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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, 1999
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 1865
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
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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. [X]
The aggregate market value of voting stock held by non-affiliates of
the Company is approximately $2,346,000 as of March 17, 2000.
2,444,426
(Number of shares of common stock outstanding as of March 17, 2000)
Part III is incorporated by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 22, 2000.
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ITEM 1. BUSINESS
GENERAL
LTC Healthcare, Inc. ("LTC Healthcare" or the "Company"), a Nevada corporation,
was incorporated on March 20, 1998 and began operations on March 25, 1998. The
Company was originally a preferred stock subsidiary of LTC Properties, Inc.
("LTC Properties"), a 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 Properties into voting common stock of the Company, LTC
Properties completed the spin-off of Company common stock through a taxable
dividend to holders of LTC Properties common stock, convertible subordinated
debentures and Series C Preferred Stock. See "Part II, Item 8- Notes to
Consolidated Financial Statements- Note 3. Transactions with LTC Properties" for
additional information.
The principal business of the Company is providing long-term healthcare services
through the operation of nursing facilities. As of March 1, 2000, the Company
operated 31 skilled nursing facilities with 3,473 licensed beds and one
rehabilitation hospital with 84 licensed beds. The facilities operated by the
Company are located in nine states and are collectively referred to herein as
nursing facilities. In addition to the operation of nursing facilities, as of
March 1, 2000, the Company owned six nursing facilities and four assisted living
facilities that were leased to third party operators under triple net leases.
OPERATIONS
The Company has one operating segment, nursing operations. Nursing operations
include revenues generated by providing long-term healthcare services in nursing
facilities operated by the Company and rental income generated by leasing
long-term care facilities owned by the Company to third party operators.
Prior to September 1, 1999, the Company's revenues consisted primarily of rental
income from the ownership of long-term care facilities leased to third party
operators. On September 1, 1999 the Company entered into operating leases with
LTC Properties and began operating six nursing facilities and in October 1999,
the Company began operating 12 additional nursing facilities. Eleven of the
nursing facilities the Company began operating in October 1999 are leased from
LTC Properties and the remaining facility was acquired by the Company. On
January 1, 2000, the Company began operating an additional 13 facilities that
are leased from LTC Properties and on February 1, 2000, the Company began
operating one facility that is leased from a third party. As a result, as of
March 1, 2000, the Company operates a total of 32 nursing facilities with 3,557
licensed beds.
The Company's nursing facilities provide residents with routine care services,
including daily dietary, social and recreational services and pharmacy and
medical supplies as well as restorative, rehabilitative and nursing care for
people not requiring the more extensive and sophisticated treatment available at
acute care hospitals. The Company's facilities also provide inpatient skilled
nursing services and rehabilitative, restorative and transitional medical
services to individuals with higher acuity medical conditions. The Company
provides 24-hour nursing care in these facilities by registered nurses, licensed
practical nurses and certified nurses' aides.
The Company believes that the margins of its nursing operations can be improved
by direct management by the Company of its operating nursing facilities and by
increasing patient census. The Company's strategy is to improve patient census
while providing comprehensive quality services to the residents of its nursing
facilities within the reimbursement constraints imposed by third party payors.
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COMPETITION
The long-term care industry is highly competitive. The Company's facilities
generally operate in communities that are also served by similar facilities
operated by other operators. Some competing facilities are located in buildings
that are newer than those operated by the Company, provide services not offered
by the Company's facilities or are operated by entities having greater financial
and other resources and longer operating histories than the Company. In
addition, some facilities are operated by nonprofit organizations or government
agencies supported by endowments, charitable contributions, tax revenues and
other resources not available to the Company. The Company's ability to compete
with other operators of long-term care facilities is based on numerous factors,
including its reputation for the quality and comprehensiveness of services
provided; the commitment and expertise of its staff; the innovativeness of its
treatment programs; local physician and hospital support; marketing programs;
charges for services; family preferences and the physical appearance, location
and condition of its facilities. There can be no assurance that the Company will
not encounter increased competition in the future that would adversely affect
its financial condition and results of operations.
EMPLOYEES
As of March 1, 2000, the Company had approximately 2,900 employees.
GOVERNMENTAL REGULATION
GENERAL. The Company derives a substantial portion of its revenue from third
party payors, including the Medicare and Medicaid programs. The Medicare program
was enacted in 1965 to provide a nationwide, federally funded health insurance
program for the elderly and certain disabled persons. The Medicaid program is a
joint federal-state cooperative arrangement established for the purpose of
enabling states to furnish medical assistance on behalf of aged, blind or
disabled individuals, and members of families with dependent children, whose
income and resources are insufficient to meet the costs of necessary medical
services. Within the Medicare and Medicaid statutory framework, there are
substantial areas subject to administrative regulations and rulings,
interpretation and discretion which may affect payments made to providers under
these programs. The amounts of program payments received by the Company can be
changed by legislative or regulatory actions and by determinations made by
fiscal intermediaries and other payment agents acting on behalf of the programs.
BALANCED BUDGET ACT -- MEDICARE. The Balanced Budget Act, enacted on August 5,
1997, made numerous changes to the Medicare and Medicaid programs which affect
the Company. With respect to the Medicare program, the law required the
Secretary of the Department of Health and Human Services ("HHS") to establish a
prospective payment system ("PPS") for Medicare Part A skilled nursing facility
services, under which facilities are paid a federal per diem rate for virtually
all covered services. The Medicare program historically utilized a cost-based
retrospective reimbursement system for nursing facilities. The PPS system is
being phased in over three cost reporting periods, and started with cost
reporting periods beginning on or after July 1, 1998. Subsequent legislation
(see discussion below on the Balanced Budget Refinement Act) will increase the
per diem rate for certain higher-acuity patients.
Substantially all of the Company's nursing facilities participate in the
Medicare program as skilled nursing facilities. All of the Company's nursing
facilities that participate in the Medicare program as skilled nursing
facilities operate under PPS which has resulted in more intense price
competition and lower margins. There can be no assurance that the Company will
be successful in reducing costs of services below the PPS reimbursement rates,
or that the failure to do so will not have a material adverse effect on the
Company's liquidity, financial condition and results of operations.
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BALANCED BUDGET REFINEMENT ACT - MEDICARE. The Balanced Budget Refinement Act,
enacted November 29, 1999, is a legislative response to mitigate some of the
effects of the Balanced Budget Act. With respect to nursing facilities, the law
temporarily increases the PPS per diem rates by 20 percent for 15 patient
categories (based on acuity). This payment increase is intended to compensate
skilled nursing facilities for the provision of care to medically complex
patients, pending appropriate refinements to the PPS system. Facilities
providing care to patients falling within every non-rehabilitation patient
category above the presumptive Medicare eligibility line will benefit from this
increase. Three patient categories falling within the "high" and "medium"
rehabilitation category also are subject to the increase. The increased payments
will begin on April 1, 2000, and end before the later of (1) October 1, 2000, or
(2) the date the Health Care Financing Administration ("HCFA") implements a
refined PPS system that better accounts for medically-complex patients. The law
also provides for a four percent increase in the federal per diem payment rates
for all patient acuity categories in both fiscal years 2001 and 2002. This
increase is calculated exclusive of the 20 percent rate increase for the 15
acuity categories subject to direct adjustments. The 20 percent rate increase
for medical complexity will not be built into the base payment rates, however,
and therefore future updates to the federal payment rates will be calculated
from the initial base rate. The law also provides for a one-time waiver for
skilled nursing facilities which elect to immediately transition to the full
federal rate (rather than a blend of the federal rate and a facility-specific
rate during the three year transition period) on or after December 15, 1999, for
cost reporting periods beginning on or after January 1, 2000. In addition to the
per diem rate increases for certain patient categories, the Balanced Budget
Refinement Act temporarily suspended for years 2000 and 2001 the reimbursement
caps on Part B therapy services imposed by the Balanced Budget Act.
BALANCED BUDGET ACT - MEDICAID. The Balanced Budget Act also contains a number
of changes affecting the Medicaid program. Among other things, the law repealed
the Boren Amendment, which required state Medicaid programs to reimburse nursing
facilities for the costs that are incurred by efficiently and economically
operated nursing homes. It is unclear at this time whether state Medicaid
programs will adopt changes in their Medicaid reimbursement systems, or, if
adopted and implemented, what effect such initiatives would have on the Company.
In any event, there can be no assurance that future changes in Medicaid
reimbursement rates to nursing facilities will not have an adverse effect on the
Company. Further, the Balanced Budget Act allows states to mandate enrollment in
managed care systems without seeking approval from the Secretary of HHS for
waivers from certain Medicaid requirements as long as certain standards are met.
These managed care programs have historically exempted institutional care
although some states have instituted pilot programs to provide such care under
managed care programs. States have considerable flexibility in establishing
payment rates. The Company is not able to predict whether any states' waiver
provisions will change the Medicaid reimbursement systems for long-term care
facilities from cost-based or fee-for-service to managed care negotiated or
capitated rates or otherwise affect the level of payments. Significant limits on
the scope of services reimbursed and on rates of reimbursement under the
Medicaid program could have a material adverse effect on the Company's
liquidity, financial condition and results of operations.
FUTURE LEGISLATIVE CHANGES. The Company expects Congress to continue to
consider measures to reduce the growth in Medicare and Medicaid expenditures
review and assess alternate health care delivery systems, and operational
requirements for health care providers, including protection of confidential
information. Both 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 the rate of program reimbursement
to nursing facilities. The Company cannot predict at this time whether any
additional measures will be adopted or if adopted and implemented, what
effect such proposals would have. There can be no assurance that payments
under state and federal governmental programs will remain at levels
comparable to present levels or will be sufficient to cover the costs of
patients eligible for reimbursement pursuant to the programs.
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Certain states are currently evaluating various proposals to restructure
healthcare delivery within their respective jurisdictions. It is uncertain at
this time what legislation of this type will ultimately be enacted and
implemented or whether other changes in the administration or interpretation of
governmental healthcare programs will occur. The Company anticipates that state
legislatures will continue to review and assess various healthcare reform
proposals and alternative healthcare systems and payment methodologies. The
Company is unable to predict the ultimate impact of any future state
restructuring of the healthcare delivery system, but such changes could have a
material adverse effect on the Company's liquidity, financial condition and
results of operations.
