well-located properties that
are currently under-performing can be acquired on advantageous terms and
repositioned through selective restructuring and development activities with
the expectation of achieving enhanced returns.
ACQUISITION OF DEBT AND EQUITY SECURITIES OF ENTITIES ENGAGED IN REAL ESTATE
AND HEALTH CARE RELATED ACTIVITIES. The Company may acquire real estate or
health care related equity securities or make loans that constitute, or
invest in real estate or health care related senior, junior or other
subordinated debt securities. Investments in equity securities may include
the purchase of general or limited partnership interests in limited
partnerships or shares in publicly traded or privately held corporations or
interests in other entities engaged in real estate or health care related
activities. Investments in debt securities may include debt that is acquired
at a discount, commercial mortgage-backed securities, secured and unsecured
lines of credit and instruments that are convertible into equity securities.
In some instances, the Company may only acquire a participating interest in a
debt security.
FINANCING POLICIES. The Company intends to finance its investments through
public and private secured and unsecured debt financings, as well as public
and private placements of its equity securities. Equity securities issued may
include both common and preferred classes of common stock. The Company may
incur additional indebtedness when, in the opinion of the directors, it is
advisable. For other short-term purposes, the Company may, from time to time,
negotiate lines of credit, or arrange for other short-term borrowings from
banks or otherwise. The Company may also arrange for long-term borrowings
through public offerings or from institutional investors.
In addition, the Company may incur mortgage indebtedness on real estate which
it has acquired through purchase or otherwise. The Company may also obtain
mortgage financing for unleveraged or underleveraged properties in which it
has invested or may refinance properties acquired on a leveraged basis. There
is no limitation on the number or amount of mortgages that may be placed on
any one property, and the Company has no policy with respect to limitations
on borrowing, whether secured or unsecured.
The Company currently does not intend to qualify as a REIT under the Internal
Revenue Code of 1986, as amended (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
distribute each year at least 95% 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
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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 have voting rights and are expected to have
enhanced liquidity through their ability to sell or margin their stock.
However, unlike REITs and opportunity funds, the Company is subject to
corporate level taxation.
RELATIONSHIP WITH LTC PROPERTIES, INC. The Company and LTC entered into an
administrative services agreement containing a number of provisions relating
to employees of LTC and the Company. The administrative services agreement
generally provides that, 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 is responsible for continuing to
provide employee benefits (other than those provided separately under the
Healthcare 1998 Equity Participation 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.
Pursuant to an intercompany agreement, the Company has agreed 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, the Company and LTC also agreed 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 agreed 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.
The Company and LTC have adopted policies and procedures 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 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. 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.
EMPLOYEES
The Company has no employees. However, pursuant to the administrative
services agreement with LTC, LTC is obligated to provide the Company with the
services of its employees. At December 31, 1998, LTC had 21 employees.
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GOVERNMENT FINANCING AND REGULATION OF HEALTH CARE
GENERAL. Both the federal and state governments are significant sources of
revenues for the skilled nursing facilities who lease properties from the
Company and used such properties as collateral for those borrowings. In
addition, the skilled nursing facilities and the Company's other tenants who
provide health care related services are often subject to extensive
government regulation.
GOVERNMENT FINANCING. Medicare is a federal program that provides certain
health care benefits to beneficiaries who are 65 years of age or older, are
disabled, or qualify for the End Stage Renal Disease program. Historically,
Medicare covered the reasonable costs of certain post-hospital extended care
services furnished by skilled nursing facilities, including capital-related
costs, subject to limits on routine operating and capital-related costs.
Medicaid is a program of medical assistance, funded jointly by the federal
government and the states for certain needy individuals and their dependents,
and certain other eligible persons. Under Medicaid, the federal government
provides grants to states that have medical assistance programs that are
consistent with federal standards. Medicaid programs or the equivalent are
currently in existence in all of the states in which the Company has nursing
facility investments. While these programs differ in certain respects from
state to state, they are all subject to certain federally imposed
requirements, as a substantial portion of the funds available under these
programs is provided by the federal government. Medicaid programs provide for
payments to participating health care facilities on behalf of the indigent
and certain other eligible persons. California and Texas provide for
reimbursement at flat daily rates, as determined by the responsible state
agency and depending on certain levels of care. In all other states, payments
are based upon specific cost reimbursement formulas established by the
applicable state.
Up until July 1, 1998, Medicare and most state Medicaid programs utilized a
cost-based reimbursement system for skilled nursing facilities which
reimbursed these facilities for the reasonable direct and indirect allowable
costs incurred in providing routine services plus, in certain states, a
return on equity, subject to certain cost ceilings. These costs normally
included allowances for administrative and general costs as well as the costs
of property and equipment (depreciation and interest, fair rental allowance
or rental expense). In certain states, cost-based reimbursement was typically
subject to retrospective adjustment through cost report settlement, and for
certain states, payments made to a facility on an interim basis that were
subsequently determined to be less than or in excess of allowable costs could
be adjusted through future payments to the affected facility and to other
facilities owned by the same owner. State Medicaid reimbursement programs
varied as to the methodology used to determine the level of allowable costs
which were reimbursed to operators.
- PROSPECTIVE PAYMENT SYSTEM
Beginning on July 1, 1998, the congressionally mandated prospective
payment system was implemented for skilled nursing facilities. Under the
prospective payment system, skilled nursing facilities are paid a
case-mix adjusted federal per diem rate for Medicare-covered services
provided by skilled nursing facilities. The per diem rate is calculated
to cover routine service costs, ancillary costs and capital-related
costs. The phased-in implementation of the prospective payment system
for skilled nursing facilities began with the first cost-reporting
period beginning in fiscal years, starting on or after July 1, 1998. The
prospective payment system is expected to be fully implemented over
three such cost-reporting periods. The effect of the implementation of
the prospective payment system on a particular skilled nursing facility
will vary in relation to the amount of revenue derived from Medicare
patients for each skilled nursing facility.
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Skilled nursing facilities may need to restructure their operations to
accommodate the new Medicare prospective payment system reimbursement.
In part because of the uncertainty as to the effect of the prospective
payment system on skilled nursing facilities, in November 1998, Standard
and Poor's, an international rating agency that provides credit analysis
and information through the rating of financial instruments, placed many
skilled nursing facility companies on a "credit watch" because of the
potential negative impact of the implementation of the prospective
payment system on the financial condition of skilled nursing facilities,
including the ability to make interest and principal payments on
outstanding borrowings. In early March 1999, Standard & Poor's lowered
the ratings of several skilled nursing facility companies, including one
operator that operates skilled nursing facilities in which the Company
invests, because of the impact of the implementation of the prospective
payment system, particularly those companies with substantial debt.
- BALANCED BUDGET ACT OF 1997
The Balanced Budget Act of 1997 signed by President Clinton on August 5,
1997 is expected to produce billions of dollars in savings to the
Federal Government over five years. In addition, the Balanced Budget Act
repealed the Boren Amendment under which states were required to pay
long-term care providers, including skilled nursing facilities, rates
that are "reasonable and adequate to meet the cost which must be
incurred by efficiently and economically operated facilities." As a
result of the repeal of the Boren Amendment, states are now required by
the Balanced Budget Act to:
- use a public process for determining rates,
- publish proposed and final rates, the methodologies underlying
the rates, and justifications for the rates, and
- give methodologies and justifications.
During rate-setting procedures, states are required to take into account
the situation of facilities that serve a disproportionate number of
low-income patients with special needs. The Secretary of the Department
of Health and Human Services is required to study and report to Congress
within four years concerning the effect of state rate-setting
methodologies on the access to and the quality of services provided to
Medicaid beneficiaries. The Balanced Budget Act also provides the
federal government with expanded enforcement powers to combat waste,
fraud and abuse in delivery of health care services. Though applicable
to payments for services furnished on or after October 1, 1997, the new
requirements are not retroactive. Thus, states that have not proposed
changes in their payment methods or standards, or changes in rates for
items and services furnished on or after October 1, 1997, need not
immediately implement a Balanced Budget Act public approval process.
The Balanced Budget Act also created the Medicare+Choice program which
provides a variety of options for individuals entitled to Medicare Part
A and enrolled in Medicare Part B. The options include coordinated care
plans (including provider-sponsored organization plans), private fee for
service plans, and medical savings accounts plans. Medicare+Choice is
effective as of January 1, 1999. It is not possible at this time to
predict with any certainty the effect of Medicare+Choice on the
Company's tenants.
Both the Medicare and Medicaid programs contain specific requirements which
must be adhered to at all times by health care facilities in order to qualify
under the programs. The Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy, intermediary determinations and governmental funding restrictions,
all of which may materially increase or decrease
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program reimbursement to health care facilities. No assurance can be given as
to whether the future funding of such programs will remain at levels
comparable to the present levels.
ANTI-FRAUD LAWS AND REGULATIONS. There are various federal and state laws
prohibiting fraud by health care providers, including criminal provisions
which prohibit filing false claims or making false statements to receive
payment or certification under Medicare and Medicaid, or failing to refund
overpayments or improper payments. Violation of these federal provisions is a
felony punishable by up to five years imprisonment and/or $25,000 fines.
Civil provisions prohibit the knowing filing of a false claim or the knowing
use of false statements to obtain payment. The penalties for such a violation
are fines of not less than $5,000 nor more than $10,000, plus treble damages,
for each claim filed.
There are also laws which govern referrals and financial relationships. The
federal Anti-Kickback Law prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for, or to
induce, the referral of Medicare and Medicaid patients. A wide array of
relationships and arrangements, including ownership interests in a company by
persons who refer or who are in a position to refer patients, as well as
personal services agreements, have under certain circumstances, been alleged
or been found to violate these provisions. In addition to the Anti-Kickback
Statute, the federal government restricts certain financial relationships
between physicians and other providers of health care services.
State and federal governments are devoting increasing attention and resources
to anti-fraud initiatives against health care providers. The Health Insurance
Portability and Accountability Act of 1996 and the Balanced Budget Act expand
the penalties for health care fraud, including broader provisions for the
exclusion of providers from the Medicare and Medicaid programs. Further,
under Operation Restore Trust, a major anti-fraud demonstration project, the
Office of Inspector General of the U.S. Department of Health and Human
Services, in cooperation with other federal and state agencies, has focused
on the activities of skilled nursing facilities, home health agencies,
hospices and durable medical equipment suppliers in certain states in which
we have properties. Due to the success of Operation Restore Trust, the
project has been expanded to numerous other states and to additional
providers including providers of ancillary nursing home services.
Based upon information periodically received from the Company's operators
over the terms of their respective leases, management believe that the
nursing facilities in which the Company has investments are in substantial
compliance with the various regulatory requirements applicable to them,
although there can be no assurance that the operators are in compliance or
will remain in compliance in the future.
OTHER REGULATORY AND LICENSING REQUIREMENTS. In addition to the requirements
to be met by skilled nursing facilities for participation in the Medicare and
Medicaid programs, skilled nursing facilities are subject to regulatory and
licensing requirements of federal, state and local authorities. The operator
of each skilled nursing facility is licensed annually by the board of health
or other applicable agency in each state. In granting and renewing licenses,
regulatory agencies consider, among other things, the physical buildings and
equipment, the qualifications of the administrative personnel and nursing
staff, the quality of care and continuing compliance with the laws and
regulations relating to the operation of the facilities. State licensing of
facilities is a prerequisite to certification under the Medicare and Medicaid
programs. In the ordinary course of business, the operators receive notices
of deficiencies for failure to comply with various regulatory requirements
and take appropriate corrective and preventive actions. The Company believes
that the nursing facilities in which it has investments are in compliance
with the applicable licensing or other regulation although there can be no
assurance that the operators are or will be in compliance at any time.
