<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
----------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from ____ to ____
Commission file number 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)
(805) 981-8655
(Registrant's telephone number, including area code)
Indicate by check mark whether Registrant (1) has filed all reports 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 Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Shares of Registrant's common stock, $.01 par value, outstanding at May 12,
1999 - 2,696,928 (excludes Treasury Shares of 638,954)
<PAGE>
LTC HEALTHCARE, INC.
FORM 10-Q
MARCH 31, 1999
INDEX
PART I -- FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets........................ 3
Condensed Consolidated Statement of Operations .............. 4
Condensed Consolidated Statement of Cash Flows .............. 5
Notes to Condensed Consolidated Financial Statements ........ 6
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations ....... 8
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................ 11
2
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LTC HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
--------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Real Estate Investments:
Buildings and improvements $ 61,376 $ 61,376
Land 3,806 3,806
Accumulated depreciation (4,802) (4,306)
----------- ---------
Land, buildings and improvements, net 60,380 60,876
Mortgage loan receivable 13,620 -
----------- ---------
74,000 60,876
Marketable Securities:
Available-for-sale equity securities 2,463 3,632
Held-to-maturity debt securities 10,918 10,886
----------- ---------
13,381 14,518
Other Assets:
Cash and cash equivalents 321 1,012
Prepaid expenses and other assets 1,081 838
----------- ---------
1,402 1,850
----------- ---------
Total Assets $ 88,783 $ 77,244
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage loans payable 46,384 $ 46,527
Note payable 13,120 -
Line of credit from LTC Properties, Inc. 17,672 16,528
Accrued interest 428 308
Accrued expenses and other liabilities 495 633
----------- ---------
Total Liabilities 78,099 63,996
Minority Interest 3,518 3,461
Commitments
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 33
Capital in excess of par value 10,224 10,224
Treasury stock, 1999-638,954 shares; 1998-151,050 shares (1,695) (384)
Cumulative net loss (261) (119)
Accumulated comprehensive loss (1,135) 33
----------- ---------
Total Stockholders' Equity 7,166 9,787
----------- ---------
Total Liabilities and Stockholders' Equity $ 88,783 $ 77,244
----------- ---------
----------- ---------
</TABLE>
SEE ACCOMPANYING NOTES
3
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LTC HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
------------------
(Unaudited)
<S> <C>
Revenues:
Rental income $ 1,772
Interest income from mortgage loan receivable 375
Interest and other income 329
-----------
Total revenues 2,476
-----------
Expenses:
Interest on mortgages payable 978
Interest on line of credit from LTC Properties, Inc. 425
Interest on note payable 362
Depreciation 496
Minority interest 86
General and administrative 271
-----------
Total expenses 2,618
-----------
Operating loss (142)
Provision for income taxes -
-----------
Net loss $ (142)
-----------
-----------
Weighted average shares outstanding 2,848,330
Net Loss per Share:
Basic $ (0.05)
-----------
-----------
Diluted $ (0.05)
-----------
-----------
Comprehensive Loss:
Net loss $ (142)
Unrealized loss on available-for-sale equity securities (1,168)
-----------
Total comprehensive loss $ (1,310)
-----------
-----------
</TABLE>
SEE ACCOMPANYING NOTES
4
<PAGE>
LTC HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
------------------
(Unaudited)
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (142)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 496
Other non-cash items (30)
Increase in accrued interest 120
Net change in other assets and liabilities (173)
---------
Net cash provided by operating activities 271
CASH FLOWS USED IN FINANCING ACTIVITIES:
Stock repurchase (1,311)
Advances under line of credit from LTC Properties, Inc. 3,479
Payments on line of credit from LTC Properties, Inc. (2,335)
Principal payments on note payable (571)
Principal payments on mortgage loans payable (143)
---------
Net cash used in financing activities (881)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Principal payments on mortgage loan receivable 71
Other (152)
---------
Net cash used in investing activities (81)
---------
Decrease in cash and cash equivalents (691)
Cash and cash equivalents, beginning of period 1,012
---------
Cash and cash equivalents, end of period $ 321
---------
---------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 979
Non-cash investing and financing activities:
Purchase of mortgage loan receivable with a non-recourse note payable $ 13,691
</TABLE>
SEE ACCOMPANYING NOTES
5
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LTC HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The condensed consolidated financial statements included herein have been
prepared by LTC Healthcare, Inc. (the "Company") without audit and in the
opinion of management, include all adjustments necessary for a fair presentation
of the results of operations for the three months ended March 31, 1999 pursuant
to the rules and regulations of the Securities and Exchange Commission. The
accompanying condensed consolidated financial statements include the accounts of
the Company, its wholly-owned subsidiaries and controlled partnerships. All
significant intercompany accounts and transactions have been eliminated in
consolidation. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations; however the Company believes that the disclosures in the
accompanying financial statements are adequate to make the information presented
not misleading. The results for the three months ended March 31, 1999 are not
necessarily indicative of the results for a full year.