LICENSURE. The Company's healthcare properties are subject to extensive state
and local laws and regulations relating to licensure, conduct of operations,
ownership of facilities, and services provided within the facilities. The
nursing facilities are subject to regulation and licensing by state and local
health and social services agencies and other regulatory authorities. In order
to maintain their operating licenses, healthcare facilities must comply with
standards concerning medical care, equipment and hygiene. Although regulatory
requirements vary from state to state, these requirements generally address
among other things: personnel education and training; staffing levels; patient
records; facility services; quality of care provided; physical residence
specifications; food and housekeeping services; and residents' rights and
responsibilities. The facilities are subject to periodic survey and inspection
by governmental authorities. The Company's facilities are also subject to
various state and local building codes and other ordinances, including zoning
and safety codes.
CERTIFICATE OF NEED. Certificate of Need ("CON") statutes and regulations
control the development and expansion of healthcare services and facilities in
certain states. The CON process is intended to promote quality healthcare and to
avoid the unnecessary duplication of services, equipment and facilities. CON or
similar laws generally require that approval be obtained from the designated
state health planning agency for certain acquisitions and capital expenditures,
and that such agency determine that a need exists prior to the expansion of
existing facilities, construction of new facilities, addition of beds,
acquisition of major items of equipment or introduction of new services.
Additionally, several states have instituted moratoria on new CONs or the
approval of new beds. CONs or other similar approvals may be required in
connection with our future acquisitions and/or expansions. There can be no
assurance that the Company will be able to obtain the CONs or other approvals
necessary for any or all such projects.
SURVEY AND CERTIFICATION. Long-term care facilities must comply with certain
requirements to participate either as a skilled nursing facility under Medicare
or a nursing facility under Medicaid. Regulations promulgated pursuant to the
Omnibus Budget Reconciliation Act of 1987 obligate facilities to demonstrate
compliance with requirements relating to resident rights, resident assessment,
quality of care, quality of life, physician services, nursing services, pharmacy
services, dietary services, rehabilitation services, infection control, physical
environment and administration. Regulations governing survey, certification, and
enforcement procedures to be used by state and federal survey agencies to
determine facilities' level of compliance with the participation requirements
for Medicare and Medicaid were adopted by HCFA effective July 1, 1995. These
regulations require that surveys focus on resident outcomes. They also state
that all deviations from participation requirements will be considered
deficiencies, but a facility may have certain minor deficiencies and be in
substantial compliance with the regulations. The regulations identify various
remedies that may be imposed against facilities and specify the categories of
deficiencies for which they will be applied. These remedies include, but are not
limited to: civil money penalties of up to $10,000 per day or "per instance";
facility closure and/or transfer of residents in emergencies; denial of payment
for new or all admissions; directed plans of correction; and directed in-service
training. Failure to comply with applicable requirements for participation may
also result in termination of the provider's Medicare and Medicaid provider
agreements. Termination of any of the Company's Medicare or Medicaid provider
agreements
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could have a material adverse effect on the Company's liquidity, financial
condition and results of operations.
President Clinton has announced initiatives designed to improve the quality of
care in nursing homes and to reduce fraud in the Medicare program. These
initiatives include tougher enforcement measures by state surveying authorities,
empowering specialized contractors to track down Medicare scams and program
waste, and the creation of a Medicare financial management team made up of 100
"fraud fighters" to be located in the offices of every Medicare contractor
nationwide.
REFERRAL RESTRICTIONS AND FRAUD AND ABUSE. The Medicare and Medicaid
anti-kickback statute, 42 U.S.C. Section 1320a-7b(b), prohibits the knowing
and willful solicitation or receipt of any remuneration "in return for"
referring an individual, or for recommending or arranging for the purchase,
lease, or ordering, of any item or service for which payment may be made
under Medicare or a state healthcare program. In addition, the statute
prohibits the offer or payment of remuneration "to induce" a person to refer
an individual, or to recommend or arrange for the purchase, lease, or
ordering of any item or service for which payment may be made under the
Medicare or state healthcare programs. The statute and the so-called safe
harbor regulations establish numerous exceptions by defining conduct which is
not subject to prosecution or other enforcement remedies. Violation of the
anti-kickback statute could result in criminal conviction, as well as civil
money penalties and exclusions.
The Ethics in Patient Referrals Act ("Stark I"), effective January 1, 1992,
generally prohibits physicians from referring Medicare patients to clinical
laboratories for testing if the referring physician (or a member of the
physician's immediate family) has a "financial relationship," through ownership
or compensation, with the laboratory. The Omnibus Budget Reconciliation Act of
1993 contains provisions commonly known as "Stark II" ("Stark II") expanding
Stark I by prohibiting physicians from referring Medicare and Medicaid patients
to an entity with which a physician has a "financial relationship" for the
furnishing of certain items set forth in a list of "designated health services,"
including physical therapy, occupational therapy, home health services, and
other services. Subject to certain exceptions, if such a financial relationship
exists, the entity is generally prohibited from claiming payment for such
services under the Medicare or Medicaid programs, and civil monetary penalties
may be assessed for each prohibited claim submitted.
Other provisions in the Social Security Act and in other federal and state
laws authorize the imposition of penalties, including criminal and civil
fines and exclusions from participation in Medicare and Medicaid, for false
claims, false statements, improper billing and other offenses.
The Company is unable to predict the effect of future administrative or judicial
interpretations of the laws discussed above, or whether other legislation or
regulations on the federal or state level in any of these areas will be adopted,
what form such legislation or regulations may take, or their impact on the
Company's operations. The Company endeavors to comply with applicable regulatory
requirements, but there can be no assurance that statutory or regulatory
changes, or subsequent administrative rulings or interpretations, will not
require the Company to modify or restructure certain arrangements, or that it
will not be required to expend significant amounts to maintain compliance.
COMPLIANCE PROGRAM. The Office of Inspector General of HHS ("OIG") issued
guidance to help nursing facilities design effective voluntary compliance
programs to prevent fraud, waste, and abuse in health care programs, including
Medicare and Medicaid. The guidance, COMPLIANCE PROGRAM GUIDANCE FOR NURSING
FACILITIES, was published as a notice in the FEDERAL REGISTER. The Company has
appointed a compliance officer to monitor compliance with the Company's
policies. The Company is currently in the process of reviewing and making
improvements to its compliance programs.
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RELATIONSHIP WITH LTC PROPERTIES, INC.
The Company and LTC Properties entered into an administrative services agreement
under which LTC Properties will provide management and administrative services
to the Company. In exchange for those services, the Company is required to pay
LTC Properties 25% of the aggregate amount of all wages, salaries, bonuses and
rent for its corporate offices paid by LTC Properties each month. The
administrative services agreement has a term of ten years but may be terminated
either by LTC Properties or the Company at any time upon 30 days' prior written
notice to the other party or upon a change of control of LTC Properties. In
addition, LTC Properties has provided the Company with a $20 million unsecured
line of credit that bears interest at an annual rate of 10% and matures in March
2008. During 1999, the Company sold 100% of the stock of one of its subsidiaries
that owns two assisted living facilities leased to a third party operator to LTC
Properties for a total purchase price of $16,050,000. The Company recognized a
gain of approximately $591,000 on the sale. Proceeds from the sale were used
to repay borrowings under the unsecured line of credit from LTC
Properties.
At March 1, 2000, 30 of the nursing facilities with 3,411 licensed beds operated
by the Company are owned by LTC Properties. Also, the Company has mortgage loans
secured by eight nursing facilities payable to REMIC pools originated by LTC
Properties. Of the eight nursing facilities securing these mortgage loans, one
is operated by the Company, six are leased to third party operators and one is
currently closed but will be operated by the Company upon completion of capital
improvements to the facility. Leases on 19 of the facilities owned by LTC
Properties with current annual base rents totaling approximately $4,118,000
expire in 2000. The Company expects that the terms of these leases will be
renegotiated prior to their expiration; however, there can be no assurance that
the leases will be renewed or that if renewed, the annual base rents will remain
at the current level. Leases on the remaining 11 facilities owned by LTC
Properties with current annual base rents totaling approximately $3,979,000
expire at various dates ranging from 2004 through 2013.
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 Properties of the material terms and conditions
of such activities or investments, and LTC Properties 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 Properties 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 originated by LTC Properties which were
securitized by LTC Properties in REMIC transactions. The intercompany agreement
has a term of ten years but shall terminate earlier upon a change of control of
LTC Properties.
The Company and LTC Properties 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 Properties. 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.
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DIFFICULTIES EXPERIENCED BY LESSEES OF THE COMPANY'S INVESTMENTS IN REAL ESTATE
SUN HEALTHCARE GROUP, INC. During October 1999, Sun Healthcare Group, Inc.
("Sun") filed for reorganization under Chapter 11 of the Bankruptcy Code. At
December 31, 1999, Sun operated four nursing facilities representing
approximately 31% ($16.0 million) of the gross carrying value of the Company's
real estate investment portfolio. Sun is currently operating its business as a
debtor-in-possession subject to the jurisdiction of the Bankruptcy Court. As of
March 1, 2000 all rent payments due on the Company's properties operated by Sun
are current.
INTEGRATED HEALTH SERVICES, INC. During February 2000, Integrated Health
Services, Inc. ("Integrated Health") filed for reorganization under Chapter 11
of the Bankruptcy Code. At December 31, 1999, Integrated Health operated two
facilities representing approximately 14% ($7.0 million) of the Company's gross
real estate investment portfolio. Integrated Health is currently operating its
business as a debtor-in-possession subject to the jurisdiction of the Bankruptcy
Court. As of March 1, 2000, all rent payments due on the Company's properties
operated by Integrated Health are current.