Assisted living facilities are subject to certain state regulations and
licensing requirements. To qualify as a state licensed facility, assisted
living facilities must comply with regulations which address, among other
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things, staffing, physical design, required services and resident
characteristics. Assisted living facilities are also subject to various local
building codes and other ordinances, including fire safety codes. These
requirements vary from state to state and are monitored to varying degrees by
state agencies.
Currently, assisted living facilities are not regulated as such by the
federal government. State standards required for assisted living facility
providers are less stringent than those required of other licensed health
care operators. There can be no assurance that federal regulations governing
the operation of assisted living facilities will not be implemented in the
future or that existing state regulations will not be expanded. In addition,
only certain states have adopted laws or regulations permitting individuals
with higher acuity levels to remain in assisted living communities who may
otherwise qualify for placement in a nursing facility. While only certain
states presently provide for any Medicaid reimbursement for assisted living
residences, several states are currently reviewing their policies and
reimbursement programs to provide funding for assisted living residences.
There can be no assurance that such states will adopt the Medicaid waiver
program.
UNCERTAINTY OF HEALTH CARE REFORM
The health care industry is facing various challenges, including increased
government and private payor pressure on health care providers to control
costs. The pressure to control health care costs intensified during 1994 and
1995 as a result of the national health care reform debate and continues into
1999 as Congress attempted to slow the rate of growth of federal health care
expenditures as part of its effort to balance the federal budget.
The Balanced Budget 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, Congress established the
prospective payment system for skilled nursing facility services to replace
the cost-based reimbursement system. In addition, there are numerous
initiatives at the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. Congress
and state legislatures can be expected to continue to review and assess
alternative health care delivery systems and payment methodologies. Changes
in the law, new interpretations of existing laws, or changes in payment
methodology may have a dramatic effect on the definition of permissible or
impermissible activities, the relative costs associated with doing business
and the amount of reimbursement by the government and other third party
payors.
In light of forthcoming regulations and continuing state Medicaid program
reform, no assurance can be given that the implementation of such regulations
and reform will not have a material adverse effect on the Company's financial
condition 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, access to capital markets and changes in
tax laws and regulations.
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ITEM 2. PROPERTIES
REAL ESTATE INVESTMENTS
As of December 31, 1998, the Company's real estate investment portfolio
contained 13 properties consisting of seven skilled nursing facilities
("SNFs") with a total of 914 beds, five assisted living residences ("ALFs")
with a total of 293 units and one Alzheimer facility with 26 units,
representing a net investment of $65,182,000 (before accumulated depreciation
of $4,306,000). All of the above real estate properties were contributed to
the Company by LTC in connection with the Distribution.
Skilled nursing facilities provide restorative, rehabilitative and nursing
care for people not requiring the more extensive and sophisticated treatment
available at acute care hospitals. Many skilled nursing facilities provide
ancillary services that include occupational, speech, physical, respiratory
and IV therapies, as well as provide sub-acute care services. Such services
are paid either by the patient or the patient's family, or through the
federal Medicare or state Medicaid programs. Assisted living facilities serve
elderly persons who require assistance with activities of daily living, but
do not require the constant supervision skilled nursing facilities provide.
Services are generally available 24-hours a day and include personal
supervision and assistance with eating, bathing, grooming and administering
medication. The facilities provide a combination of housing, supportive
services, personalized assistance and health care designed to respond to
individual needs.
The following table sets forth certain information regarding the Company's
owned properties as of December 31, 1998:
<TABLE>
<CAPTION>
No. of Avg. Remaining
No. of No. of Beds Lease Term Carrying Current Annual
Location SNFs ALFs /Units Encumbrances (in Months) Value Rent Payments
- ----------------- -------- ------- ---------- -------------- -------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Arizona 2 393 $ 14,040,000 49 $ 11,273,000 $ 1,550,000
New Mexico 4 399 13,405,000 40 11,633,000 1,389,000
Ohio 5 250 17,341,000 232 30,973,000 2,807,000
Pennsylvania 1 69 232 8,327,000 770,000
Texas 1 122 1,741,000 57 2,976,000 354,000
- ----------------- -------- ------- ---------- -------------- -------------- ------------------- ---------------
TOTAL 7 6 1,233 $ 46,527,000(1) 65,182,000(2) $ 6,870,000
- ----------------- -------- ------- ---------- -------------- -------------- ------------------- ---------------
- ----------------- -------- ------- ---------- -------------- -------------- ------------------- ---------------
</TABLE>
(1) Encumbrances consist of non-recourse mortgages payable by the Company
secured by first mortgages on the facilities.
(2) Consists of: SNFs-$25,882,000; ALFs-$36,010,000; and Alzheimer
facility-$3,290,000.
The leases generally have an initial term of ten to twelve years and provide
for a fixed minimum base rent during the initial and renewal periods. Most of
the leases provide for annual fixed rent increases or increases based on
increases in consumer price indices over the term of the lease. In addition,
certain of the Company's leases provide for additional rent through revenue
participation (as defined in the lease agreement) in incremental revenues
generated by the facilities, over a defined base period, effective at various
times during the term of the lease. Each lease is a triple net lease which
requires the lessee to pay additional charges including all taxes, insurance,
assessments, maintenance and repair (capital and non-capital expenditures),
and other costs necessary in the operation of the facility.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
At December 31, 1998 the Company owned the following debt and equity
securities:
- - $8,500,000 principal amount of Regent Assisted Living, Inc. 7.5%
convertible subordinated debentures due 2008 (fair value approximates
face value);
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- - $3,000,000 principal amount (amortized cost of $2,191,000) of Assisted
Living Concepts, Inc. 5.625% convertible subordinated debentures due
2003 (fair value of $2,386,000);
- - 30,847 shares of Assisted Living Concepts, Inc. common stock contributed
by LTC in connection with its distribution of its investment in the
Company with a fair value of approximately $405,000 (net of the fair
market adjustment of approximately $81,000); and
- - 194,100 shares of LTC common stock acquired for an aggregate purchase
price of $3,308,000 (fair value of $3,227,000).
MAJOR OPERATORS
As of December 31, 1998, Integrated Health Services, Inc. ("IHS"), Sun
Healthcare Group, Inc., through a wholly owned subsidiary, ("Sun") and
Karrington Health, Inc. ("Karrington") were the Company's largest operators.
As of December 31, 1998, approximately 11%, 25% and 60% of the Company's
gross real estate investments were leased to IHS, Sun and Karrington,
respectively. In addition, the Company's investment of $8,500,000 in Regent
Assisted Living, Inc. ("Regent") convertible debentures represented
approximately 11% of the Company's total assets as of December 31, 1998. IHS,
Sun, Karrington and Regent are publicly traded companies, and as such are
subject to the filing requirements of the Securities and Exchange Commission.
See "Item 8. -Financial Statements -Note 2. Summary of Significant Accounting
Policies -CONCENTRATION OF CREDIT RISKS." for summary information for IHS,
Sun, Karrington and Regent that was extracted from public reports on file
with the Securities and Exchange Commission.
10
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding which, in the opinion of
management, would be material to its' results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------------
<S> <C> <C>
Andre C. Dimitriadis 58 Chairman, Chief Executive Officer and Director
James J. Pieczynski 36 President, Chief Financial Officer, and Director
Christopher T. Ishikawa 35 Senior Vice President and Chief Investment Officer
Raad K. Shawaf 33 Senior Vice President and General Counsel
</TABLE>
Mr. Dimitriadis has served as Chairman and CEO of the Company since its
inception. He founded LTC in 1992 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 Magellan Health Services.
Mr. Pieczynski has served as President and Director of the Company since its
inception. He has also served as President and Director of LTC since
September 8, 1997 and Chief Financial Officer of LTC 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 that,
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.
Mr. Ishikawa has served as Senior Vice President and Chief Investment Officer
of the Company since its inception. He has also 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 since 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. From
December 1989 to November 1991, he was employed by Mercantile National Bank
where he served as Assistant Treasurer.
Mr. Shawaf has served as Senior Vice President and General Counsel of the
Company and LTC since March 1, 1999. From September 1997 to March 1999, he
served as Vice President and Assistant General Counsel of LTC. Prior to
joining LTC, he was employed by Pamela J. Privett, A Professional Law
Corporation, which served outside General Counsel to LTC from June 1997 to
September 1997. From November 1996 to June 1997, he was the sole owner of
Raad K. Shawaf , Attorney At Law, a real estate law practice. From June 1993
to June 1996, he was an associate attorney at Stern, Neubauer, Greenwald &
Pauly.
11
<PAGE>
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) The Company's common stock is listed on the Pacific Exchange and began
active trading on October 1, 1998. Set forth below are the high and low
reported sale prices for the Company's common stock as reported on the
Pacific Exchange.
<TABLE>
<CAPTION>
PRICE PER SHARE
HIGH LOW
---- ---
<S> <C> <C>
1998
----
Fourth Quarter $4.38 $2.00
</TABLE>
(b) As of December 31, 1998, there were approximately 802 stockholders of
record of the Company's common stock.
(c) The Company has never paid cash dividends on its common stock. The
Company currently anticipates that it will retain all available funds
for use in the operation and expansion of its business and does not
anticipate paying any cash dividends in the foreseeable future.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL INFORMATION
The Company was not formed until March 25, 1998 therefore, comparative
results with 1997 are not provided. The following table summarizes the
Company's results of operations for the period from inception (March 25,
1998) through December 31, 1998 and balance sheet information as of December
31, 1998 and should be read in conjunction with the Company's financial
statements and related notes thereto included elsewhere in this Annual Report
on Form 10-K (Dollars in thousands except share amounts).
<TABLE>
<CAPTION>
<S> <C>
OPERATING INFORMATION:
Revenues:
Rental income $ 2,172
Interest and other income 692
---------
Total revenues 2,864
Expenses:
Mortgage interest 1,133
Interest on line of credit from LTC Properties, Inc. 711
Depreciation 586
Minority interest 86
Operating and other expenses 467
---------
Total expenses 2,983
---------
Operating Loss (119)
Provision for income taxes -
---------
Net Loss $ (119)
---------
---------
Weighted Average Shares Outstanding 3,184,832
---------
---------
PER SHARE INFORMATION:
Basic net (loss) $ (0.04)
---------
---------
Diluted net (loss) $ (0.04)
---------
---------
BALANCE SHEET INFORMATION:
Real estate investments, net $ 60,876
Total assets 77,244
Total debt 63,055
Total liabilities 63,996
Minority interest 3,461
Total stockholders' equity 9,787
OTHER INFORMATION:
Cash flows from operating activities $ 556
Cash flows (used in) investing activities (13,580)
Cash flows provided by financing activities 14,036
</TABLE>
13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OPERATING RESULTS FOR THE PERIOD FROM INCEPTION (MARCH 25, 1998) THROUGH
DECEMBER 31, 1998
On August 18, 1998, LTC transferred six properties operated by Karrington to
the Company. Rental income from August 18, 1998 to December 31, 1998 on the
Karrington properties was $1,317,000. On September 30, 1998, LTC transferred
the remaining seven real estate properties contributed to the Company in
connection with the Distribution. Rental income on these seven properties was
$855,000 for the period from October 1, 1998 to December 31, 1998. Interest
income on the Company's investment in Regent Assisted Living, Inc. and
Assisted Living Concepts, Inc. convertible subordinated debentures was
$475,000. Interest and other income consisted of $133,000 in dividends on LTC
common stock and a gain on the sale of Regent common stock of $86,000.
Mortgage interest expense includes $467,000 on a 7.27% mortgage loan of
$17,400,000 obtained by the Company in August 1998 and interest of $666,000
on mortgage debt with a weighted average rate of 9.1% assumed in connection
with the Distribution. Interest expense of $711,000 on the unsecured line of
credit from LTC represents interest at 10% on the average borrowings under
the unsecured credit line provided by LTC.
Depreciation expense of $586,000 consists of depreciation from August 18,
1998 to December 31, 1998 on the Karrington properties of $359,000 and
depreciation of $227,000 from October 1, 1998 to December 31, 1998 on the
remaining seven properties transferred to the Company in the Distribution.