The Company was not formed until March 25, 1998 therefore, comparison of
operating results with 1998 is not provided.
2. CONCENTRATION OF CREDIT RISKS
As of March 31, 1999, 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 March 31, 1999,
approximately 11%, 25% and 60% of the Company's gross real estate investments
were leased to IHS, Sun and Karrington, respectively. In addition, as of March
31, 1999, the Company's investment of $8,500,000 in Regent Assisted Living, Inc.
("Regent") convertible subordinated debentures represented 10% of the Company's
total assets. 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.
The following table 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>
DECEMBER 31, DECEMBER 31, TWELVE MONTHS ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C>
IHS
Total assets $5,393,128 $5,002,152 N/A N/A
Total debt 3,366,177 3,184,948 N/A N/A
Total stockholders' equity 1,331,965 1,088,161 N/A N/A
Total revenues N/A N/A $2,972,186 $1,402,628
Income before taxes and extraordinary items N/A N/A 232,020 35,746
Net loss N/A N/A (67,978) (33,505)
</TABLE>
6
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LTC HEALTHCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, TWELVE MONTHS ENDED DECEMBER 31,
1998 1997 1998 1997
------------ ------------ -------------- ---------------
<S> <C> <C> <C> <C>
SUN
Total assets $2,468,038 $2,579,236 N/A N/A
Total debt 705,653 1,488,861 N/A N/A
Total stockholders' equity 33,759 617,053 N/A N/A
Total revenues N/A N/A $3,088,460 $2,010,820
Income (loss) before taxes and extraordinary items N/A N/A (689,842) 95,882
Net income (loss) N/A N/A (753,693) 34,801
KARRINGTON
Total assets $ 141,172 $ 141,316 N/A N/A
Total debt 95,753 97,067 N/A N/A
Total stockholders' equity 11,047 26,507 N/A N/A
Total revenues N/A N/A $ 34,825 $ 19,220
Loss before taxes N/A N/A (15,136) (5,860)
Net loss N/A N/A (15,476) (5,670)
REGENT
Total assets $ 66,274 $ 75,704 N/A N/A
Total debt 49,705 51,451 N/A N/A
Total stockholders' equity 4,255 15,917 N/A N/A
Total revenues N/A N/A $ 30,419 $ 13,958
Loss before taxes and preferred dividends N/A N/A (11,062) (3,865)
Net loss available to common shareholders N/A N/A (11,662) (4,478)
</TABLE>
3. MORTGAGE LOAN RECEIVABLE AND NOTE PAYABLE
During the three months ended March 31, 1999, the Company purchased a
non-recourse mortgage loan of $13,691,000 secured by four nursing facilities
that bears interest at an effective annual rate of 11.2% and is fully amortizing
with final maturity on January 1, 2009. The Company financed the acquisition of
mortgage loan with a non-recourse note payable for $13,691,000 that bears
interest at an effective annual rate of 10.9% and matures on January 1, 2009.