SENSITIVE CARE, INC. During January 1999, the state of Texas took control of and
closed the operations of one nursing facility that was leased to Sensitive Care,
Inc. ("Sensitive Care"). The Company has not received rent for this facility
since August 1999 and as a result, the lease has been terminated. The Company is
making capital improvements to this facility and intends to open and begin
operating the facility by December 31, 2000.
BUSINESS RISK FACTORS
Potential investors should carefully consider the risks described below before
making an investment decision in the Company. The risks and uncertainties
described below are not the only ones facing the Company and there may be
additional risks that the Company does not presently know of or that the Company
currently considers immaterial. All of these risks could adversely affect the
Company's business, financial condition, results of operations and cash flows.
SOME POTENTIAL LOSSES ARE NOT COVERED BY INSURANCE. The Company requires, and
intends to continue to require, all lessees of the properties owned by the
Company to secure adequate comprehensive property and liability insurance that
covers the Company as well as the lessee. In addition, the Company is required,
as the lessee of the properties it operates, to secure adequate comprehensive
property and liability insurance. The Company has purchased traditional
indemnity insurance for its general, professional, and auto liabilities and has
purchased occurrence based insurance for its workers compensation liabilities.
In addition, the Company has purchased traditional indemnity property insurance
for the nursing facilities it operates. Certain risks may, however, be
uninsurable or not economically insurable and there can be no assurance the
Company or a lessee will have adequate funds to cover all contingencies.
THE HEALTH CARE INDUSTRY IS HEAVILY REGULATED BY THE GOVERNMENT. Operators of
nursing 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 Company's failure to comply with such laws, requirements and
regulations could affect its ability to operate its facilities.
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THE COMPANY RELIES ON GOVERNMENT AND THIRD PARTY REIMBURSEMENT. A significant
portion of the Company's revenue is derived from government-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 the Medicare
and 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 the Company's revenues.
THE COMPANY'S FACILITIES ARE SUBJECT TO LICENSING, CERTIFICATION AND
ACCREDITATION. In addition to the requirements to be met by nursing facilities
for participation in the Medicare and Medicaid programs, nursing facilities are
subject to regulatory and licensing requirements of federal, state and local
authorities. The operator of each 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, 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 Company's
operations.
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.
THE COMPANY'S FACILITIES RELY ON EXPERIENCED LABOR. The health care industry has
experienced a shortage of experienced nurses and therapists to staff nursing
operations in the past. The Company is not currently experiencing a nursing or
therapist shortage but it competes with other operators for nursing and therapy
personnel. A shortage of nursing or therapist personnel could cause the Company
to pay higher salaries and employ higher cost temporary personnel which could
adversely affect the Company's operations.
THE COMPANY HAS NOT RECEIVED ITS MEDICARE PROVIDER NUMBER FOR CERTAIN FACILITIES
IT OPERATES. Certain of the Company's nursing facilities participate in the
Medicare program. In order to bill and receive reimbursement for services
provided under the Medicare program, the Company must obtain a provider
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number for each facility that participates in the program. The Company has
completed applications for Medicare provider numbers for all of its
facilities that participate in the program; however, certain facilities have
not received their provider number. The majority of these facilities are
billing for Medicare services provided under the previous operators' provider
numbers and the remaining facilities are not able to bill for Medicare
services at this time. The Company believes all of its facilities will
receive Medicare provider numbers and that the Company will be reimbursed for
services provided under the Medicare program.
THE COMPANY LEASES A MAJORITY OF THE FACILITIES IT OPERATES. As of March 1,
2000, the Company operates 30 facilities that are owned by LTC Properties. The
leases under which these 19 facilities are operated will expire in 2000. The
Company believes that the terms of these leases will be renegotiated prior to
their expiration; however, there can be no assurance that the leases will be
renewed or that if renewed, the annual base rents will remain at the current
level. The Company has a long-term obligation for operating leases, that expire
at various dates ranging from 2004 to 2013, under which the remaining 11
facilities are operated. The economic performance of these facilities operations
can be affected by many factors including governmental regulation, economic
conditions, and demand for health care services. In the event the Company's
operations are adversely affected, the Company will continue to be liable for
rent payments due under these leases.
THE COMPANY OPERATES PROPERTIES REQUIRING RESTRUCTURING IN ORDER TO CREATE
SIGNIFICANT VALUE. As of March 1, 2000, all of the nursing facilities operated
by the Company were previously operated by other operators who have filed for
Chapter 11 bankruptcy protection or are experiencing liquidity and other
financial difficulties. A significant number of these facilities are currently
generating operating losses. The Company believes it will be able to operate
these facilities at a profit; however, if the Company is not able to
successfully "turn-around" the operations of these facilities within an
acceptable time period it could adversely affect the Company's financial
position, liquidity and results of operations.
SCHEDULED DEBT PAYMENTS COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL
CONDITION. The Company is subject to risks normally associated with debt
financing, including the risks that it 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.
THE COMPANY MAY BE UNABLE TO OBTAIN EXTERNAL SOURCES OF CAPITAL. The Company's
access to third party sources of capital depends upon a number of factors,
including general market conditions and the market's perception of its growth
potential and its current and potential future earnings and cash distributions
and the market price of the shares of its capital stock.
FINANCIAL COVENANTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION. If a
property is mortgaged to secure payment of indebtedness and the Company is
unable to meet mortgage payments, the mortgagee could foreclose on the property,
resulting in loss of income and asset value. The mortgages on the Company's
properties contain customary negative covenants which, among other things, limit
its 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 the Company's financial condition and results of operations.
THE COMPANY IS UNABLE TO REFINANCE CERTAIN INDEBTEDNESS. As of December 31,
1999, the Company had approximately $30.4 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 the Company and LTC Properties, the
Company has agreed not to prepay or cause to be prepaid any of the mortgage
loans unless the property is sold to an unaffiliated third
10
<PAGE>
party. Because of this agreement, the Company will not have the ability to
refinance this mortgage debt and consequently will not be able to lower its
interest costs in a low interest rate environment.
THERE ARE FACTORS OUTSIDE OF THE COMPANY'S CONTROL THAT AFFECT THE PERFORMANCE
AND VALUE OF THE COMPANY'S 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. The Company cannot assure that the value of property securing any of
its mortgage loans 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.
REAL ESTATE INVESTMENTS ARE ILLIQUID. Real estate investments are relatively
illiquid and, therefore, tend to limit the Company's ability to vary its
portfolio promptly in response to changes in economic or other conditions. All
of the Company's 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 the
Company's owned 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 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 would be adversely affected.
CERTAIN OF THE COMPANY'S EXECUTIVE OFFICERS AND BOARD MEMBERS ARE ALSO EXECUTIVE
OFFICERS AND BOARD MEMBERS OF LTC PROPERTIES.
- Andre C. Dimitriadis, who is currently the Company's Chairman
and Chief Executive Officer serves in the same positions with LTC
Properties;
- James J. Pieczynski, who is currently the Company's President
and Chief Financial Officer serves in the same positions with LTC
Properties;
- Christopher T. Ishikawa, who is currently the Company's
Executive Vice President and Chief Operating Officer serves as Senior
Vice President and Chief Investment Officer with LTC Properties; and
- Julia L. Kopta, who is currently the Company's Senior Vice
President and General Counsel 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. The continued involvement in LTC Properties by some of the
Company's executive officers and directors could divert management's attention
from its day-to-day operations.
CONFLICTS OF INTEREST MAY ARISE IN INTERPRETATIONS OF INTERCOMPANY AGREEMENTS
BETWEEN OUR COMPANY AND LTC PROPERTIES. The Company 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 the
Company (representing approximately 99% of the outstanding shares of our common
11
<PAGE>
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 the
Company's management is largely the same as LTC Properties' management,
conflicts may arise with respect to the operation and effect of the intercompany
agreements and relationships which could have an adverse effect on the Company
if not properly resolved. More specifically, overlapping members of the board of
directors and senior management of both companies may be presented with
conflicts of interest with respect to matters affecting the Company 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, potential competition between the business activities conducted,
or sought to be conducted, by such companies, possible corporate transactions
(such as acquisitions and leasing of facilities), and other strategic decisions
affecting the future of such companies.
ITEM 2. PROPERTIES
The following table sets forth certain information regarding the nursing
facilities operated by the Company as of March 1, 2000:
<TABLE>
<CAPTION>
Licensed
State Number Beds
- -------------------- ----------- --------------
<S> <C> <C>
Florida 2 240
Georgia 4 362
Illinois(1) 3 273
Iowa 6 448
Kansas(2) 5 363
North Carolina 1 100
Tennessee 1 120
Texas 8 1,328
Virginia 2 323
----------- --------------
TOTAL(3)(4) 32 3,557
=========== ==============
</TABLE>
- -------------------------------------------------------------------------------
(1) One nursing facility with 96 beds is owned by the Company and is
encumbered by non-recourse mortgage debt. As of December 31, 1999, the
Company's gross carrying value and the outstanding principal on the
mortgage debt was $1,571,000 and $1,567,000, respectively.
(2) One facility with 84 beds is a rehabilitation hospital.
(3) One facility in Illinois with 96 beds is owner/operated, one facility in
Kansas with 50 beds is leased from a non-affiliated party and the
remaining 30 facilities are leased from LTC Properties. Leases on 19 of
the facilities owned by LTC Properties expire in 2000. The terms of these
leases will be renegotiated prior to their expiration; however, there can
be no assurance that the leases will be renewed or that if renewed, the
annual base rents will remain at the current level.
(4) At December 31, 1999, the Company operated two facilities in Florida, two
facilities in Georgia, three facilities in Illinois, six facilities in
Iowa, one facility in Kansas, one facility in North Carolina, one facility
in Tennessee and two facilities in Virginia with a total of 1,839 licensed
beds.