General and administrative expenses were $467,000, the majority of which
relates to a fee of $350,000 for services provided by LTC under the
administrative services agreement.
No benefit for income taxes was recorded since the Company believes that it
is more likely than not that future taxable income will not be sufficient to
realize tax benefits associated with net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of the Company, LTC
provided the Company with a $20.0 million unsecured line of credit.
Borrowings outstanding under the unsecured line of credit bear interest at
10% and mature in 2008. (See "Item 8. Financial Statements -Note. 3
Distribution of LTC's Investment in the Company for a more complete
discussion of the formation and capitalization of the Company".) As of
December 31, 1998, the Company had borrowings outstanding under the unsecured
line of credit of $16,528,000. In addition to amounts available under the
unsecured line of credit, as of December 31, 1998, the Company owns
unencumbered assets consisting of approximately $16,050,000 in real estate,
$10,886,000 in convertible subordinated debentures and $3,632,000 in
marketable equity securities.
During 1998, the Company utilized working capital and borrowings under the
line of credit to:
- - repurchase 138,600 shares of its common stock for an aggregate purchase
price of $384,000;
- - purchase $8,500,000 principal amount of Regent Assisted Living, Inc.
7.5% convertible subordinated debentures due 2008 (fair value
approximates face value);
14
<PAGE>
- - purchase $3,000,000 principal amount of Assisted Living Concepts, Inc.
5.625% convertible subordinated debentures due 2003 for approximately
$2,160,000 (fair value of $2,386,000; amortized cost $2,191,000);
- - purchase 194,100 shares of LTC common stock for an aggregate purchase
price of $3,308,000 (fair value of $3,227,000).
In August 1998, the Company obtained mortgage financing of $17,400,000 from a
third-party lender on four of the unencumbered properties transferred from
LTC in the Distribution. The mortgage loan bears interest at 7.27% and
matures in August 2008. Proceeds were used to repay borrowings under the line
of credit.
Subsequent to December 31, 1998, the Company utilized borrowings under the
line of credit to purchase an additional 40,058 shares of LTC common stock
for approximately $585,000 and an additional 453,400 shares of its own common
stock for approximately $1,240,000.
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.
As of December 31, 1998, the Company had 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.
YEAR 2000
Currently many computer programs assume the first two digits of a year are
"19" and simply identify a year by the last two digits. It is widely
anticipated that, beginning in the year 2000 when the first two digits of a
year are "20" rather than "19", these computer programs will incorrectly
identify the year (i.e. the year 2000 will be incorrectly identified as
1900). Such miscalculations could result in the disruption of operations that
are reliant on these computer programs. Computer programs that identify a
year by four digits are deemed to be year 2000 compliant. The statements in
this section include year 2000 readiness disclosure within the meaning of the
Year 2000 Information and Readiness Disclosure Act of 1998.
STATUS OF THE COMPANY'S INFORMATION TECHNOLOGY SYSTEMS AND NON-INFORMATION
TECHNOLOGY SYSTEMS. The Company's primary use of information technology
systems is its internal accounting and information management software
(collectively the "Systems"). The Company has evaluated the Systems to assess
whether they will function properly with respect to dates in the year 2000
and beyond. Systems that were determined to be non-compliant with the year
2000 and beyond will be upgraded or replaced.
15
<PAGE>
Implementation of year 2000 compliant Systems and upgrades to existing
Systems are expected to be completed by mid-1999. The total cost associated
with modifications required to become year 2000 compliant will not be
material to the Company's financial position, results of operations or
liquidity. Due to the Company's limited reliance on complex Systems, the
Company believes the year 2000 issue, as it relates to its internal Systems,
will not have a material adverse effect upon the Company's financial
position, results of operations or liquidity.
The Company will also have year 2000 exposure in non-information technology
areas as it relates to owned properties and its leased corporate offices.
There is a risk that embedded chips in elevators, security systems,
electrical systems and similar technology-driven devices may stop functioning
on January 1, 2000. All of the Company's owned properties are leased under
triple-net leases and as such, the cost to repair any of these items will be
paid by the lessee. While any disruption in services at our corporate offices
due to failure of non-information technology systems may be inconvenient and
disruptive to day-to-day activities, it is not expected to have a material
adverse effect on our financial position, results of operations or liquidity.
EXPOSURE TO THIRD PARTY YEAR 2000 ISSUES. The Company depends upon the
following third parties:
- - its tenants and other third parties in which it has made investments
in their debt and equity securities for rents and cash flows;
- - its financial institutions for availability of working capital; and
- - its transfer agent to maintain and track investor information.
If our primary tenants or other third parties in which we have made
investments are not year 2000 compliant, or if they face disruptions in their
cash flows due to year 2000 issues, we could face significant temporary
disruptions in our cash flows after that date. These disruptions could be
compounded if the commercial banks that process our cash receipts and
disbursements are not year 2000 compliant.
Neither we nor our lessees can be assured that the federal and state
governments, upon which our lessees rely for Medicare and Medicaid revenue,
will be in compliance in a timely manner. The General Accounting Office has
reported that the Health Care Financing Administration, which runs Medicare,
is behind schedule in taking steps to deal with the year 2000 issue and that
it is highly unlikely that all of the Medicare systems will be compliant in
time to ensure the delivery of uninterrupted benefits and services into the
year 2000. The General Accounting Office has also reported that, based upon
its survey of the states, the District of Columbia and three territories,
less than 16% of the automated systems used by state and local government to
administer Medicaid are reported to be year 2000 compliant. Due to the
general uncertainty surrounding the readiness of third-party tenants and
other third-parties, including the federal and state governments, with which
the Company and its lessees does business, the Company is unable at this time
to determine whether non-compliance with the year 2000 issue by third-parties
will have a material impact on the Company's financial position, results of
operations or liquidity.
CONTINGENCY PLAN. In the event we experience a significant disruption in cash
receipts due to the a delay in Medicare or Medicaid receipts by our tenants
or due to other year 2000 non-compliance issues, we would seek additional
liquidity from our lenders and slow our investment activity.
Readers are cautioned that forward-looking statements contained in the above
discussion regarding year 2000 compliance should be read in conjunction with
the disclosure under the heading -Statement Regarding Forward Looking
Disclosure.
16
<PAGE>
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, access to capital markets and changes in
tax laws and regulations.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Readers are cautioned that statements contained in this section are
"Quantitative and Qualitative Disclosures About Market Risk" are forward
looking and should be read in conjunction with the disclosure under the
heading "-Statement Regarding Forward Looking Disclosure" set forth above.
The Company is exposed to market risks associated with fluctuations in
interest rates on its debt and investments in debt securities and
fluctuations in equity prices on its investment in equity and convertible
debt securities. These market risks are sensitive to many factors, including
governmental monetary and tax policies, domestic and international economic
and political considerations and other factors that are beyond our control.
The Company does not use interest rate contracts or other types of derivative
financial instruments.
All of the Company's investments in debt securities and secured mortgage
loans payable at December 31, 1998 have fixed interest rates. Changes in
interest rates generally impact the fair value, but not future earnings or
cash flows of investments in debt and equity securities and fixed rate debt.
At December 31, 1998, based on prevailing interest rates for comparable loans
and estimates made by management, the fair value of our mortgage loans
payable was approximately $39,285,000. The carrying value and weighted
average interest rate for mortgage loans payable was $46,527,000 and 8.4%,
respectively at December 31, 1998. At December 31, 1998, based on quoted
market values, interest rates for comparable securities and estimates made by
management, the fair value of the Company's investment in debt and equity
securities was $14,518,000. The Company does not believe that the future
market rate risks associated with its investments in debt and equity
securities and debt will have a material impact on the Company or its future
operations.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors ........................................................................ 19
Consolidated Balance Sheet as of December 31, 1998 .....................................................20
Consolidated Statement of Income for the period from
inception (March 25, 1998) to December 31, 1998.........................................................21
Consolidated Statement of Stockholders' Equity for the period from
inception (March 25, 1998) to December 31, 1998.........................................................22
Consolidated Statement of Cash Flows for the period from
inception (March 25, 1998) to December 31, 1998.........................................................23
Notes to Consolidated Financial Statements .............................................................24
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LTC Healthcare, Inc.
We have audited the accompanying consolidated balance sheet of LTC
Healthcare, Inc. as of December 31, 1998 and the related consolidated
statement of income, stockholders' equity, and cash flows for the period from
inception (March 25, 1998) to December 31, 1998. Our audit also included the
financial statement schedule listed at Item 14(d). These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LTC Healthcare,
Inc. at December 31, 1998, and the consolidated results of its operations and
its cash flows for the period from inception (March 25, 1998) to December 31,
1998, 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, present fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
January 19, 1999, except Note 13, as to
which the date is March 19, 1999
19
<PAGE>
LTC HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
<S> <C>
ASSETS
Real Estate Investments:
Buildings and improvements $ 61,376
Land 3,806
Accumulated depreciation (4,306)
-----------------
Real estate investments, net 60,876
Equity Investments 3,632
Investment in Convertible Subordinated Debentures 10,886
Other Assets:
Cash and cash equivalents 1,012
Debt issue costs, net 104
Interest receivable 187
Prepaid expenses and other assets 547
-----------------
1,850
-----------------
Total assets $ 77,244
-----------------
-----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage loans payable $ 46,527
Line of credit from LTC Properties, Inc. 16,528
Accrued interest 308
Accrued expenses and other liabilities 633
-----------------
Total liabilities 63,996
Minority Interest 3,461
Commitments and Contingencies
Stockholders' Equity:
Preferred stock $0.01 par value; 10,000,000 shares
authorized; No shares issued and outstanding -
Common stock $0.01 par value; 40,000,000 shares authorized;
3,335,882 shares issued 33
Capital in excess of par value 10,224
Treasury stock, 151,050 shares (384)
Retained earnings (loss) (119)
Accumulated comprehensive income 33
-----------------
Total stockholders' equity 9,787
-----------------
Total liabilities and stockholders' equity $ 77,244
-----------------
-----------------
</TABLE>
See accompanying notes
20
<PAGE>
LTC HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 25, 1998) TO
DECEMBER 31, 1998
---------------------
<S> <C>
Revenues:
Rental income $ 2,172
Interest and other income 692
---------------------
Total revenues 2,864
---------------------
Expenses:
Interest on mortgages payable 1,133
Interest expense on line of credit from LTC Properties, Inc. 711
Depreciation 586
Minority interest 86
General and administrative 467
---------------------
Total expenses 2,983
---------------------
Operating loss (119)
Provision for income taxes -
---------------------
Net loss $ (119)
---------------------
---------------------
Net (loss) Per Common Share:
Basic net (loss) per share $ (0.04)
---------------------
---------------------
Diluted net (loss) per share $ (0.04)
---------------------
---------------------
</TABLE>
See accompanying notes
21
<PAGE>
LTC HEALTHCARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
CAPITAL IN RETAINED ACCUMULATED
COMMON EXCESS OF TREASURY EARNINGS COMPREHENSIVE COMPREHENSIVE
STOCK PAR STOCK (LOSS) INCOME INCOME (LOSS)
------ ---------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of 3,335,882 shares $ 33 $ 10,224 $ - $ - $ - $ -
Repurchase of (138,600) shares - - (384) - - -
Contribution of Net Assets from
LTC Properties, Inc. (12,450) shares - - - - - -
Unrealized gains on
available-for-sale securities - - - - 33 33
Net loss - - - (119) - (119)
------ ---------- -------- -------- ------------- -------------
Comprehensive loss $ (86)
-------------
-------------
Balance - December 31, 1998 $ 33 $ 10,224 $ (384) $ (119) $ 33
------ ---------- -------- -------- -------------
------ ---------- -------- -------- -------------
</TABLE>
See accompanying notes
22
<PAGE>
LTC HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
(MARCH 25, 1998) TO
DECEMBER 31, 1998
---------------------
<S> <C>
OPERATING ACTIVITIES:
Net loss $ (119)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 586
Gain on sale of investments (86)
Other non-cash items (31)
Increase in other assets (473)
Increase in accrued interest 108
Increase in accrued expenses and other liabilities 571
---------------------
Net cash provided by operating activities 556
INVESTING ACTIVITIES:
Investment in equity securities (3,308)
Investment in convertible subordinated debentures (10,660)
Proceeds from sale of investments, net 388
---------------------
Net cash used in investing activities (13,580)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 2,001
Advance on line of credit from LTC Properties, Inc. 12,800
Payments on line of credit from LTC Properties, Inc. (17,668)
Mortgage loan borrowings 17,400
Debt issue costs (143)
Principal payments on mortgage loans payable (136)
Repurchase of common stock (384)
Other 166
---------------------
Net cash provided by financing activities 14,036
---------------------
Increase (decrease) in cash and cash equivalents 1,012
Cash and cash equivalents, beginning of year -
---------------------
Cash and cash equivalents, end of year $ 1,012
---------------------
---------------------
Supplemental disclosure of cash flow information:
Interest paid $ 880
Non-cash distribution of net assets from LTC Properties Inc. $ 10,224
</TABLE>
See accompanying notes
23
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
LTC Healthcare, Inc. (the "Company"), a Nevada corporation, was incorporated
on March 20, 1998 and began operations on March 25, 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.