4. STOCKHOLDERS' EQUITY
During the three months ended March 31, 1999, the Company repurchased 487,904
shares of its common stock for approximately $1,311,000.
5. LTC PROPERTIES, INC.
During the three months ended March 31, 1999, the Company recorded interest
expense of $425,000 on the average outstanding principal balance outstanding
under the unsecured line of credit provided by LTC Properties and the Company
reimbursed LTC Properties $173,000 for administrative and management advisory
services.
At March 31, 1999, the Company held 194,100 shares of LTC Properties common
stock which is accounted for at fair value as available-for-sale securities. As
of March 31, 1999, the LTC Properties common stock was recorded at its fair
value of approximately $2,353,000.
7
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LTC HEALTHCARE, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OPERATING RESULTS
The Company was not formed until March 25, 1998 therefore, comparison of
operating results with 1998 is not provided.
The Company recorded a total of $2,476,000 in revenue for the three months ended
March 31, 1999. Revenue consisted of rental income of $1,772,000, interest
income of $375,000 from the mortgage loan receivable at an effective rate of
11.2% and interest and other income which consisted primarily of interest income
from convertible subordinated debentures of $241,000 and dividend income of
$76,000.
Mortgage interest expense includes $314,000 on a 7.27% mortgage loan of
$17,278,000, and $664,000 on mortgage debt with a weighted average rate of 9.1%.
Interest on the line of credit from LTC Properties, Inc. ("LTC") of $425,000 for
the three months ended March 31, 1999 represents interest at 10% on average
borrowings outstanding under the unsecured credit line provided by LTC to the
Company. Interest on the non-recourse note payable of $362,000 represents
interest at an effective rate of 10.9% for the three months ended March 31,
1999.
General and administrative expenses were $271,000 for the three months ended
March 31, 1999, the majority of which is reimbursement of costs and services of
$173,000 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. As of March 31, 1999, the Company had borrowings outstanding under the
unsecured line of credit of $17,672,000.
In addition to amounts available under the unsecured line of credit, as of March
31, 1999, the Company owns unencumbered assets consisting of approximately
$16,050,000 in real estate, $10,723,000 in convertible subordinated debentures
and $2,463,000 in marketable equity securities.
During the three months ended March 31, 1999 the Company utilized cash on hand
and borrowings under the line of credit to purchase 487,904 shares of its own
common stock for approximately $1,311,000 and to repay principal of $500,000
under the note payable.
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, or preferred stock 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
8
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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 March 31, 1999, the Company has no commitments to purchase any additional
assets. The Company intends to operate its business as described herein, and may
purchase additional assets from time to time in the future. The purchase of
additional assets will be contingent upon securing adequate funding on terms
acceptable to the Company. The Company is not aware of any material unfavorable
trends in either capital resources or the outlook for long-term cash generation;
nor, does it expect any material changes in the availability and relative cost
of such capital resources.
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. 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
9
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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 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.
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.
10
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PART II
LTC HEALTHCARE, INC.
OTHER INFORMATION
MARCH 31, 1999
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the
three months ended March 31, 1999.
11
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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 PROPERTIES, INC.
Registrant
Dated: May 14, 1999 By: /s/ JAMES J. PIECZYNSKI
-----------------------
James J. Pieczynski
President and Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LTC
HEALTHCARE, INC.'S ANNUAL REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31,
1999 FILED HEREWITH AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 321
<SECURITIES> 13,381
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 65,182
<DEPRECIATION> 4,802
<TOTAL-ASSETS> 88,783
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 33
<OTHER-SE> 7,133
<TOTAL-LIABILITY-AND-EQUITY> 88,783
<SALES> 0
<TOTAL-REVENUES> 2,476
<CGS> 0
<TOTAL-COSTS> 2,618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,765
<INCOME-PRETAX> (142)
<INCOME-TAX> 0
<INCOME-CONTINUING> (142)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (142)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