12
<PAGE>
The following table sets forth certain information regarding properties owned by
the Company and leased to third party operators as of March 1, 2000 (dollar
amounts are as of December 31, 1999):
<TABLE>
<CAPTION>
Assisted Living
Nursing Facilities Facilities Average
----------------------- -------------------- Months Currency
Licensed Remaining Gross Annual
State Number Beds Number Units Encumbrances in Lease Carrying Rent
Term Value Payments
- --------------- ----------- ----------- ----------- -------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Arizona 2 393 - - $13,841,000 37 $11,273,000 $1,623,000
N. Mexico 4 399 - - 13,289,000 28 11,633,000 1,389,000
Ohio - - 4 186 17,100,000 220 23,250,000 2,093,000
----------- ----------- ----------- -------- ---------------- -------------- --------------
TOTAL 6 792 4 186 $44,230,000(1) $46,156,000 $5,105,000
=========== =========== =========== ======== ================ ============== ==============
</TABLE>
(1) Encumbrances consist of non-recourse mortgages payable by the Company
secured by first mortgages on the facilities.
The above tables do not include one nursing facility with 122 licensed beds in
Texas that is currently closed. The Company's carrying value of this nursing
facility is $3,290,000 and it is encumbered by mortgage debt of $1,727,000. The
Company is currently making capital improvements to the property and intends to
open and begin operating the nursing facility by December 31, 2000.
The leases on facilities owned by the Company and leased to third party
operators 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.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is a party to various claims and lawsuits arising
in the ordinary course of business which, in management's opinion, are not
singularly or in the aggregate material to the Company's results of operations
of financial position.
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 59 Chairman, Chief Executive Officer and
Director
James J. Pieczynski 37 President, Chief Financial Officer, and
Director
Christopher T. Ishikawa 36 Executive Vice President and Chief
Operating Officer
Julia L. Kopta 50 Senior Vice President and General
Counsel
</TABLE>
Mr. Dimitriadis has served as the Chairman and Chief Executive Officer since its
inception. He founded LTC Properties in 1992 and has served as its Chairman and
Chief Executive Officer since its inception. Prior to that he 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. Mr.
Dimitriadis is a member of the board of Magellan Health Services.
Mr. Pieczynski has served as President and Director since the Company's
inception. He has also served as President and Director of LTC Properties
since 1997 and Chief Financial Officer of LTC Properties since May 1994. From
May 1994 to 1997, he also served as Senior Vice President of LTC Properties.
He joined LTC Properties 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 Executive Vice President and Chief Operating
Officer since 1999. From the Company's inception to 1999 he served as Senior
Vice President and Chief Investment Officer. He has also served as LTC
Properties Senior Vice President and Chief Investment Officer since 1997.
Prior to that, he served as Vice President and Treasurer of LTC Properties
since April 1995. Prior to joining LTC Properties, he was employed by
MetroBank from December 1991 to March 1995, where he served as First Vice
President and Controller.
Ms. Kopta has served as Senior Vice President and General Counsel of the Company
and LTC Properties since January 1, 2000. Prior to that, she served as Special
Counsel to the Chief Executive Officer of Coram Healthcare Corporation from
September 1999 through November 1999. From October 1993 to October 1997, she
served as Executive Vice President, General Counsel and Corporate Secretary of
Transitional Hospital Corporation.
14
<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
---- ---
1999
----
<S> <C> <C>
First Quarter $2.8125 $1.50
Second Quarter 2.125 1.8125
Third Quarter 2.1875 1.50
Fourth Quarter 2.0625 1.25
1998
----
Fourth Quarter $4.38 $2.00
</TABLE>
(b) As of December 31, 1999, there were approximately 689 stockholders of
record of the Company's common stock.
(c) The Company has not paid cash dividends on its common stock since its
inception. The Company intends to 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.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL INFORMATION
The following table summarizes the Company's results of operations for the year
ended December 31, 1999 and for the period from inception (March 25, 1998)
through December 31, 1998 and balance sheet information as of December 31, 1999
and 1998. At December 31, 1999, the Company operated 18 nursing facilities with
a total of 1,839 licensed beds. The Company began operating these nursing
facilities in September and October 1999. The following table of selected
financial data 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 per share amounts).
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION (MARCH
YEAR ENDED 25, 1998) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- --------------------
OPERATING INFORMATION:
<S> <C> <C>
Revenues:
Net patient revenues $ 11,713 $ -
Rental income 6,692 2,172
Interest and other income 2,344 692
------------- ------------
Total revenues 20,749 2,864
Costs and Expenses:
Salaries and benefits 8,295 -
Supplies 1,217 -
Rent - LTC Properties 779 -
Interest on mortgages payable 4,014 1,133
Interest on line of credit - LTC Properties 1,514 711
Depreciation 1,885 586
Minority interest 343 86
Other operating and administrative 6,434 467
------------- ------------
Total expenses 24,481 2,983
Loss before provision for income taxes (3,732) (119)
Provision for income taxes - -
------------- ------------
Net Loss $ (3,732) $ (119)
============== =============
Weighted Average Shares Outstanding 2,696,691 3,184,832
============== =============
PER SHARE INFORMATION:
Basic and diluted net loss $ (1.38) $ (0.04)
============== =============
BALANCE SHEET INFORMATION:
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- -------------------
Total assets $ 66,374 $ 77,244
Total debt $ 53,861 $ 63,055
Total liabilities $ 60,457 $ 63,996
Minority interest $ 3,518 $ 3,461
Total stockholders' equity $ 2,399 $ 9,787
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE PERIOD FROM INCEPTION (MARCH 25,
1998) THROUGH DECEMBER 31, 1998
The Company was formed in March 1998, spun-off from LTC Properties on September
30, 1998 and commenced nursing operations on September 1, 1999; therefore,
operating results for 1999 are not comparative with 1998. At December 31, 1999,
the Company operated 18 nursing facilities with a total of 1,839 licensed beds
and owned six nursing and four assisted living facilities that were leased to
third party operators. At December 31, 1998, the Company owned seven nursing and
six assisted living facilities that were leased to third party operators.
Total revenues for 1999 increased to $20,749,000 from $2,864,000 for 1998.
Patient revenues from the commencement of operating nursing homes in September
and October 1999 contributed $11,713,000 to the increase in total revenues.
Increased rental income contributed $4,520,000 to the increase in total
revenues. For the properties owned by the Company and leased to third party
operators as of December 31, 1999, rental income for 1999 was $5,261,000
compared to $1,537,000 for 1998, accounting for approximately $3,724,000 of the
increase in rental income. During 1999, the Company sold two assisted living
facilities that were leased to a third party and terminated the lease on one
nursing facility. Rental income related to these three properties for the
portion of the year they were owned by the Company and leased to third parties
in 1999 and 1998 was $1,431,000 and $635,000, respectively resulting in an
increase in rental income of approximately $796,000. The increase in interest
and other income is primarily due to an increase in interest and dividends on
the Company's investments in debt and equity securities and a gain of
approximately $591,000 recognized on the sale of the two assisted living
facilities discussed above.
Salaries and benefits of $8,295,000 and supplies of $1,217,000 in 1999 relate to
the commencement of operating nursing homes.
As of December 31, 1999, 17 of the facilities operated by the Company were
leased from LTC Properties. The Company incurred rent expense of $779,000 under
operating leases with LTC Properties.
The increase in interest on mortgage loans of $2,881,000 is due to the inclusion
of interest expense for a full year in 1999 on mortgage loans assumed by the
Company in connection with the spin-off from LTC Properties. Also contributing
to the increase was the assumption of a mortgage loan in 1999 in connection with
the acquisition of a nursing facility. Interest on the line of credit with LTC
Properties increased due to outstanding borrowings under the line for a full
year. The increase in interest on the line of credit with LTC Properties was
largely mitigated by the repayment of borrowings with the proceeds from the sale
of two assisted living facilities.
The increase of $1,299,000 in depreciation expense is primarily due to the
inclusion of depreciation for a full year on properties transferred to the
Company in September 1998 in connection with the spin-off from LTC Properties.
Corporate general and administrative and management advisory services are
provided to the Company by LTC Properties under the terms of an administrative
services agreement. The Company reimbursed LTC Properties $740,000 in 1999 and
$350,000 in 1998 for services provided under the administrative services
agreement. The administrative services fee is included in other operating and
administrative expenses. The remaining
17
<PAGE>
increase in other operating and administrative costs in 1999 is the result of
the commencement of nursing operations in 1999.
No benefit for income taxes was recorded in 1999 or 1998 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.
PERIOD FROM INCEPTION (MARCH 25, 1998) THROUGH DECEMBER 31, 1998
On August 18, 1998, LTC Properties transferred six assisted living facilities
leased to a third party operator to the Company. Rental income from August 18,
1998 to December 31, 1998 on these properties was $1,317,000. On September 30,
1998, LTC Properties transferred seven nursing facilities to the Company. 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 debt
securities was $475,000. Interest and other income also includes dividends on
LTC Properties common stock totaling $133,000.
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 by the Company in
connection with the transfer of properties from LTC Properties discussed above.
Interest expense of $711,000 on the unsecured line of credit from LTC Properties
represents interest at 10% on the average borrowings under the unsecured credit
line provided by LTC Properties.
Depreciation expense of $586,000 consists of depreciation from August 18, 1998
to December 31, 1998 on the assisted living facilities of $359,000 and
depreciation of $227,000 from October 1, 1998 to December 31, 1998 on the seven
nursing facilities transferred to the Company by LTC Properties.
General and administrative expenses were $467,000, the majority of which relates
to a fee of $350,000 for services provided by LTC Properties 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
LTC Properties has provided the Company with a $20.0 million unsecured line
of credit that bears interest at an annual rate of 10% and matures in 2008.
As of December 31, 1999, the Company had borrowings outstanding under the
unsecured line of credit of $6,337,000. As of December 31, 1999, the Company
had borrowing capacity under the unsecured line of credit of $13,663,000.
Net cash used in operating activities for the year ended December 31, 1999 was
$2,728,000. The use of cash in operating activities is largely attributable to
the Company's commencement of nursing home operations in 1999 which resulted in
an increase in net working capital at December 31, 1999.
Net cash provided by investing activities for the year ended December 31, 1999
was $15,406,000. During 1999, the Company sold 100% of the stock of one of its
subsidiaries that owns two assisted living facilities leased to a third party
operator to LTC Properties for a total purchase price of $16,050,000 which
equaled the Company's cost basis in the properties.