The Company was originally a preferred stock subsidiary of LTC Properties,
Inc. ("LTC"), a Maryland corporation and real estate investment trust. On
September 30, 1998, concurrently with the conversion of all shares of Company
non-voting common stock held by LTC into voting common stock of the Company,
LTC completed the spin-off of Company common stock through a taxable dividend
to holders of LTC common stock, convertible subordinated debentures and
Series C Preferred Stock (the "Distribution"). Upon completion of the
Distribution, the Company began operating as a separate public company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries and
controlled partnerships. All intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
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.
REAL ESTATE. Real estate assets transferred to the Company from LTC are
recorded at LTC's historical cost. See Note 3. -Distribution of LTC's
Investment in the Company. Land and buildings and improvements acquired by
the Company are recorded at the Company's cost. 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 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.
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Investments in debt and equity
securities are accounted for at fair value as available-for-sale securities.
Unrealized holding gains and losses resulting from changes in the fair value
are reported as a separate component of stockholders' equity and
comprehensive income.
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
24
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
percentage of increased revenue over a specified base period revenue of the
long-term care facilities, is recognized as earned.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company has entered 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. See Note 3.
- -Distribution of LTC's Investment in the Company.
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 effect
taxable income.
STOCK-BASED COMPENSATION. The Company has adopted the disclosure
requirements of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" but
accounts for stock-based compensation using the intrinsic value method
prescribed by APB Opinion No. 25.
INDUSTRY SEGMENTS. Management allocates resources and assesses performance on
an individual property or investment basis. The Company has aggregated its
investments into a single operating segment since they consist primarily of
long-term care real estate properties and long-term care debt and equity
securities.
CONCENTRATION OF CREDIT RISKS. As of December 31, 1998, Integrated Health
Services, Inc. ("IHS"), Sun Healthcare Group, Inc., through a wholly-owned
subsidiary, ("Sun") and Karrington Health, Inc., ("Karrington") were the
Company's largest operators leasing approximately 11%, 25% and 60% of the
Company's gross real estate investments, respectively. In addition, as of
December 31, 1998, the Company's investment of $8,500,000 in Regent Assisted
Living, Inc. ("Regent") convertible subordinated debentures represented 11%
of the Company's total assets. See Note 5. - Convertible Subordinated
Debentures. The Company's financial position, results of operations and
liquidity could be adversely affected by financial difficulties experienced
by IHS, Sun, Karrington or Regent, including bankruptcy, insolvency or
general downturn in business, or in the event IHS, Sun, or Karrington does
not renew and/or extend its leases with the Company as they expire. IHS, Sun,
Karrington and Regent are publicly traded companies, and as such are subject
to the filing requirements of the Securities and Exchange Commission
On October 18, 1998, Sunrise Assisted Living, Inc. ("Sunrise") and Karrington
announced a definitive agreement of merger whereby Sunrise would acquire
Karrington. The acquisition is expected to close during the second quarter of
1999.
25
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table, which is not covered by the Report of Independent
Auditors on page 19, contains summary information (in thousands) for IHS,
Sun, Karrington and Regent that was extracted from public reports on file
with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
September 30, December 31, -------------------------------
1998 1997 1998 1997
------------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
IHS
Total assets $5,257,785 $5,063,144 N/A N/A
Total debt 3,288,530 3,238,233 N/A N/A
Total stockholders' equity 1,306,891 1,088,161 N/A N/A
Total revenues N/A N/A $2,249,793 $1,009,139
Income before taxes, discontinued operations
and extraordinary items N/A N/A 213,741 81,433
Net income (loss) N/A N/A (78,763) 28,407
SUN
Total assets 3,098,516 $2,832,611 N/A N/A
Total debt 1,682,575 1,799,019 N/A N/A
Total stockholders' equity 612,429 615,197 N/A N/A
Total revenues N/A N/A 2,463,667 $1,536,886
Income (loss) before taxes and extraordinary items N/A N/A (1,319) 63,402
Net income (loss) N/A N/A (44,156) 31,716
KARRINGTON
Total assets $139,126 $141,316 N/A N/A
Total debt 98,396 104,066 N/A N/A
Total stockholders' equity 16,690 26,507 N/A N/A
Total revenues N/A N/A $24,040 $13,231
Loss before taxes N/A N/A (9,834) (3,916)
Net loss N/A N/A (9,834) (3,726)
REGENT
Total assets $70,405 $75,704 N/A N/A
Total debt 53,021 56,169 N/A N/A
Total stockholders' equity 6,851 15,917 N/A N/A
Total revenues N/A N/A $19,868 $10,224
Loss before taxes N/A N/A (8,617) (1,446)
Net loss N/A N/A (8,617) (1,422)
</TABLE>
3. DISTRIBUTION OF LTC'S INVESTMENT IN THE COMPANY
During the period from inception (March 25, 1998) to September 30, 1998, LTC
acquired 4,002 shares of the Company's non-voting common stock for $2,001,000
and contributed equity investments with a book value of $788,000, 13 real
estate properties with a gross book value of $65,182,000 (net book value of
$61,462,000) that were encumbered by $29,263,000 of mortgage debt on seven of
the properties and a minority interest liability of $3,461,000, and other
related assets and liabilities with a book value of $93,000 to the Company in
exchange for an additional 36,000 shares of Company non-voting common stock
and borrowings by the Company under the unsecured line of credit provided by
LTC of $21,396,000. During 1998, the Company borrowed an additional
$12,800,000 under the unsecured line of credit. Subsequent to the
contribution of the above assets and liabilities by LTC to the Company, the
Company obtained mortgage financing of $17,400,000 from a third-party lender
on four of the unencumbered properties. The Company
26
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
utilized proceeds from the mortgage debt and cash on hand to repay borrowings
of $17,668,000 under the unsecured line of credit provided by LTC.
On September 30, 1998, the 40,002 shares of Company non-voting common stock
held by LTC were converted into 3,335,882 shares of Company voting common
stock. Concurrently, LTC completed the spin-off of all Company voting common
stock through a taxable dividend distribution to the holders of LTC common
stock, Cumulative Convertible Series C Preferred Stock ("Series C Preferred
Stock") and Convertible Subordinated Debentures (the "Debentures"). One share
of Company common stock was distributed to each holder of LTC common stock,
Series C Preferred Stock and Debentures for each ten shares of LTC common
stock owned and for each ten shares of LTC common stock that would have been
issued upon conversion of the Debentures and Series C Preferred Stock. Upon
completion of the Distribution, the Company began operating as a separate
public company.
For book purposes, the net assets and liabilities transferred to the Company
by LTC were transferred at LTC's book value of approximately $10,224,000. The
Distribution was a taxable dividend distribution by LTC and accordingly, for
tax purposes, the net assets and liabilities were transferred at their net
fair market value of approximately $15,650,000 ($4.69 per share of Company
common stock)(unauditied).
The Company and LTC have entered into various agreements which, among other
things, provide for a sharing of corporate overhead under an administrative
services agreement. During the period ended December 31, 1998, LTC charged
the Company an administrative services fee of approximately $350,000.
4. REAL ESTATE INVESTMENTS
As of December 31, 1998, the Company had investments in 13 properties located
in five states. The properties include seven skilled nursing facilities with
a total of 914 beds, five assisted living residences with a total of 293
units and one Alzheimer facility with 26 units all of which were contributed
to the Company by LTC in connection with the Distribution.
Owned long-term facilities are leased under operating leases generally with
an initial term of ten to twelve years. Many of the leases contain renewal
options and some contain options that permit the operators to purchase the
facilities. The leases provide for a fixed minimum base rent during the
initial and renewal periods. Most of the leases provide for annual fixed rent
increases or increases based on increases in consumer price indices over the
term of the lease. In addition, certain of the Company's leases provide for
additional rent through revenue participation (as defined on the lease
agreement) in incremental revenues generated by the facilities, over a
defined base period, effective at various times during the term of the lease.
Each lease is a triple net lease that requires the lessee to provide for the
payment of all taxes, insurance, maintenance and repair (capital and
non-capital expenditures),and other costs necessary in the operation of the
facility.
Depreciation expense on buildings and improvements was $586,000 for the year
ended December 31, 1998.
27
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum base rents receivable under the remaining non-cancelable terms
of operating leases are: $6,906,000, $6,957,000, $6,758,000, $6,401,000,
$4,191,000 and $51,272,000 for the years ending December 31, 1999, 2000,
2001, 2002 and 2003 and thereafter.
5. CONVERTIBLE SUBORDINATED DEBENTURES
During 1998, the Company purchased $8,500,000 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 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 December
31, 1998, the purchase price approximated the fair value of the Regent
Debentures.
During October 1998, the Company purchased $3,000,000 principal amount of
Assisted Living Concepts, Inc. ("ALC") 5.625% convertible subordinated
debentures due 2003 for approximately $2,160,000. As of December 31, 1998,
the fair value of the ALC convertible debentures, based on quoted market
prices, was approximately $2,386,000.
6. EQUITY INVESTMENTS
During 1998, the Company purchased for investment purposes, 194,100 shares of
LTC common stock for an aggregate cost of approximately $3,308,000. As of
December 31, 1998, the fair value of the Company's investment in LTC stock,
based on quoted market prices, was $3,227,000.
LTC transferred equity investments consisting of 69,000 shares of Regent
common stock and 30,847 shares of ALC common stock to the Company. Subsequent
to the transfer by LTC, the Company sold its investment in Regent common
stock for total proceeds of approximately $388,000 and recognized a gain of
approximately $86,000. As of December 31, 1998 the ALC common stock was
recorded at its fair value of $405,000 (net of an $81,000 unrealized loss).
7. LINE OF CREDIT FROM LTC
On March 30, 1998, the Company 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 December 31, 1998,
borrowings of $16,528,000 were outstanding under the line of credit. During
1998, the Company recorded interest expense under the unsecured line of
credit of $711,000.
8. MORTGAGES PAYABLE
In connection with the transfer of seven real estate properties from LTC to
the Company, the Company assumed non-recourse mortgage loans totaling
$29,263,000 that bear interest at a weighted average rate of 9.1%. See Note
3.-Distribution of LTC's Investment in the Company.
28
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In August 1998, the Company obtained mortgage financing of $17,400,000 from a
third-party lender on four of the unencumbered properties transferred from
LTC. The mortgage loan bears interest at 7.27% and matures in August 2008.
At December 31, 1998, based on prevailing interest rates for comparable loans
and estimates made by management, the fair value of our mortgage loans
payable was approximately $39,285,000. Aggregate scheduled principal payments
for the mortgage loans payable as of December 31, 1998 were $571,000,
$617,000, $674,000, $3,988,000, $754,000, and $39,923,000 in 1999, 2000,
2001, 2002, 2003 and thereafter.
9. STOCKHOLDERS' EQUITY
INITIAL CAPITALIZATION. On March 25, 1998, 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 in exchange for a $1,000 promissory note. LTC acquired an
additional 4,000 shares of non-voting common stock for $2,000,000 and 36,000
shares of non-voting common stock in exchange for the contribution of certain
assets and liabilities. On September 30, 1998, the 2 shares of voting common
stock acquired by Mr. Ishikawa were retired in return for the cancellation of
the $1,000 promissory note.
On September 30, 1998, the 40,002 shares of Company non-voting common stock
held by the LTC were converted into 3,335,882 shares of Company voting common
stock. On September 30, 1998, the date of the Distribution, the Company owned
124,500 shares of LTC common stock and as a result of the Distribution,
received 12,450 shares of treasury stock. See Note 3.-Distribution of LTC's
Investment in the Company.
REPURCHASE OF COMMON STOCK. During 1998, the Company's Board of Directors
approved the repurchase of up to 300,000 shares of its common stock with such
purchases to be made in the open market, or in negotiated transactions, at
such times and at such prices as management may decide. As of December 31,
1998, the Company repurchased a total of 138,600 shares of its common stock
in the open market at an aggregate cost of $384,000.
STOCK BASED COMPENSATION PLAN. During 1998, the Company adopted the 1998
Equity Participation Plan (the "1998 Plan") under which 500,000 shares of
common stock have been reserved for stock based compensation awards. The 1998
Plan provides for the issuance of incentive and nonqualified stock options,
restricted stock and other stock based awards to officers, employees,
non-employee directors and consultants. The terms of awards granted under the
1998 Plan are set by the Company's compensation committee at its discretion,
however, in the case of incentive stock options, the term may not exceed ten
years from the date of grant.
29
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarized nonqualified stock option activity for the
period from inception (March 25, 1998) to December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Shares Average Price
-------- -------------
<S> <C> <C>
Outstanding, March 25, 1998 - $ -
Granted 296,000 2.50
--------
--------
Outstanding, December 31, 1998 296,000 $ 2.50
--------
--------
Available for Grant, December 31, 1998 204,000
--------
--------
</TABLE>
All options outstanding as of December 31, 1998 have a ten year life and vest
equally over three years from the original date of grant based on continued
employment as of each respective vesting date. Unexercised options expire
seven years after the date of vesting.
The fair value of options granted during 1998 was estimated using the
Black-Scholes valuation model and assumptions as of the grant date. In
determining the estimated fair value of options granted, the Company assumed
a life expectancy of five years from the options grant date, volatility
factor of the expected market price of the Company's common stock of 1.559,
and a risk free interest rate of 4.70%. Based on the above assumptions, the
estimated fair value of options granted was $2.32 per share. As of December
31, 1998 the average remaining contractual life of the outstanding options
was 9.8 years. Had compensation cost been recorded under the provisions of
SFAS No. 123, pro forma net loss would have been $157,000 and pro forma basic
and diluted loss per share would have been $0.05 per share.
10. INCOME TAXES
For federal and state income tax purposes, the Company recorded the assets
and liabilities transferred from LTC at the net fair market value which was
approximately $5,426,000 higher than their net book value at the date of
transfer (unaudited). The excess of fair market value over book value was
recorded as a deferred tax asset. Sufficient taxable income must be generated
in future years to realize the tax benefit associated with the net deferred
tax asset. The Company believes that sufficient doubt exists as to whether it
is more likely than not that future taxable income will be sufficient to
realize such tax benefits and, accordingly, a valuation allowance was
established against the deferred tax asset resulting from the transfer of
assets and liabilities from LTC and net operating loss carryforwards. See
Note 3.-Distribution of LTC's Investment in the Company.
At December 31, 1998, the Company had, for federal and California tax
purposes, net operating loss carryforwards totaling $379,000 and $49,000
respectively (expiring in 2018 for federal and 2003 for California).
SFAS No. 109 requires the reduction of the deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely
than not that a portion or all of the deferred tax asset will not be
realized. For the year ended December 31, 1998, the Company has established a
$41,000 valuation allowance for net operating loss carryforward which
currently is not expected to be utilized.
30
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation between the statutory provision for income taxes and the
actual provision for income taxes is shown as follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Income tax at federal statutory rate $ (41,000)
State income taxes, net of federal benefit (5,000)
Reduction in valuation allowance 41,000
Other 5,000
----------
Provision for income taxes $ -
----------
----------
</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.
The components of the Company's deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
Deferred tax assets:
Partnership and other income $ 47,000
Federal benefit of state deferred tax 7,000
NOL carryforward 144,000
----------
Total deferred tax assets 198,000
Deferred tax liabilities:
Depreciation (96,000)
Accrued Expenses (52,000)
Other (9,000)
----------
Total deferred tax liabilities (157,000)
----------
Net deferred tax assets before valuation allowance 41,000
Valuation allowance (41,000)
----------
Net deferred tax asset $ -
----------
----------
</TABLE>
11. NET LOSS PER SHARE
The Company had no dilutive securities for the period ended December 31,
1998. Weighted average shares outstanding for the period ended December 31,
1998 were calculated assuming the conversion of 40,002 shares of non-voting
common stock held by LTC into 3,335,882 shares of voting common stock and the
151,050 shares of treasury stock obtained by the Company occurred at the
beginning of the period. See Note 9.--Stockholders' Equity.
31
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------
<S> <C> <C> <C>
Net income (loss) available to
Common stockholders $ 4 $ (37) $ (86)
Basic net income (loss) per share 0.00 (0.01) (0.03)
Diluted net income (loss) per share 0.00 (0.01) (0.03)
</TABLE>
13. SUBSEQUENT EVENTS
During 1998, the Company's board of directors authorized the repurchase of
300,000 shares of the Company's common stock. As of December 31, 1998 the
Company had repurchased 138,600 shares of its' common stock for approximately
$384,000. As of January 13, 1999, the Company had repurchased an additional
161,400 shares for approximately $444,000 and had repurchased all the shares
authorized under the 1998 stock repurchase plan. On January 14, 1999 the
Company's board of directors authorized the repurchase of 300,000 additional
shares of the Company's common stock. As of March 19, 1999, the Company had
repurchased 292,000 shares of its common stock under the 1999 stock
repurchase plan, for approximately $796,000. In addition, the Company
purchased 40,058 shares of LTC common stock for approximately $585,000.
During 1999, the Company entered into a transaction with National Healthcare
Investors, Inc. ("NHI"), whereby LTC purchased a note receivable of
$13,691,000 from an NHI subsidiary (the "NHI Note"). The NHI Note is a
non-recourse note secured by four skilled nursing facilities that bears
interest at an annual rate of 11% (calculated using the 365/360 day
methodology resulting in an effective interest rate of approximately 11.2%),
and is fully amortizing with a final maturity of January 1, 2009. The Company
financed the acquisition of the NHI Note with a non-recourse note payable to
NHI for $13,691,000 that bears interest at 10.75% (effective rate of 10.9%)
and matures on January 1, 2009 concurrently with the NHI Note.
32
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 25, 1999, to
be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 25, 1999, to
be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 25, 1999, to
be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 25, 1999, to
be filed pursuant to Regulation 14A.
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K.
(a) Financial Statements
The financial statements are filed as Item 8. Financial
Statements and Supplementary Data of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits in the accompanying index to exhibits are filed
as part of this Annual Report on Form 10-K.
(d) Financial Statement Schedules
Schedule XI. Real Estate and Accumulated Depreciation is filed
as part of this Annual Report on Form 10-K. All other
schedules have been omitted since the required information is
not present or not present in amounts sufficient to require
submission of the schedules.
33
<PAGE>
ITEM 14 (c). INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -------------------------------------------------------------------
<S> <C>
3.1 Form of Amended and Restated Articles of Incorporation of LTC
Healthcare, Inc. (incorporated by reference to Exhibit 3.1 to
Amendment No. 4 to LTC Healthcare, Inc.'s Information
Statement on Form 10 as filed on September 9, 1998).
3.2 Form of Amended and Restated Bylaws of LTC Healthcare, Inc. (incorporated
by reference to Exhibit 3.2 to Amendment No. 4 to LTC Healthcare,
Inc.'s Information Statement on Form 10 as filed on September 9, 1998).
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to Amendment No. 2 to LTC Healthcare, Inc.'s Information
Statement on Form 10 as filed on August 21, 1998).
10.1 Distribution Agreement, dated as of September 30, 1998, by and
between LTC Properties, Inc. and LTC Healthcare, Inc.
(incorporated by reference to Exhibit 10.1 to LTC Healthcare,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.2 Administrative Services Agreement, dated as of September 30,
1998, by and between LTC Properties, Inc. and LTC Healthcare,
Inc. (incorporated by reference to Exhibit 10.2 to LTC
Healthcare, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.3 Intercompany Agreement, dated as of September 30, 1998, by and
between LTC Properties, Inc. and LTC Healthcare, Inc.
(incorporated by reference to Exhibit 10.3 to LTC Healthcare,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.4 Tax Sharing Agreement, dated as of September 30, 1998, by and
between LTC Properties, Inc. and LTC Healthcare, Inc.
(incorporated by reference to Exhibit 10.4 to LTC Healthcare,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.5 Amended and Restated Promissory Note, dated as of May 19,
1998, between LTC Properties, Inc. and LTC Healthcare, Inc.
(incorporated by reference to Exhibit 10.5 to LTC Healthcare,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.6 LTC Healthcare, Inc. Equity Participation Plan.
21.1 List of Subsidiaries
27 Financial Data Schedule
99 Risk Factors
</TABLE>
In accordance with Item 601(b)(4)(iii) of Regulation S-K,
certain instruments pertaining to Registrant's long-term debt
have not been filed; copies thereof will be furnished to the
Securities and Exchange Commission upon request.
34
<PAGE>
LTC HEALTHCARE, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
<TABLE>
<CAPTION>
Initial Gross Amount at which Carried
Cost to Company Costs at December 31, 1998
------------------ Capitalized ----------------------------- Construction/
Building and Subsequent Building and Accum Renovation Acquisition
Encumbrances Land Improvements to Acquisition Land Improvements Total (1) Deprec.(2) Date Date
------------ ------ ------------ -------------- ------ ------------ --------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Skilled Nursing Facilities:
Alamagordo, NM 4,811 314 3,567 28 314 3,595 3,909 739 1985 Mar-93
Roswell, NM 4,066 85 2,932 25 85 2,957 3,042 759 1979 Nov-92
Tucson, AZ 6,432 145 3,932 - 145 3,932 4,077 773 1985 Mar-93
Phoenix, AZ 7,608 432 6,764 - 432 6,764 7,196 1,150 1985/1992 May-94
Clovis, NM 1,644 100 2,519 32 100 2,551 2,651 91 1968 Feb-98
Clovis, NM 2,884 100 1,899 32 100 1,931 2,031 62 1969/1995 Feb-98
Richland Hills, TX 1,741 100 2,844 32 100 2,876 2,976 75 1967 Feb-98
------- ------ ------- ---- ------ ------- ------- ------
SNFs 29,186 1,276 24,457 149 1,276 24,606 25,882 3,649
------- ------ ------- ---- ------ ------- ------- ------
Assisted Living Facilities:
Arlington, OH 17,341(3) 510 6,115 - 510 6,115 6,625 110 1993 Apr-98
Bexley, OH (3) 410 6,215 - 410 6,215 6,625 112 1992 Apr-98
Worthington, OH (3) - 6,710 - - 6,710 6,710 116 1993 Apr-98
Worthington, OH (3) - 3,290 - - 3,290 3,290 63 1996 Apr-98
Rocky River, OH - 760 6,693 - 760 6,693 7,723 130 1998 May-98
Erie, PA - 850 7,477 - 850 7,477 8,327 126 1998 Jun-98
------- ------ ------- ---- ------ ------- ------- ------
ALFs 17,341 2,530 36,770 - 2,530 36,770 39,300 657
------- ------ ------- ---- ------ ------- ------- ------
Total $46,527 $3,806 $61,227 $149 $3,806 $61,376 $65,182 $4,306
------- ------ ------- ---- ------ ------- ------- ------
------- ------ ------- ---- ------ ------- ------- ------
</TABLE>
(1) The aggregate cost for federal income tax purposes is approximately
$67,000,000.