18
<PAGE>
Net cash used in financing activities for the year ended December 31, 1999 was
$13,266,000. The proceeds of $16,050,000 from the sale of the two assisted
living facilities were used towards the repayment of borrowings of $23,527,000
under the unsecured line of credit provided by LTC Properties. During 1999, the
Company utilized borrowings under the line of credit of approximately
$13,336,000 to repurchase shares of its common stock and to the fund the working
capital requirements of the nursing homes operated by the Company.
The Company anticipates that cash flow from operations and borrowings under its
line of credit will be adequate to meet its short-term liquidity requirements.
The ability of the Company to satisfy its long term liquidity requirements will
be dependent upon its future performance, which will be subject to prevailing
economic conditions and to financial, business, economic and other factors
beyond the Company's control. There can be no assurance that future healthcare
legislation or other efforts by governmental and private payors to reduce
healthcare costs will not have a material adverse effect on the Company's
results of operations, liquidity and financial position. Currently, the Company
has no external sources 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.
YEAR 2000
In the prior year, the Company implemented a plan to become Year 2000 ready. In
late 1999, the Company completed the remediation and testing of its systems. As
a result of its planning and implementation efforts, the Company experienced no
significant disruptions in mission critical information technology and
non-information technology systems and it believes its systems successfully
responded to the Year 2000 date change. The Company is not aware of any
significant adverse effects on its facility managers, third party payors or
vendors resulting from the Year 2000 date change. The Company will continue to
monitor its mission critical computer applications and those of its third party
payors and vendors throughout the year 2000 to ensure that any latent Year 2000
matters that may arise are addressed promptly.
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.
19
<PAGE>
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, 1999 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, 1999, based on prevailing interest rates for comparable loans
and estimates made by management, the fair value of our mortgage loans payable
was approximately $38,484,000. A 1% increase in such rates would decrease the
fair value of our mortgage loans payable by approximately $1,857,000 while a 1%
decrease in such rates would increase their estimated fair value by
approximately $2,007,000. The carrying value and weighted average interest rate
for mortgage loans payable was $47,524,000 and 8.5%, respectively at December
31, 1999.
At December 31, 1999, 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 $8,604,000. The Company
does not believe that the future market rate risks associated with its
investments in debt and equity securities will have a material impact on the
Company or its future operations.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors ..................................................... 22
Consolidated Balance Sheets as of December 31, 1999 and 1998 .......................................... 23
Consolidated Statements of Operations for the year ended December 31, 1999
and for the period from inception (March 25, 1998) to December 31, 1998................................ 24
Consolidated Statements of Stockholders' Equity and Comprehensive Loss for the
year ended December 31, 1999 and for the period from inception
(March 25, 1998) to December 31, 1998.................................................................. 25
Consolidated Statements of Cash Flows for the year ended December 31, 1999
and for the period from inception (March 25, 1998) to December 31, 1998................................ 26
Notes to Consolidated Financial Statements ............................................................ 27
</TABLE>
21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LTC Healthcare, Inc.
We have audited the accompanying consolidated balance sheets of LTC Healthcare,
Inc. as of December 31, 1999 and 1998 and the related consolidated statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1999 and 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 schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LTC Healthcare,
Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for the year ended December 31, 1999 and for the
period from inception (March 25, 1998) to December 31, 1998, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, 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
March 17, 2000
22
<PAGE>
LTC HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1999 1998
-------------------- ----------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 424 $ 1,012
Accounts receivable, net of allowance for doubtful
accounts: 1999 - $313 6,131 -
Prepaid expenses and other current assets 815 734
-------------------- ----------------
Total current assets 7,370 1,746
Property and Equipment:
Buildings, improvements and equipment 48,928 61,376
Land 2,246 3,806
Accumulated depreciation (5,580) (4,306)
-------------------- ----------------
Property and equipment, net 45,594 60,876
Other Assets:
Equity securities 1,703 3,632
Debt securities 11,013 10,886
Other assets 694 104
-------------------- ----------------
Total other assets 13,410 14,622
-------------------- ----------------
Total assets $66,374 $77,244
==================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,549 $ -
Accrued salaries and benefits 1,272 -
Current portion of mortgage loans payable 626 571
Other accrued liabilities 3,775 941
-------------------- ----------------
Total current liabilities 7,222 1,512
Mortgage Loans Payable 46,898 45,956
Line of Credit from LTC Properties 6,337 16,528
Minority Interest 3,518 3,461
Commitments and Contingencies
Stockholders' Equity:
Preferred stock $0.01 par value; 10,000,000 shares authorized - -
Common stock $0.01 par value; 40,000,000 shares authorized;
shares issued: 1999 - 3,335,882; 1998 - 3,335,882 33 33
Capital in excess of par value 10,224 10,224
Treasury stock: shares 1999 - 881,556; 1998 - 151,050 (2,112) (384)
Accumulated deficit (3,851) (119)
Accumulated comprehensive income (loss) (1,895) 33
-------------------- ----------------
Total stockholders' equity 2,399 9,787
-------------------- ----------------
Total liabilities and stockholders' equity $66,374 $77,244
==================== ================
</TABLE>
See accompanying notes
23
<PAGE>
LTC HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED (MARCH 25, 1998) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- ----------------------
<S> <C> <C>
Revenues:
Net patient revenues $11,713 $ -
Rental income 6,692 2,172
Interest and other income 2,344 692
-------------------- ----------------------
Total revenues 20,749 2,864
Costs and Expenses:
Salaries and benefits 8,295 -
Supplies 1,217 -
Rent - LTC Properties, Inc. 779 -
Interest on mortgages payable 4,014 1,133
Interest expense on line of credit from LTC Properties, Inc. 1,514 711
Depreciation 1,885 586
Minority interest 343 86
Other operating and administrative 6,434 467
-------------------- ----------------------
Total expenses 24,481 2,983
Loss before provision for income taxes (3,732) (119)
Provision for income taxes - -
-------------------- ----------------------
Net loss $(3,732) $ (119)
==================== =======================
Net Loss Per Common Share:
Basic and diluted net loss per share $ (1.38) $(0.04)
===================== =======================
</TABLE>
See accompanying notes
24
<PAGE>
LTC HEALTHCARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
CAPITAL IN ACCUMULATED
COMMON EXCESS OF TREASURY ACCUMULATED COMPREHENSIVE
STOCK PAR STOCK DEFICIT INCOME (LOSS) TOTAL
--------- ----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Contribution of net assets from LTC
Properties $33 $10,224 $ - $ - $ - $ 10,257
Repurchase of 138,600 shares - - (384) - - (384)
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 9,787
Repurchase of 730,506 shares - - (1,728) - - (1,728)
Unrealized loss on available-for-sale
securities - - - - (1,928) (1,928)
Net loss - - - (3,732) - (3,732)
-----------
Comprehensive loss - - - - - (5,660)
--------- ----------- ----------- ----------- ------------- -----------
Balance - December 31, 1999 $33 $10,224 $(2,112) $(3,851) $(1,895) $ 2,399
========= =========== =========== =========== ============= ===========
</TABLE>
See accompanying notes
25
<PAGE>
LTC HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
YEAR ENDED (MARCH 25, 1998) TO
DECEMBER 31, 1999 DECEMBER 31, 1998
-------------------- ---------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (3,732) $ (119)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 1,885 586
Other non-cash items 197 (117)
Increase in accounts receivable, net (6,131) -
Increase in prepaid expenses and other assets (565) (473)
Increase in accounts payable 1,549 -
Increase in accrued salaries and benefits 1,272 -
Increase in accrued expenses and other liabilities 2,797 679
--------------------- ---------------------
Net cash provided by (used in) operating activities (2,728) 556
INVESTING ACTIVITIES:
Investment in equity securities - (3,308)
Investment in convertible subordinated debentures - (10,660)
Proceeds from sale of property and equipment 16,050 -
Other (644) 388
--------------------- ---------------------
Net cash provided by (used in) investing activities 15,406 (13,580)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net - 2,001
Advances under line of credit from LTC Properties 13,336 12,800
Payments on line of credit from LTC Properties (23,527) (17,668)
Mortgage loan borrowings - 17,400
Principal payments on mortgage loans payable (574) (136)
Repurchase of common stock (1,728) (384)
Other (773) 23
--------------------- ---------------------
Net cash provided by (used in) financing activities (13,266) 14,036
--------------------- ---------------------
Increase (decrease) in cash and cash equivalents (588) 1,012
Cash and cash equivalents, beginning of year 1,012 -
--------------------- ---------------------
Cash and cash equivalents, end of year $ 424 $ 1,012
==================== =====================
Supplemental disclosure of cash flow information:
Interest paid $ 5,309 $ 1,536
Non-cash investing and financing activities:
Assumption of mortgage loan relating to acquisition of property and $ 1,571 $ -
equipment
Non-cash distribution of net assets from LTC Properties Inc. - 10,224
</TABLE>
See accompanying notes
26
<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. The Company was
originally a preferred stock subsidiary of LTC Properties, Inc. ("LTC
Properties"), a real estate investment trust. On September 30, 1998,
concurrently with the conversion of all shares of Company non-voting common
stock held by LTC Properties into voting common stock of the Company, LTC
Properties completed the spin-off of Company common stock through a taxable
dividend to holders of LTC Properties 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. See
"Note 3.--Transactions with LTC Properties" for additional information.
The principal business of the Company is providing long-term healthcare services
through the operation of nursing facilities. At December 31, 1999, the Company
operated 18 nursing facilities with 1,839 licensed beds. The facilities operated
by the Company are located in eight states (Florida, Georgia, Illinois, Iowa,
Kansas, North Carolina, Tennessee and Virginia) and are collectively referred to
herein as nursing facilities. In addition to the operation of nursing
facilities, as of December 31, 1999, the Company owned six nursing facilities
and four assisted living facilities that were leased to third party operators
under triple net leases.
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 AND CASH EQUIVALENTS. Cash and cash equivalents consist of highly liquid
investments with an initial maturity of three months or less and are stated at
cost which approximates market.