(2) Depreciation for building is calculated rising a 35 year life for
skilled nursing facilities and a 40 year life for assisted living
residences and additions to facilities. Depreciation for furniture and
fixtures is calculated based on a 7 year life for all facilities.
(3) Single note backed by four facilities in Ohio.
Activity for the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Real Estate Accumulated
& Equipment Depreciation
----------- ------------
<S> <C> <C>
Balance at Inception (March 25, 1998) $ - $ -
Additions - 586
Contribution of assets by LTC 65,182 3,720
----------- ------------
Balance at December 31, 1998 $ 65,182 $ 4,306
----------- ------------
----------- ------------
</TABLE>
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the securities
Exchange Act of 1934, Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LTC Healthcare, Inc.
Registrant
Dated: March 31, 1999 By: /s/ JAMES J. PIECZYNSKI
-----------------------
JAMES J. PIECZYNSKI
President, Chief Financial Officer
and Director
/s/ ANDRE C. DIMITRIADIS
- ------------------------------
ANDRE C. DIMITRIADIS Chairman of the Board, Chief March 31, 1999
Executive Officer and Director
/s/ JAMES J. PIECZYNSKI
- ------------------------------
JAMES J. PIECZYNSKI President, Chief Financial March 31, 1999
Officer and Director
/s/ STEVEN STUART
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STEVEN STUART Director March 31, 1999
/s/ BARY G. BAILEY
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BARY G. BAILEY Director March 31, 1999
36
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LTC HEALTHCARE, INC.
EXHIBIT 10.6
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 May 19,
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.
<PAGE>
"CHANGE IN CONTROL" shall mean a change in ownership or control of the
Company effected through any of the following transactions:
(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
<PAGE>
(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 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.
<PAGE>
"OPTIONEE" shall mean an Employee, consultant or Independent Director
granted an Option under the Plan.
"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
<PAGE>
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.
"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
<PAGE>
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.
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
<PAGE>
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 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:
<PAGE>
(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;
(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 ten thousand
(10,000) 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.
<PAGE>
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.
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.
<PAGE>
(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. 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;
<PAGE>
(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 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-
<PAGE>
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 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
<PAGE>
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 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
<PAGE>
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.
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
<PAGE>
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 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.
<PAGE>
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 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,
<PAGE>
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 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.
<PAGE>
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.
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:
<PAGE>
(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, 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
<PAGE>
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;
(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
<PAGE>
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. 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
<PAGE>
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 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.
<PAGE>
LTC HEALTHCARE, INC.
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
COMPANY STATE OF ORGANIZATION
- ------- ---------------------
<S> <C>
LTC GP VI, Inc. Delaware
Coronado Corporation Delaware
LTC Partners IX, L.P. Delaware
Missouri River Corporation Delaware
Park Villa Corporation Delaware
Kansas-LTC Corporation Delaware
LTC-New Mexico Corporation Delaware
LTC-Ohio, Inc. Delaware
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LTC
HEALTHCARE, INC.'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1998 FILED HEREWITH AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001059186
<NAME> LTC HEALTHCARE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,012
<SECURITIES> 3,632
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 65,182
<DEPRECIATION> 4,306
<TOTAL-ASSETS> 77,244
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 33
<OTHER-SE> 9,754
<TOTAL-LIABILITY-AND-EQUITY> 77,244
<SALES> 0
<TOTAL-REVENUES> 2,864
<CGS> 0
<TOTAL-COSTS> 2,983
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,133
<INCOME-PRETAX> (119)
<INCOME-TAX> 0
<INCOME-CONTINUING> (119)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (119)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> (0.04)
</TABLE>
<PAGE>
LTC HEALTHCARE, INC.
EXHIBIT 99
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision in our company. The risks and uncertainties described
below are not the only ones facing our company and there may be additional
risks that we do not presently know of or that we currently consider
immaterial. All of these risks could adversely affect our business, financial
condition, results of operations and cash flows. As a result, our ability to
pay distributions on, and the market price of, our common stock may be
adversely affected if any of such risks are realized.
In accordance with "plain English" guidelines provided by the Securities and
Exchange Commission, whenever we refer to "our company" or to "us," or use
the terms "we" or "our," we are referring to LTC Healthcare, Inc. and its
subsidiaries.
OUR PERFORMANCE IS SUBJECT TO RISKS ASSOCIATED WITH HEALTH CARE REAL ESTATE
INVESTMENT
THERE ARE FACTORS OUTSIDE OF OUR CONTROL THAT AFFECT THE PERFORMANCE AND
VALUE OF OUR REAL ESTATE. Real property investments in the health care
industry are subject to varying degrees of risk. The economic performance and
values of health care real estate can be affected by many factors including
governmental regulation, economic conditions, and demand for health care
services. We cannot assure that the value of any property acquired by us will
appreciate or that the value of property securing any of our mortgage loans
or any property acquired by us will not depreciate. Certain significant
expenditures associated with an investment in real estate (such as mortgage
payments, real estate taxes and maintenance costs) generally do not decline
when circumstances cause a reduction in income from the property.
INCOME AND RETURNS FROM HEALTH CARE FACILITIES CAN BE VOLATILE. The
possibility that the health care facilities in which we invest will not
generate income sufficient to meet operating expenses, will generate income
and capital appreciation, if any, at rates lower than those anticipated or
will yield returns lower than those available through investments in
comparable real estate or other investments are additional risks of investing
in health care related real estate. Income from properties and yields from
investments in such properties may be affected by many factors, including
changes in governmental regulation (such as zoning laws), general or local
economic conditions (such as fluctuations in interest rates and employment
conditions), the available local supply of and demand for improved real
estate, a reduction in rental income as the result of an inability to
maintain occupancy levels, natural disasters (such as earthquakes and floods)
or similar factors.
REAL ESTATE INVESTMENTS ARE ILLIQUID. Real estate investments are relatively
illiquid and, therefore, tend to limit our ability to vary our portfolio
promptly in response to changes in economic or other conditions. All of the
our properties are "special purpose" properties that could not be readily
converted to general residential, retail or office use. Transfers of
operations of nursing homes and other health care-related facilities are
subject to regulatory approvals not required for transfers of other types of
commercial operations and other types of real estate. Thus, if the operation
of any of our properties becomes unprofitable due to competition, age of
improvements or other factors such that the lessee becomes unable to meet its
obligations on the lease, the liquidation value of the property may be
substantially less -- relative to the amount owing on the mortgage loan --
than would be the case if the property were readily adaptable to other uses.
The receipt of liquidation proceeds could be delayed by the approval process
of any state agency necessary for the transfer of the property. In addition,
certain significant expenditures associated with real estate investment (such
as
<PAGE>
real estate taxes and maintenance costs) are generally not reduced when
circumstances cause a reduction in income from the investment. If any of
these events occur, our income and funds available for distribution would be
adversely affected.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE. We currently require, and
we intend to continue to require, all of any of our properties to secure
adequate comprehensive property and liability insurance that covers us as
well as the lessee. Certain risks may, however, be uninsurable or not
economically insurable and there can be no assurance we or a lessee will have
adequate funds to cover all contingencies itself. Certain losses such as
losses due to floods or seismic activity may be insured subject to certain
limitations including large deductibles or co-payments and policy limits. If
an uninsured loss or a loss in excess of insured limits occurs with respect
to one or more of our properties, we could lose the capital we invested in
the properties, as well as the anticipated future revenue from the properties
and, in the case of debt which is with recourse to us, we would remain
obligated for any mortgage debt or other financial obligations related to the
properties.
WE DEPEND ON LEASE INCOME FROM REAL PROPERTY. Since a substantial portion of
our income is derived from lease income from real property, our income would
be adversely affected if we were unable to lease our properties on
economically favorable terms. There can be no assurance that any lessee will
exercise its option to renew its lease upon the expiration of the initial
term or that if such failure to renew were to occur, we could lease the
property to others on favorable terms.
OUR LESSEES FACE COMPETITION IN THE HEALTHCARE INDUSTRY
The long-term care industry is highly competitive and we expect that it may
become more competitive in the future. Our lessees are competing with
numerous other companies providing similar long-term care services or
alternatives such as home health agencies, life care at home, community-based
service programs, retirement communities and convalescent centers. There can
be no assurance that our lessees will not encounter increased competition in
the future which could limit their ability to attract residents or expand
their businesses and therefore affect their ability to make their lease
payments to us.
THE HEALTHCARE INDUSTRY IS HEAVILY REGULATED BY THE GOVERNMENT
Our lessees who operate health care facilities are subject to heavy
regulation by federal, state and local governments. These laws and
regulations are subject to frequent and substantial changes resulting from
legislation, adoption of rules and regulations, and administrative and
judicial interpretations of existing law. These changes may have a dramatic
effect on the definition of permissible or impermissible activities, the
relative costs associated with doing business and the amount of reimbursement
by both government and other third-party payors. These changes may be applied
retroactively. The ultimate timing or effect of these changes cannot be
predicted. The failure of any lessee of any of our properties to comply with
such laws, requirements and regulations could affect its ability to operate
its facility or facilities and could adversely affect such lessee's ability
to make lease payments to us.
OUR LESSEES RELY ON GOVERNMENT AND THIRD PARTY REIMBURSEMENT. The ability of
our lessees to generate revenue and profit determines the underlying value of
that facility to us. Revenues of our lessees are generally derived from
payments for patient care. Sources of such payments include the federal
Medicare program, state Medicaid programs, private insurance carriers, health
care service
<PAGE>
plans, health maintenance organizations, preferred provider arrangements,
self-insured employers, as well as the patients themselves.
A significant portion of the revenue of our lessees is derived from
governmentally-funded reimbursement programs, such as Medicare and Medicaid.
Because of significant health care costs paid by such government programs,
both federal and state governments have adopted and continue to consider
various health care reform proposals to control health care costs. In recent
years, there have been fundamental changes in the Medicare program which
resulted in reduced levels of payment for a substantial portion of health
care services. In many instances, revenues from Medicaid programs are already
insufficient to cover the actual costs incurred in providing care to those
patients.
Moreover, health care facilities have experienced increasing pressures from
private payors attempting to control health care costs, and reimbursement
from private payors has in many cases effectively been reduced to levels
approaching those of government payors.
Governmental and public 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
payors will be sufficient to cover cost increases in providing services to
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 our lessees and thereby adversely affect
those `lessees' ability to make their lease payments to us. Failure of the
lessees to make their lease payments would have a direct and material adverse
impact on us.
REGULATIONS HAVE BEEN ADOPTED TO ELIMINATE FRAUD AND ABUSE. There are various
federal and state laws prohibiting fraud by health care providers, including
criminal provisions which prohibit filing false claims or making false
statements to receive payment or certification under Medicare and Medicaid,
or failing to refund overpayments or improper payments. Violation of these
federal provisions is a felony punishable by up to five years imprisonment
and/or $25,000 fines. Civil provisions prohibit the knowing filing of a false
claim or the knowing use of false statements to obtain payment. The penalties
for such a violation are fines of not less than $5,000 nor more than $10,000,
plus treble damages, for each claim filed.