OTHER ACCRUED LIABILITIES. A summary of other accrued liabilities at December
31 follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------- ----------
<S> <C> <C>
Accrued interest $ 527 $ 308
Due to prior operators 1,350 -
Other 1,898 633
------------- ----------
$ 3,775 $ 941
============= ===========
</TABLE>
REAL ESTATE. Real estate assets transferred to the Company from LTC Properties
are recorded at LTC Properties' historical cost and real estate assets 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
27
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
carrying value of its assets on a property by property basis. Based on
management's review, no real estate assets were deemed to be impaired in 1999
or 1998.
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 securities are
accounted for at amortized cost as held-to-maturity securities 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 of
available-for-sale securities are reported as a separate component of
stockholders' equity and comprehensive loss.
REVENUE RECOGNITION. Net patient revenues are derived primarily from providing
long-term care services. Approximately 40.6% and 6.5% of the Company's revenues
for 1999 were derived from services provided under the Medicaid and Medicare
programs, respectively. The Company accrues for patient revenues at standard
charges, adjusted to amounts estimated to be received under governmental
programs and other third-party contractual arrangements, when services are
provided. Base rental revenue is recognized using the straight-line method by
averaging annual minimum rents over the terms of the leases. Contingent rental
income, which is generated by a percentage of increased revenue over a specified
base period revenue of the long-term care facilities, is recognized as earned.
Laws and regulations governing Medicare and Medicaid programs are complex and
subject to interpretation. The Company believes that it is in compliance with
all applicable laws and regulations. Compliance with such laws and regulations
is subject to government review and interpretation, as well as significant
regulatory action including fines, penalties, and exclusion from the Medicare
and Medicaid programs.
INSURANCE. The Company has purchased traditional indemnity insurance for its
general, professional, and auto liabilities and has purchased occurrence based
insurance for its workers compensation liabilities. The Company has purchased
traditional indemnity property insurance for the nursing facilities it operates.
The facilities owned by the Company that are leased to third party operators are
leased under triple net leases which require the lessee to provide for the
payment of all insurance.
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.
EARNINGS (LOSS) PER SHARE. The Company had no dilutive securities for the period
ended December 31, 1999 or 1998. Weighted average shares outstanding for 1999
and 1998 were 2,696,691 and 3,184,832, respectively.
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.
28
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDUSTRY SEGMENTS. The Company has one operating segment, nursing operations.
Nursing operations include revenues generated by providing long-term healthcare
services in nursing facilities operated by the Company and rental income
generated by leasing long-term care facilities owned by the Company to third
party operators. The Company commenced operating nursing facilities on September
1, 1999. Prior to September 1, 1999, the Company's revenues consisted primarily
of rental income from the ownership of long-term care facilities leased to third
party operators.
CONCENTRATION OF CREDIT RISKS. For the year ended December 31, 1999, rental
income under operating leases with Sun Healthcare Group, Inc., through a
wholly-owned subsidiary, ("Sun") and Sunrise Assisted Living, Inc., ("Sunrise")
accounted for approximately 11% and 16% of the Company's total revenues,
respectively. For the period from inception to December 31, 1998, rental income
under operating leases with Sun and Sunrise accounted for approximately 20% and
46% of the Company's total revenues, respectively. In October 1999, Sun filed
for Chapter 11 bankruptcy protection. As of December 31, 1999, all rent payments
due from Sun were current.
As of December 31, 1999 and 1998, the Company's investment of $8,500,000 in
Regent Assisted Living, Inc. ("Regent") convertible subordinated debentures
represented 13% and 11%, respectively, of the Company's total assets.
The Company has significant accounts receivable whose collectibility or
realizability is dependent upon the performance of certain government programs,
primarily Medicare and Medicaid.
The Company's financial position, results of operations and liquidity could be
adversely affected by financial difficulties experienced by Sun, Sunrise or
Regent, including bankruptcy, insolvency or general downturn in business, or in
the event Sun, or Sunrise does not renew and/or extend its leases with the
Company as they expire. The Company does not believe there are significant
credit risks associated with the government programs. The Company believes that
an adequate provision has been made for the possibility of accounts receivable
proving uncollectible and continually monitors and adjusts these reserves as
necessary.
The following table, which is not covered by the Report of Independent Auditors
on page 22, contains summary information for Sun, Sunrise and Regent that was
extracted from public reports on file with the Securities and Exchange
Commission. Sun, Sunrise and Regent are publicly traded companies, and as such
are subject to the filing requirements of the Securities and Exchange
Commission.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
September 30, December 31, -------------------------------
1999 1998 1999 1998
------------- ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
SUN
Total assets $1,647,871 $2,468,038 N/A N/A
Total debt 1,662,382 1,625,656 N/A N/A
Total stockholders' equity (deficit) (890,114) 33,759 N/A N/A
Total revenues N/A N/A $1,903,525 $2,308,290
Income (loss) before taxes and extraordinary N/A N/A (923,890) 31,134
items
Net income (loss) N/A N/A (938,601) 7,990
</TABLE>
29
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
September 30, December 31, -------------------------------
1999 1998 1999 1998
------------- ------------ ----------- --------------
(in thousands)
<S> <C> <C> <C> <C>
SUNRISE
Total assets $1,038,914 $ 683,411 N/A N/A
Total debt 633,382 428,326 N/A N/A
Total stockholders' equity 323,828 227,655 N/A N/A
Total revenues N/A N/A $181,035 $121,518
Income before taxes N/A N/A 22,364 14,895
Net income N/A N/A 16,353 14,895
REGENT
Total assets $ 67,092 $ 66,274 N/A N/A
Total debt 44,736 49,989 N/A N/A
Total stockholders' equity (1,885) 4,255 N/A N/A
Total revenues N/A N/A $ 39,169 $ 19,868
Loss before taxes N/A N/A (5,690) (8,617)
Net loss N/A N/A (6,140) (9,067)
</TABLE>
3. TRANSACTIONS WITH LTC PROPERTIES
During the period from inception (March 25, 1998) to September 30, 1998, LTC
Properties acquired 4,002 shares of the Company's non-voting common stock for
$2,001,000. In addition, the Company acquired 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 from LTC Properties in exchange for a combination of 36,000 shares of
Company non-voting common stock and borrowings of $21,396,000 by the Company
under an unsecured line of credit provided by LTC Properties. Subsequent to the
acquisition of the above assets and liabilities, 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 Properties.
On September 30, 1998, the 40,002 shares of Company non-voting common stock held
by LTC Properties were converted into 3,335,882 shares of Company voting common
stock. Concurrently, LTC Properties completed the spin-off of all Company voting
common stock through a taxable dividend distribution to the holders of LTC
Properties common stock, Cumulative Convertible Series C Preferred Stock
("Series C Preferred Stock") and Convertible Subordinated Debentures (the
"Debentures").
Upon completion of the spin-off, the Company began operating as a separate
public company. As of December 31, 1999, LTC Properties owned 239,900 shares or
9.8% of the Company's outstanding common stock.
For book purposes, the net assets and liabilities transferred to the Company by
LTC Properties were transferred at LTC Properties' book value of approximately
$10,224,000. The spin-off was a taxable dividend distribution by LTC Properties
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) (unaudited).
30
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LTC Properties has provided the Company with a $20.0 million unsecured line of
credit that bears interest at 10% and matures in March 2008. As of December 31,
1999 and 1998, $6,337,000 and $16,528,000, respectively, was outstanding under
the line of credit. As of December 31, 1999 and 1998, the Company owned 194,100
shares of LTC Properties common stock. See "Note 6.--Debt and Equity
Securities".
During 1999 and 1998, the Company recorded interest expense related to the
unsecured line of credit of $1,514,000 and $711,000, respectively.
The Company and LTC Properties entered into an administrative services
agreement under which LTC Properties will provide management and
administrative services to the Company. In exchange for those services, the
Company is required to pay LTC Properties 25% of the aggregate amount of all
wages, salaries, bonuses and rent for its corporate offices paid by LTC
Properties each month. The administrative services agreement expires in
September 2006 but may be terminated either by LTC Properties or the Company
at any time upon 30 days prior written notice. During 1999 and 1998, the
Company reimbursed LTC Properties $740,000 and $350,000, respectively for
administrative and management advisory services as provided for under the
administrative services agreement. The administrative services fee is
included in other operating and administrative expenses.
During 1999, the Company sold 100% of the stock of a subsidiary that owns two
assisted living facilities leased to a third-party operator to LTC Properties
for total proceeds of $16,050,000 which equaled the Company's cost basis in the
properties. A gain of approximately $591,000 on the sale is included in interest
and other income in the accompanying statement of operations. The Company used
the proceeds to repay borrowings under the unsecured line of credit provided by
LTC Properties.
As of December 31,1999, the Company leased 17 nursing facilities with 1,743
licensed beds from LTC Properties. During 1999, the Company recorded rental
expense of approximately $779,000 on properties leased from LTC Properties.
Also, as of December 31, 1999, the Company had mortgage loans secured by eight
nursing facilities with total outstanding principal of $30,424,000 and a
weighted average interest rate of 9.18% payable to LTC Properties' REMIC pools.
One of the nursing facilities securing the mortgage loans payable to LTC
Properties REMIC pools is operated by the Company, one nursing facility is
currently closed and will be opened and operated by the Company upon the
completion of capital improvements, and the remaining six nursing facilities are
leased to third party operators. Effective January 1, 2000, the Company began
operating an additional 13 facilities with 1,668 licensed beds that are owned by
LTC Properties. Leases on 19 of the facilities owned by LTC Properties and
operated by the Company will expire in 2000 and the remaining 11 lease
expirations range from 2004 to 2013. The terms of these leases will be
renegotiated prior to their expiration; however, there can be no assurance that
the leases will be renewed or that if renewed, the annual base rents will remain
at the current level.
4. NURSING HOME OPERATIONS
On August 20, 1999 the Company acquired Generations Management Services, Inc.