There are also laws which govern referrals and financial relationships. The
federal Anti-Kickback Law prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for, or to
induce, the referral of Medicare and Medicaid patients. A wide array of
relationships and arrangements, including ownership interests in a company by
persons who refer or who are in a position to refer patients, as well as
personal services agreements, have under certain circumstances, been alleged
or been found to violate these provisions. In addition to the Anti-Kickback
Statute, the federal government restricts certain financial relationships
between physicians and other providers of health care services.
State and federal governments are devoting increasing attention and resources
to anti-fraud initiatives against health care providers. The Health Insurance
Portability and Accountability Act of 1996 and the Balanced Budget Act of
1997 expand the penalties for health care fraud, including broader provisions
for the exclusion of providers from the Medicare and Medicaid programs.
Further, under Operation Restore Trust, a major anti-fraud demonstration
project, the Office of Inspector General of the U.S. Department of Health and
Human Services, in cooperation with other federal and state agencies, has
focused on the activities of skilled nursing facilities, home health
agencies, hospices and durable medical equipment suppliers in certain states,
including California, in which we have
<PAGE>
properties. Due to the success of Operation Restore Trust, the project has
been expanded to numerous other states and to additional providers including
providers of ancillary nursing home services.
Based upon information we have periodically received from our operators over
the terms of their respective leases and loans, we believe that the nursing
facilities in which we have investments are in substantial compliance with
the various regulatory requirements applicable to them, although there can be
no assurance that the operators are in compliance or will remain in
compliance in the future.
CONGRESS HAS ENACTED HEALTH CARE REFORM MEASURES. The health care industry is
facing various challenges, including increased government and private payor
pressure on health care providers to control costs. The pressure to control
health care costs intensified during 1994 and 1995 as a result of the
national health care reform debate and continues into 1999 as Congress
attempted to slow the rate of growth of federal health care expenditures as
part of its effort to balance the federal budget. The Balanced Budget 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, Congress established the prospective payment system
for skilled nursing facility services to replace the cost-based reimbursement
system. Skilled nursing facilities may need to restructure their operations
to accommodate the new Medicare prospective payment system reimbursement. In
part because of the uncertainty as to the effect of the prospective payment
system on skilled nursing facilities, in November 1998, Standard and Poor's,
an international rating agency that provides credit analysis and information
through the rating of financial instruments, placed many skilled nursing
facility companies on a "credit watch" because of the potential negative
impact of the implementation of the prospective payment system on the
financial condition of skilled nursing facilities, including the ability to
make interest and principal payments on outstanding borrowings. In early
March 1999, Standard & Poor's lowered the ratings of several skilled nursing
facility companies, including skilled nursing facilities in which we invest,
because of the impact of the implementation of the prospective payment
system, particularly those companies with substantial debt.
In addition, there are numerous initiatives at the federal and state levels
for comprehensive reforms affecting the payment for and availability of
health care services. Congress and state legislatures can be expected to
continue to review and assess alternative health care delivery systems and
payment methodologies. Changes in the law, new interpretations of existing
laws, or changes in payment methodology may have a dramatic effect on the
definition of permissible or impermissible activities, the relative costs
associated with doing business and the amount of reimbursement by the
government and other third party payors.
In light of forthcoming regulations and continuing state Medicaid program
reform, no assurance can be given that the implementation of such regulations
and reform will not have a material adverse effect on our financial condition
or results of operations.
OUR FACILITIES ARE SUBJECT TO LICENSING, CERTIFICATION AND ACCREDITATION. In
addition to the requirements to be met by skilled nursing facilities for
participation in the Medicare and Medicaid programs, skilled nursing
facilities are subject to regulatory and licensing requirements of federal,
state and local authorities. The operator of each skilled nursing facility is
licensed annually by the board of health or other applicable agency in each
state. In granting and renewing licenses, regulatory agencies consider, among
other things, the physical buildings and equipment, the qualifications of the
administrative personnel and nursing staff, the quality of care and
continuing compliance with the
<PAGE>
laws and regulations relating to the operation of the facilities. State
licensing of facilities is a prerequisite to certification under the Medicare
and Medicaid programs. In the ordinary course of business, the operators
receive notices of deficiencies for failure to comply with various regulatory
requirements and take appropriate corrective and preventive actions.
Failure to obtain licensure or loss of licensure would prevent a facility
from operating. Failure to maintain certification in the Medicare and
Medicaid programs would result in a loss of funding from those programs.
Although accreditation is generally voluntary, loss of accreditation could
result in a facility not meeting eligibility requirements to participate in
various reimbursement programs. These events could adversely affect the
facility operator's ability to make rent and debt payments.
In addition to licensing requirements, state and local laws may regulate
expansion, including the addition of new beds or services or acquisition of
medical equipment, and occasionally the contraction of health care facilities
by requiring certificate of need or other similar approval programs. States
vary in their utilization of these programs. In addition, health care
facilities are subject to the Americans with Disabilities Act and building
and safety codes which govern access, physical design requirements for
facilities, and building standards.
LONG-TERM CARE FACILITIES. Long-term care facilities are regulated primarily
through the licensing of such facilities against a common background
established by federal law enacted as part of the Omnibus Budget
Reconciliation Act of 1987. Regulatory authorities and licensing standards
vary from state to state, and in some instances from locality to locality.
These standards are constantly reviewed and revised. Agencies periodically
inspect facilities, at which time deficiencies may be identified. The
facilities must correct these deficiencies as a condition to continued
licensing or certification and participation in government reimbursement
programs. Depending on the nature of such deficiencies, remedies can be
routine or costly. Similarly, compliance with regulations which cover a broad
range of areas such as patients' rights, staff training, quality of life and
quality of resident care may increase facility start-up and operating costs.
ASSISTED LIVING FACILITIES Assisted living facilities are subject to certain
state regulations and licensing requirements. To qualify as a state licensed
facility, assisted living facilities must comply with regulations which
address, among other things, staffing, physical design, required services and
resident characteristics. Assisted living facilities are also subject to
various local building codes and other ordinances, including fire safety
codes. These requirements vary from state to state and are monitored to
varying degrees by state agencies. Failure to comply with these laws and
regulations could result in the denial of reimbursement, the imposition of
fines, suspension or decertification from the Medicare and Medicaid program,
and in extreme cases, the revocation of a facility's license or closure of a
facility. Such actions may have an effect on the revenues of the lessees of
properties owned by us and therefore adversely impact our revenues.
Currently, assisted living facilities are not regulated as such by the
federal government. State standards required for assisted living facility
providers are less stringent than those required of other licensed health
care operators. There can be no assurance that federal regulations governing
the operation of assisted living facilities will not be implemented in the
future or that existing state regulations will not be expanded. In addition,
only certain states have adopted laws or regulations permitting individuals
with higher acuity levels to remain in assisted living communities who may
otherwise qualify for placement in a nursing facility. While only certain
states presently provide for any Medicaid reimbursement for assisted living
residences, several states are currently reviewing their policies and
reimbursement programs to provide funding for assisted living residences.
There can be no assurance that such states will adopt the Medicaid waiver
program.
<PAGE>
ENVIRONMENTAL PROBLEMS ARE POSSIBLE AND CAN BE COSTLY. Under various federal,
state and local environmental laws, ordinances and regulations, an owner of
real property or a secured lender (such as our company) may be liable for the
costs of removal or remediation of hazardous or toxic substances at, under or
disposed of in connection with such property, as well as other potential
costs relating to hazardous or toxic substances (including government fines
and damages for injuries to persons and adjacent property). Such laws often
impose such liability without regard to whether the owner or secured lender
knew of, or was responsible for, the presence or disposal of such substances
and may be imposed on the owner or secured lender in connection with the
activities of an operator of the property. The cost of any required
remediation, removal, fines or personal or property damages and the owner's
or secured lender's liability therefore could exceed the value of the
property, and/or the assets of the owner or secured lender. In addition, the
presence of such substances, or the failure to properly dispose of or
remediate such substances, may adversely affect the owner's ability to sell
or rent such property or to borrow using such property as collateral which,
in turn, would reduce our revenues.
Although the leases covering our properties require the lessee to indemnify
us for certain environmental liabilities, the scope of such obligations may
be limited and we cannot assure that any such lessee would be able to fulfill
its indemnification obligations.
WE RELY ON A FEW MAJOR OPERATORS
As of December 31, 1998, Karrington Health, Inc., Sun Healthcare Group, Inc.
(through its wholly owned subsidiary Sunrise Healthcare Corporation) and
Integrated Health Services, Inc. are our largest operators, operating twelve
facilities which represent approximately 60%, 25% and 11%, respectively, of
our adjusted gross portfolio on such date. Sun is a publicly traded company,
and as such is subject to the filing requirements of the Securities and
Exchange Commission. Our financial position and our ability to make
distributions may be adversely affected by financial difficulties experienced
by any of such operators, or any other of our major operators, including a
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.
THIRD PARTIES WE INVEST IN MAY BECOME BANKRUPT
If third parties we invest in become bankrupt, any investments we make in
assets operating in workout modes or under Chapter 11 of the Bankruptcy Code
could be subordinated or disallowed, and we could be liable to third parties.
Furthermore, if we receive any distributions relating to such investments,
they could be recovered from us if the distribution is regarded as a
fraudulent conveyance or preferential payment. Bankruptcy laws, including the
automatic stay imposed upon the filing of a bankruptcy petition, may delay
our ability to realize on collateral securing loans made by us or may
adversely affect the priority of our 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.
WE MAY BE UNABLE TO CONSUMMATE ACQUISITIONS, LEASINGS AND FINANCINGS ON
ADVANTAGEOUS TERMS DUE IN PART TO COMPETITION
We intend to continue to acquire, lease and finance health care facilities.
These types of investments in health care facilities entail the risk that
they will fail to perform in accordance with expectations. Estimates of the
costs of improvements necessary for us to bring an acquired property up to
market standards may prove inaccurate. Further, we anticipate significant
competition for attractive
<PAGE>
investment opportunities from other major health care facility investors with
significant capital including real estate investment trusts ("REITs"), real
estate partnerships, health care providers and other investors, including
banks and insurance companies. We expect that future investments will be
financed through a combination of borrowings and proceeds from equity or debt
offerings by us, which could have an adverse effect on our cash flow. We may
not be able to invest in additional facilities. Our inability to finance any
future investments on favorable terms or the failure of investments to
conform with our expectations or investment criteria could have a direct and
adverse impact on us.
WE ARE SUBJECT TO RISKS AND LIABILITIES IN CONNECTION WITH PROPERTIES OWNED
THROUGH JOINT VENTURES, LIMITED LIABILITY COMPANIES AND PARTNERSHIPS
We have ownership interests in joint ventures, limited liability companies or
partnerships. We may make additional investments through these ventures in
the future. Partnership, limited liability company or joint venture
investments may involve risks such as the following:
- our partners, co-members or joint venturers might become
bankrupt (in which event we and any other remaining general
partners, members or joint venturers would generally remain
liable for the liabilities of the partnership, limited
liability company or joint venture);
- our partners, co-members or joint venturers might at any time
have economic or other business interests or goals which are
inconsistent with our business interests or goals;
- our partners, co-members or joint venturers may be in a position
to take action contrary to our instructions, requests, policies
or objectives; and
- agreements governing joint ventures, limited liability
companies and partnerships often contain restrictions on the
transfer of a joint venturer's, member's or partner's interest
or "buy-sell" or other provisions which may result in a
purchase or sale of the interest at a disadvantageous time or
on disadvantageous terms.
We will, however, generally seek to maintain sufficient control of our
partnerships, limited liability companies and joint ventures to permit us to
achieve our business objectives. Our organizational documents do not limit
the amount of available funds that we may invest in partnerships, limited
liability companies or joint ventures. The occurrence of one or more of the
events described above could have a direct and adverse impact on us.
WE COULD INCUR MORE DEBT
Our organizational documents do not contain any limitation on the amount of
indebtedness we may incur. We also have the ability to use a more highly
leveraged business strategy than typically used by REITs. As part of our
business strategy, we engage in the ownership of leveraged properties, and as
such, the purchase of additional properties will cause our debt to increase.
Accordingly, we could become further highly leveraged, resulting in an
increase in debt service that could increase the risk of default on our
indebtedness.
<PAGE>
DEBT FINANCING, FINANCIAL COVENANTS, DEGREE OF LEVERAGE AND INCREASES IN
INTEREST RATES COULD ADVERSELY AFFECT OUR ECONOMIC PERFORMANCE
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. We
are subject to risks normally associated with debt financing, including the
risks that our cash flow will be insufficient to make distributions to our
stockholders, that we will be unable to refinance existing indebtedness on
our properties (which in all cases will not have been fully amortized at
maturity) and that the terms of refinancing will not be as favorable as the
terms of existing indebtedness.
As of December 31, 1998, we had total debt outstanding of $16,528,000 under
our unsecured line of credit with LTC Properties, Inc., a Maryland
corporation, which bears interest at 10% and matures in March 2008. If we are
unable to refinance or extend principal payments due at maturity or pay them
with proceeds of other capital transactions, we expect that our cash flow
will not be sufficient in all years to pay distributions to our stockholders
and to repay all such maturing debt. Furthermore, if prevailing interest
rates or other factors at the time of refinancing (such as the reluctance of
lenders to make commercial real estate loans) result in higher interest rates
upon refinancing, the interest expense relating to that refinanced
indebtedness would increase. This increased interest expense would adversely
affect our financial condition and results of operations.
RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW. As of December
31, 1998, we had $16,528,000 outstanding under our line of credit. In
addition, we may incur other variable rate indebtedness in the future.
Increases in interest rates on this indebtedness could increase our interest
expense, which would adversely affect our financial condition and results of
operations. We may in the future engage in transactions to limit our exposure
to rising interest rates.
WE MAY BE UNABLE TO OBTAIN EXTERNAL SOURCES OF CAPITAL. Our access to
third-party sources of capital depends upon a number of factors, including
general market conditions and the market's perception of our growth potential
and our current and potential future earnings and cash distributions and the
market price of the shares of our capital stock. Additional debt financing
may substantially increase our leverage.
FINANCIAL COVENANTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. If a
property is mortgaged to secure payment of indebtedness and we are unable to
meet mortgage payments, the mortgagee could foreclose on the property,
resulting in loss of income and asset value. The mortgages on our properties
contain customary negative covenants which, among other things, limit our
ability, without the prior consent of the lender, to further mortgage the
property, to enter into new leases or materially modify existing leases, and
to discontinue insurance coverage. Foreclosure on mortgaged properties or an
inability to refinance existing indebtedness would likely have a negative
impact on our financial condition and results of operations.
WE ARE UNABLE TO REFINANCE CERTAIN INDEBTEDNESS. As of December 31, 1998, we
had approximately $29.2 million of mortgage loans payable that were
securitized by LTC Properties in REMIC transactions. The interest rates on
the mortgage loans range from 8.0% to 12.0%. In connection with an
administrative services agreement between us and LTC Properties, we have
agreed not to prepay or cause to be prepaid any of our mortgage loans
provided by LTC Properties which are securitized in REMIC transactions unless
the property is sold to an unaffiliated third party. Because of this
agreement, we will not have the ability to refinance this mortgage debt and
consequently will not be able to lower our interest costs in a low interest
rate environment.
<PAGE>
OUR HEDGING POLICIES INVOLVE RISKS OF UNANTICIPATED MOVEMENTS IN INTEREST
RATES
We may decide to employ hedging techniques to protect us against adverse
movements in currency and/or other types of interest rates. While we 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 us than if it had not entered into
such hedging transactions.
In connection with the financing of real estate investments, we may use
derivative financial instruments primarily to reduce exposure to adverse
fluctuations in interest rates and foreign exchange rates. We do not intend
to enter into derivative financial instruments for trading purposes. We would
use any derivative position we maintain to reduce risk by hedging an
underlying economic exposure. We intend to invest in derivatives having
straightforward instruments with liquid markets. In order to reduce
counter-party credit or legal enforcement risk, we will have all
counter-parties be major investment or commercial banks and we will execute
all transactions with documentation consistent with accepted industry
practice.
CONFLICTS OF INTEREST
SOME OF OUR EXECUTIVE OFFICERS AND BOARD MEMBERS ARE ALSO EXECUTIVE OFFICERS
AND BOARD MEMBERS OF A REAL ESTATE INVESTMENT TRUST.
- Andre C. Dimitriadis, who is currently our Chairman and Chief
Executive Officer serves in the same positions with LTC Properties;
- James J. Pieczynski, who is currently our President and Chief
Financial Officer serves in the same positions with LTC Properties;
and
- Christopher T. Ishikawa, who is currently our Senior Vice President
and Chief Investment Officer serves in the same positions with LTC
Properties.
LTC Properties is a real estate investment trust that invests primarily in
long-term care through mortgage loans, facility lease transactions and other
investments. Although none of the members of our management is committed to
spending a particular amount of time on LTC Healthcare's or LTC Properties'
affairs, each of the members of management of LTC Healthcare spends
approximately 25% of his time on LTC Healthcare's affairs and 75% of his time
on LTC Properties' affairs. The continued involvement in LTC Properties by
some of our executive officers and directors could divert management's
attention from our day-to-day operations.
CONFLICTS OF INTEREST MAY ARISE IN INTERPRETATIONS OF INTERCOMPANY AGREEMENTS
BETWEEN OUR COMPANY AND LTC PROPERTIES.
We and LTC Properties entered into an intercompany agreement and an
administrative services agreement on September 30, 1998. Because LTC
Properties owned nonvoting common stock of our company (representing
approximately 99% of the outstanding shares of our common stock) at the time
the agreements were entered into, 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. Moreover, because our management
is largely the same as LTC Properties' management, conflicts may arise with
respect to the operation and effect of our intercompany agreements and
relationships which could have an adverse effect on us if not properly
resolved. More specifically, overlapping members of the board of directors
and senior management of both companies may be presented with
<PAGE>
conflicts of interest with respect to matters affecting us and LTC
Properties, 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 LTC Properties' right to engage
in activities or make investments that involve real estate unless we were
first offered the opportunity and declined to pursue such activities or
investments.
IF LTC PROPERTIES FAILS TO QUALIFY AS A REIT, LTC PROPERTIES WOULD BE ALLOWED
TO COMPETE WITH US.
The intercompany agreement which we entered into with LTC Properties
prohibits us from developing a direct or indirect opportunity to invest in
real estate through facility lease transactions and other investments unless
LTC Properties was first offered the opportunity and declined to pursue such
activities and investments. As a REIT, LTC Properties 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. If LTC Properties in the future
should fail to qualify as a REIT, it would thereafter have the ability to
participate in a broader range of investments and activities that are
presented to it by us under the intercompany agreement. As a result, LTC
Properties's ability to engage in non REIT activities could (1) significantly
restrict the opportunities we may pursue, and/or (2) allow LTC Properties to
compete with us for non REIT investments. Accordingly, if LTC Properties
should fail to qualify as a REIT, that failure could have a material adverse
effect on us.
IF WE ISSUE ADDITIONAL EQUITY SECURITIES, THE INVESTMENT OF EXISTING
STOCKHOLDERS WILL BE DILUTED
We 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 our securities, including our common
stock.
THERE ARE DISADVANTAGES OF INVESTMENTS IN DEBT INSTRUMENTS
WE COULD CHANGE OUR INVESTMENT AND FINANCING POLICIES WITHOUT A VOTE OF
STOCKHOLDERS
Our Board of Directors will determine our investment and financing policies,
our growth strategy and our debt, capitalization, distribution and operating
policies. Although the Board of Directors has no present intention to revise
or amend these strategies and policies, the Board of Directors may do so at
any time without a vote of stockholders. Accordingly, stockholders will have
no control over changes in our strategies and policies (other than through
the election of directors), and any such changes may not serve the interests
of all stockholders and could adversely affect our financial condition or
results
VARIOUS MARKET CONDITIONS AFFECT THE PRICE OF OUR COMMON STOCK
As with other publicly-traded equity securities, the market price of our
common stock will depend upon various market conditions, which may change
from time to time. Among the market conditions that may affect the market
price of our common stock are the following:
<PAGE>
- the extent of investor interest in us;
- the general reputation of healthcare related investment companies
and the attractiveness of their equity securities in comparison to
other equity securities (including securities issued by other real
estate-based companies);
- our financial performance and that of our operators; and
- general stock and bond market conditions, including changes in
interest rates on fixed income securities which may lead prospective
purchasers of our common stock to demand a higher annual yield from
future distributions. Such an increase in the required yield from
distributions may adversely affect the market price of our common
stock.
Other factors such as governmental regulatory action and changes in tax laws
could also have a significant impact on the future market price of our common
stock.
WE MAY EXPERIENCE RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS
We believe our internal accounting and information systems will be Year 2000
compliant by mid-1999. However, we cannot guarantee that we will achieve
these results. In addition, we cannot be assured that other third parties
whose systems and operations impact us will be compliant nor can we and our
lessees be assured that the federal and state governments, upon which our
lessees rely for Medicare and Medicaid revenue, will be in compliance in a
timely manner. If we, our third-party tenants or other third-parties,
including the federal and state governments, with which we and our lessees do
business, are not year 2000 compliant, we could experience disruptions to our
business and operations that could have a material impact on our financial
position, results of operations or liquidity.
We will also have year 2000 exposure in non-information technology areas as
it relates to owned properties. There is a risk that embedded chips in
elevators, security systems, electrical systems and similar technology-driven
devices may stop functioning on January 1, 2000. All of our owned properties
are leased under triple-net leases and as such, the cost to repair any of
these items will be paid by the lessee.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We depend on the efforts of our executive officers, particularly Messrs.
Dimitriadis and Pieczynski. While we believe that we could find suitable
replacements for these key personnel, the loss of their services or the
limitation of their availability could have an adverse impact on our
operations.
DIVIDEND POLICY
The future payment of dividends by us will depend on decisions that will be
made by our Board of Directors from time to time based on our results of
operations and financial condition and such other business considerations as
the Board of Directors considers relevant. We presently anticipates that we
will retain all available funds for use in the operation and expansion of its
business and do not anticipate paying any dividends in the foreseeable future
<PAGE>
CERTAIN ANTI TAKEOVER FEATURES AFFECTING A CHANGE IN CONTROL OF OUR COMPANY
Certain provisions of our Amended and Restated Articles of Incorporation and
our Amended and Restated Bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of our company. Such
provisions include Article II of the Articles of Incorporation which
authorizes our Board of Directors to issue shares of preferred stock of our
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 common stock) of any series of preferred stock so issued. Our 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 our Bylaws by the stockholders or certain provisions of our
Articles of Incorporation 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 we are a party
and which requires stockholder approval under Nevada statutory law and any
sale or other disposition by us of all or substantially all of our 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 our common stock. Such provisions also may
inhibit fluctuations in the market price of our 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 our company without the concurrence of our Board of
Directors.
In addition, certain provisions of Nevada statutory law may make more
difficult the acquisition of control of our company without the approval of
our Board of Directors. 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:
(1) an aggregate market value equal to 5% or more of the aggregate
market value of the assets of the corporation;
(2) an aggregate market value equal to 5% or more of the aggregate
market value of all outstanding shares of the corporation; or
(3) 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
<PAGE>
held by disinterested stockholders, or if the consideration to be paid by the
interested stockholder is at least equal to the highest of:
(1) 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;
(2) 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
(3) 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
December 31, 1998, we do not have more 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 us.
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.