("Generations"), a nursing facility management company for $450,000. In
connection with the acquisition, the Company recorded goodwill of approximately
$398,000. For the period from August 20, 1999 to December 31, 1999, Generations
managed the operations of nine nursing facilities for a third party provider of
long-term care. Effective January 1, 2000, the Company began operating eight of
these facilities pursuant to a management agreement and the management agreement
on the remaining facility was terminated. Accordingly, the Company expensed the
goodwill recorded for the acquisition of Generations. The Company anticipates
that the management agreement, under which the eight facilities discussed
above are operated, will
31
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expire during 2000 and that the Company will begin leasing the facilities
directly from LTC Properties.
On September 1, 1999 the Company entered into operating leases with LTC
Properties and began operating six nursing facilities and in October 1999, the
Company began operating 12 additional nursing facilities. Eleven of the nursing
facilities the Company began operating in October 1999 are leased from LTC
Properties and the remaining facility was acquired by the Company. The Company
entered into a management agreement with two third party operators of long-term
care facilities for the management of the 12 facilities discussed above.
Effective February 29, 2000, the management agreement with one of the third
party operators was terminated and the Company began managing nine of the
facilities.
On January 1, 2000, the Company began operating 13 facilities (including the
eight facilities discussed above that the Company previously managed for a third
party operator) that are leased from LTC Properties, and effective February 1,
2000, the Company began operating one facility that is leased from a third
party. As a result, as of March 1, 2000 the Company operates 32 nursing
facilities with 3,557 licensed beds.
5. REAL ESTATE INVESTMENTS
During 1999, the Company acquired one nursing facility with 96 licensed beds in
Illinois for a purchase price of $1,571,000. The purchase price equaled the
amount of the mortgage debt secured by the property that was assumed by the
Company. Also, during 1999, the Company sold 100% of the stock of a subsidiary
that owns two assisted living facilities to LTC Properties for total proceeds of
$16,050,000 which equaled the Company's cost basis in the properties. As a
result of the above transactions, as of December 31, 1999, the Company owned
eight nursing facilities with 1,010 licensed beds and four assisted living
facilities with 186 units. Six nursing facilities with 792 licensed beds and the
four assisted living facilities are leased to third party operators under triple
net leases. One nursing facility with 96 licensed beds is operated by the
Company and the remaining nursing facility with 122 licensed beds is currently
closed. The Company is currently making capital improvements to the closed
facility and intends to open and begin operating the facility by December 31,
2000.
Long-term facilities that are leased under operating leases to third parties
generally have 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 and certain 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.
Future minimum base rents receivable under the remaining non-cancelable terms of
operating leases are: $5,105,000, $4,895,000, $4,526,000, $2,407,000, $2,093,000
and $27,900,000 for the years ending December 31, 2000, 2001, 2002, 2003, 2004
and thereafter.
32
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEBT AND EQUITY SECURITIES
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 and bear interest at 7.5%. At December 31,
1998, the Regent Debentures were convertible into Regent common stock at $7.50
per share. During 1999, Regent's common stock was de-listed from the NASDAQ and
the conversion price was reduced to $6.75 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,
1999, based on management's estimates, the fair value of the Regent Debentures
was approximately $5,100,000. As of December 1998, the purchase price of
$8,500,000 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, 1999 and
1998, the fair value of the ALC convertible debentures, based on quoted market
prices, was approximately $1,800,000 and $2,386,000, respectively.
During 1998, the Company purchased for investment purposes, 194,100 shares of
LTC Properties common stock for an aggregate cost of approximately $3,308,000.
At December 31 1999 and 1998, the Company's investment in LTC Properties common
stock was recorded at its fair value of $1,638,000 and $3,227,000, respectively,
in the accompanying balance sheets. Unrealized holding losses on changes in the
fair value of the Company's investment in LTC Properties common stock of
$1,589,000 and $81,000 are included in comprehensive loss for 1999 and 1998,
respectively.
During 1998, LTC Properties transferred equity investments consisting of 69,000
shares of Regent common stock and 30,847 shares of ALC common stock to the
Company. Subsequently during 1998, 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, 1999 and 1998 the ALC common stock
was recorded at its fair value of $66,000 and $405,000, respectively. Unrealized
holding losses on changes in the fair value of the Company's investment in ALC
common stock of $339,000 and $81,000 are included in comprehensive income for
1999 and 1998, respectively.
7. LONG-TERM DEBT
LTC Properties has provided the Company with a $20.0 million unsecured line of
credit that bears interest at 10% and matures in March 2008. As of December 31,
1999 and 1998, $6,337,000 and $16,528,000, respectively, was outstanding under
the line of credit.
In connection with the transfer of seven real estate properties from LTC
Properties to the Company in 1998, the Company assumed non-recourse mortgage
loans totaling $29,263,000 that are payable to REMIC pools originated by LTC
Properties. 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 Properties. During 1999, the Company acquired one nursing
facility subject to existing non-recourse mortgage debt of $1,571,000 that is
also payable to a REMIC pool originated by LTC Properties. The Company has
agreed not to prepay any of the mortgage loans payable to REMIC pools originated
by LTC Properties.
33
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1999 and 1998, the Company had total outstanding mortgage loans
of $47,524,000 and $46,527,000, respectively, with a weighted average interest
rate of 8.5% and 8.4%, respectively. At December 31, 1999 and 1998, based on
prevailing interest rates for comparable loans and estimates made by management,
the fair value of our mortgage loans payable was approximately $38,484,000 and
$39,285,000, respectively.
Aggregate scheduled principal payments for the mortgage loans payable as of
December 31, 1999 are $626,000, $685,000, $4,000,000, $768,000, $2,339,000, and
$39,106,000 in 2000, 2001, 2002, 2003, 2004 and thereafter.
8. COMMITMENTS AND CONTINGENCIES
The future minimum rental commitments payable to LTC Properties required by all
non-cancelable operating leases with original or remaining terms in excess of
one year as of December 31, 1999 are $116,000, $116,000, $116,000, $116,000 and
$45,000 for 2000, 2001, 2002, 2003 and 2004.
The Company is not party to any legal proceedings which, in the opinion of
management, would have a material adverse affect on the Company's financial
position, results of operations or liquidity.
9. STOCKHOLDERS' EQUITY
INITIAL CAPITALIZATION. On March 25, 1998, LTC Properties acquired 2 shares of
non-voting common stock for $1,000. LTC Properties 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, 40,002 shares of Company non-voting common stock held by
LTC Properties were converted into 3,335,882 shares of Company voting common
stock. On September 30, 1998, the date of the spin-off, the Company owned
124,500 shares of LTC Properties common stock and as a result of the spin-off,
received 12,450 shares of treasury stock.
REPURCHASE OF COMMON STOCK. During 1999 and 1998, the Company repurchased
730,506 and 138,600 shares, respectively, of its common stock in the open market
for an aggregate purchase price of $1,728,000 and $384,000, respectively.
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.
34
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes nonqualified stock option activity 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended Period from Inception (March
December 31, 1999 25, 1998) to December 31, 1998
---------------------------------- --------------------------------
Weighted Weighted
Shares Average Price Shares Average Price
---------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period 296,000 $ 2.50 - $ -
Granted 63,000 2.50 296,000 2.50
Canceled (81,000) 2.50 - -
--------------- ------------
Outstanding, end of period 278,000 $ 2.50 296,000 $ 2.50
=============== ============
Exercisable, December 31 78,337 $ 2.50 - $ -
=============== ============
Available for Grant, December 31 222,000 204,000
=============== ============
</TABLE>
All options have a ten year life and vest equally over three to five 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 1999 and 1998 were estimated using the
Black-Scholes valuation model with the following assumptions as of the grant
date for options granted in 1999 and 1998, respectively: (i) weighted average
option life expectancy of six years and five years; (ii) volatility factor of
the expected market price of the Company's common stock of 1.104 and 1.559; and
(iii) a risk free interest rate of 6.0% and 4.7%. Based on the above
assumptions, the weighted average estimated fair value of options granted in
1999 and 1998 was $1.75 and $2.32 per share, respectively. As of December 31,
1999 and 1998 the average remaining contractual life of the outstanding options
was 8.9 and 9.8 years. Had compensation cost been recorded under the provisions
of SFAS No. 123, pro forma net loss would have been $3,913,000 and $157,000 for
1999 and 1998, respectively, and pro forma basic and diluted loss per share
would have been $1.45 and $0.05 per share for 1999 and 1998, respectively.
10. INCOME TAXES
For federal and state income tax purposes, the Company recorded the assets and
liabilities transferred from LTC Properties 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.
At December 31, 1999 the Company had, for federal income tax purposes, net
operating loss carryforwards of $4,234,000 (expiring in 2018 and 2019).
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.
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 future taxable income will be sufficient
to realize such tax benefits and, accordingly, a valuation allowance was
established against the deferred tax asset. For the year
ended December 31, 1999 and 1998, the Company recorded a valuation allowance of
$1,415,000 and $41,000.
35
<PAGE>
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation between the statutory provision for income taxes and the
actual provision for income taxes is shown as follows:
<TABLE>
<CAPTION>
1999 1998
----------- ---------
<S> <C> <C>
Income tax (benefit) at federal statutory rate $(1,269,000) $ (41,000)
State income tax (benefit), net of federal benefit (146,000) (5,000)
Valuation allowance (1,415,000) 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>
1999 1998
----------- ---------
<S> <C> <C>
Deferred tax assets:
Partnership and other income $ 193,000 $ 47,000
Federal benefit of state deferred tax 9,000 7,000
Allowance for bad debt 126,000 -
NOL carryforward 1,766,000 144,000
----------- ---------
Total Deferred Tax Asset 2,094,000 198,000
----------- ---------
Deferred tax liabilities:
Depreciation (353,000) (96,000)
Accrued Expenses (163,000) (52,000)
Other (122,000) (9,000)
----------- ---------
Total deferred tax liabilities (638,000) (157,000)
----------- ---------
Net deferred tax assets before valuation allowance 1,456,000 41,000
Valuation allowance (1,456,000) (41,000)
----------- ---------
Net deferred tax asset $ - $ -
=========== =========
</TABLE>
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended
-------------------------------------------------------------
March 31 June 30 September 30 December 31
-------- ------- ------------ -----------
(dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1999
- ----
Revenues $2,114 $2,123 $3,298 $12,623
Net Loss $ (142) $ (268) $ (142) (3,180)
Basic and diluted net loss per share $(0.05) $ (.10) $(0.05) $ (1.24)
1998
- ----
Revenues $ - $ 115 $ 610 $ 2,139
Net loss $ - $ 4 $ (37) $ (86)
Basic and diluted net loss per share $ - $ - $ (0.01) $ (0.03)
</TABLE>
Revenues for the quarters ended March 31, 1999 and June 30, 1999 include a
reclassification to conform to the quarters ended September 30, 1999 and
December 31, 1999 presentation. Results for the quarters ended September 30,
1999 and December 31, 1999 include the results from the commencement of
nursing operations in September and October 1999.
36
<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 22, 2000 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 22, 2000, 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 22, 2000, 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 22, 2000, 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
On October 15, 1999, the Company filed a Current Report on
Form 8-K dated October 1, 1999 reporting that the Company had
commenced nursing home operations through a series of
transactions that included entering into operating leases for
long-term care properties and the leveraged acquisition of
long-term care properties.
On November 2, 1999, the Company filed a Current Report on
Form 8-K dated October 18, 1999 reporting that the Company
sold 100% of the stock of Missouri River Corporation to LTC
Properties, Inc. for total proceeds of $16,050,000 and the use
of the proceeds to repay outstanding borrowings under the
unsecured line of credit provided by LTC Properties, Inc.
On January 17, 2000, the Company filed an amendment to its
Current Report on Form 8-K dated October 15, 1999 reporting
that the Company had commenced nursing home operations through
a series of transactions that included entering into operating
leases for long-term care properties and the leveraged
acquisition of long-term care properties.
37
<PAGE>
(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 II. Valuation and Qualifying Accounts and Schedule
III. Real Estate and Accumulated Depreciation are 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.
38
<PAGE>
ITEM 14 (c). INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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 (incorporated by
reference to Exhibit 10.6 to LTC Healthcare, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1998)
21.1 List of Subsidiaries
27 Financial Data Schedule
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.
39
<PAGE>
LTC HEALTHCARE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Beginning of Period Charge to Operations End of Period
-------------------------- -------------------------- ------------------
<S> <C> <C> <C>
Allowance for Doubtful Accounts:
1999 $ - $ 313 $ 313
1998 $ - $ - $ -
</TABLE>
40
<PAGE>
LTC HEALTHCARE, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at Which Carried
Initial Cost to Company Costs at December 31, 1999
----------------------- Capitalized ------------------------------
Building and Subsequent Building and Accum
Encumbrances Land Improvements to Acquisition Land Improvements Total (1) Deprec.(2)
------------ --------------------- -------------- ------------------------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Skilled Nursing
Facilities:
Alamagordo, NM $ 4,768 $ 314 $ 3,567 $ 28 $ 314 $ 3,595 $ 3,909 $ 867
Roswell, NM 4,030 85 2,932 25 85 2,957 3,042 884
Tucson, AZ 6,341 145 3,932 - 145 3,932 4,077 908
Phoenix, AZ 7,500 432 6,764 - 432 6,764 7,196 1,397
Clovis, NM 1,631 100 2,519 32 100 2,551 2,651 164
Clovis, NM 2,860 100 1,899 32 100 1,931 2,031 135
Sumner, IL 1,567 50 1,521 - 50 1,521 1,571 17
Richland Hills, TX 1,727 100 2,844 346 100 3,190 3,290 203
--------- -------- -------- ------- -------- -------- -------- -------
SNFs 30,424 1,326 25,978 463 1,326 26,441 27,767 4,575
--------- -------- -------- ------- -------- -------- -------- -------
Assisted Living
Facilities:
Arlington, OH 17,100(3) 510 6,115 - 510 6,115 6,625 275
Bexley, OH (3) 410 6,215 - 410 6,215 6,625 279
Worthington, OH (3) - 6,710 - - 6,710 6,710 292
Worthington, OH (3) - 3,290 - - 3,290 3,290 159
--------- -------- -------- ------- -------- -------- -------- -------
ALFs 17,100 920 22,330 - 920 22,330 23,250 1,005
--------- -------- -------- ------- -------- -------- -------- -------
Total $ 47,524 $ 2,246 $ 48,308 $ 463 $ 2,246 $ 48,771 $ 51,017 $ 5,580
========= ======== ======== ======= ======== ======== ======== =======
Construction
Renovation Acquisition
Date Date
------------ ------------
<S> <C> <C>
Skilled Nursing
Facilities:
Alamagordo, NM 1985 Sept-98
Roswell, NM 1979 Sept-98
Tucson, AZ 1985 Sept-98
Phoenix, AZ 1985/1992 Sept-98
Clovis, NM 1968 Sept-98
Clovis, NM 1969/1995 Sept-98
Sumner, IL 1965 Oct -99
Richland Hills, TX 1967 Sept-98
SNFs
Assisted Living
Facilities:
Arlington, OH 1993 Sept-98
Bexley, OH 1992 Sept-98
Worthington, OH 1993 Sept-98
Worthington, OH 1996 Sept-98
</TABLE>
- ---------------
(1) The aggregate cost for federal income tax purposes is approximately
$54,900,000. The above table does not include equipment of $157,000
acquired by the Company for properties it operates under triple net
leases.
(2) Depreciation for building is calculated using 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 years ended December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Real Estate and Accumulated
Equipment Depreciation
------------------ -----------------
<S> <C> <C>
Balance at Inception (March 25, 1998) $ - $ -
Additions - 586
Contribution of assets by LTC Properties 65,182 3,720
------------------ -----------------
Balance at December 31, 1998 65,182 4,306
Additions to owned properties 1,885 1,885
Additions to properties leased from LTC
Properties 157 -
Dispositions (16,050) (611)
------------------ -----------------
Balance at December 31, 1999 $ 51,174 $ 5,580
================== =================
</TABLE>
41
<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 30, 2000 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 Executive Officer
and Director March 30, 2000
/s/ JAMES J. PIECZYNSKI
----------------------------
JAMES J. PIECZYNSKI President, Chief Financial
Officer and Director March 30, 2000
/s/ STEVEN STUART
----------------------------
STEVEN STUART Director March 30, 2000
/s/ BARY G. BAILEY
----------------------------
BARY G. BAILEY Director March 30, 2000
42
<PAGE>
LTC HEALTHCARE, INC.
EXHIBIT 21.1
LIST OF SUBSIDIARIES
CORONADO CORPORATION, a Delaware corporation
GENERATIONS MANAGEMENT SERVICES, INC., a Delaware corporation
LTC GP VI, INC., a Delaware corporation
LTC HEALTHCARE OF ILLINOIS, INC., a Delaware corporation
LTC Healthcare of Carlinville, LLC, a Delaware limited liability
company
LTC Healthcare of Sumner, LLC, a Delaware limited liability
company
LTC Healthcare of Sumner Hills, LLC, a Delaware limited
liability company
LTC HEALTHCARE OF IOWA, INC., a Nevada corporation
LTC HEALTHCARE OF NORTH CAROLINA, INC., a Nevada corporation
LTC Healthcare of Fayetteville, Inc., a Nevada corporation
LTC HEALTHCARE NURSING HOMES, INC., a Nevada corporation
LTC HEALTHCARE OF FLORIDA, INC., a Nevada corporation
LTC Healthcare of Crawfordville, Inc., a Nevada corporation
LTC Healthcare of New Port Richey, Inc., a Nevada corporation
LTC Healthcare of Venice, Inc., a Nevada corporation
LTC HEALTHCARE OF GEORGIA, INC., a Nevada corporation
LTC Healthcare of Fort Valley, Inc., a Nevada corporation
LTC Healthcare of Jessup, Inc., a Nevada corporation
LTC Healthcare of Jonesboro, Inc., a Nevada corporation
LTC Healthcare of Roberta, Inc., a Nevada corporation
LTC HEALTHCARE OF KANSAS, INC., a Nevada corporation
LTC Healthcare of Coffeyville, Inc. , a Nevada corporation
LTC Healthcare of Gardner, Inc. , a Nevada corporation
LTC Healthcare of Olathe, Inc., a Nevada corporation
LTC Healthcare of Salina, Inc., a Nevada corporation
LTC HEALTHCARE OF TENNESSEE, INC., a Nevada corporation
LTC Healthcare of Tiptonville, Inc., a Nevada corporation
LTC HEALTHCARE OF TEXAS, INC., a Nevada corporation
LTC Healthcare of Richland Hills, Inc., a Nevada corporation
LTC HEALTHCARE OF RED HILLS, INC., a Delaware corporation
LTC HEALTHCARE OF VIRGINIA, INC., a Nevada corporation
LTC Healthcare of Richmond, Inc., a Nevada corporation
LTC Healthcare of Tappahannock, Inc., a Nevada corporation
LTC-NEW MEXICO, INC., a Nevada corporation
LTC-OHIO, INC., a Delaware corporation
PARK VILLA CORPORATION, a Delaware corporation
<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,
1999 FILED HEREWITH AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 424
<SECURITIES> 1,703
<RECEIVABLES> 6,444
<ALLOWANCES> 313
<INVENTORY> 0
<CURRENT-ASSETS> 7,370
<PP&E> 51,174
<DEPRECIATION> 5,580
<TOTAL-ASSETS> 66,374
<CURRENT-LIABILITIES> 7,222
<BONDS> 0
0
0
<COMMON> 33
<OTHER-SE> 2,366
<TOTAL-LIABILITY-AND-EQUITY> 66,374
<SALES> 0
<TOTAL-REVENUES> 20,749
<CGS> 0
<TOTAL-COSTS> 24,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,014
<INCOME-PRETAX> (3,732)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,732)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,732)
<EPS-BASIC> (1.38)
<EPS-DILUTED> (1.38)
</TABLE>
