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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission file number: 1-11314
LTC PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
MARYLAND 71-0720518
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 981-8655
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of Stock which registered
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Common stock, $.01 Par Value New York Stock Exchange
9.50% Series A Cumulative Preferred
Stock, $.01 Par Value New York Stock Exchange
9.00% Series B Cumulative Preferred
Stock, $.01 Par Value New York Stock Exchange
8.50% Convertible Subordinated
Debentures due 2001 New York Stock Exchange
7.75% Convertible Subordinated
Debentures due 2002 New York Stock Exchange
8.25% Convertible Subordinated
Debentures due 2001 New York Stock 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 $303,587,000 as of March 19, 1999.
27,407,096
(Number of shares of common stock outstanding as of March 19, 1999)
Part III is incorporated by reference from the Company's definitive
proxy statement for the Annual Meeting of Stockholders to be
held on May 25, 1999.
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Item 1. BUSINESS
General
LTC Properties, Inc., a health care real estate investment trust (a "REIT"), was
organized on May 12, 1992 in the State of Maryland and commenced operations on
August 25, 1992. We invest primarily in long-term care and other health care
related facilities through mortgage loans, facility lease transactions and other
investments. During 1998, we began making investments in the education industry
by investing in private and charter schools from pre-school through eighth
grade. Our primary objective is to provide current income for distribution to
stockholders through real estate investments in long-term care facilities and
other health care related facilities managed by experienced operators providing
quality care. To meet this objective, we attempt to invest in properties that
provide opportunity for additional returns to our stockholders and diversify our
investment portfolio by geographic location, operator and form of investment.
In accordance with "plain English" guidelines provided by the Securities and
Exchange Commission, whenever we refer to "our company" or to "us," or use the
terms "we" or "our," we are referring to LTC Properties, Inc. and its
subsidiaries.
We were organized to qualify, and intend to continue to qualify, as a REIT. So
long as we qualify, with limited exceptions, we may deduct distributions to our
stockholders from our taxable income. We have made distributions, and intend to
continue to make distributions to our stockholders, in order to eliminate any
federal tax liability.
At December 31, 1998, we had a gross investment portfolio (adjusted to include
mortgage loans to third parties underlying our investment in REMIC certificates)
of $918,085,000. Our investments consisted of $636,774,000 in 274 skilled
nursing facilities with 31,276 beds, $254,861,000 in 90 assisted living
facilities with 4,301 units and $26,450,000 in six schools. The properties in
our portfolio are operated by 74 healthcare providers and two education
providers in 36 states.
Owned Properties. During 1998, we acquired seven skilled nursing facilities with
a total of 816 beds, 23 assisted living residences with a total of 1,500 units
and five schools for a gross purchase price of $161,001,000 (includes the
conversion of construction loans of $7,301,000) and invested approximately
$3,624,000 in the expansion and improvement of existing properties. We also sold
three skilled nursing facilities in which we had an initial investment of
$7,654,000 for gross proceeds of $16,706,000.
Our long-term facilities are leased to operators pursuant to long-term operating
leases that generally have an initial term of 10 to 12 years and provide for
increases in the rent based upon specified rent increases, increases in revenues
over defined base periods, or increases based on consumer price indices. Each
lease is a triple net lease that requires the lessee to pay all taxes,
insurance, maintenance and other costs of the facilities.
Mortgage Loans. As part of our strategy of making long-term investments in
properties used in the provision of long-term health care services, we provide
mortgage financing on such properties based on our established investment
underwriting criteria. (See "Investment and Other Policies" in this Section.) We
also provide construction loans that by their terms convert into purchase/lease
transactions or permanent financing mortgage loans upon completion of
construction. During 1998, we originated mortgage loans of $47,452,000, net of
construction loans of $5,467,000 that converted to permanent mortgage financing,
secured by six skilled nursing facilities with 762 beds, 11 assisted living
facilities with 471 units and one school.
We maintain a long-term investment interest in mortgages we originate either
through the direct retention of the mortgages or through the retention of REMIC
certificates originated in our securitizations. We are a
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REIT and, as such, make our investments with the intent to hold them for
long-term purposes. However, we may securitize a portion of our mortgage loan
portfolio when a securitization provides us with the best available form of
capital to fund additional long-term investments. In addition, we believe that
the REMIC certificates we retain from our securitizations provide our
stockholders with a more diverse real estate investment while maintaining the
returns we desire.
REMIC Certificates. We complete a securitization by transferring mortgage
loans to a newly created Real Estate Mortgage Investment Conduit ("REMIC")
which, in turn, issues mortgage pass-through certificates aggregating
approximately the same amount. A portion of the REMIC certificates are sold
to third parties and a portion of the REMIC certificates are retained by us.
The REMIC certificates we retain are subordinated in right of payment to the
REMIC certificates sold to third parties. A portion of the REMIC certificates
we retain are interest-only certificates which have no principal amount and
entitle us to receive cash flows designated as interest. In 1998, we
completed the securitization of approximately $129,300,000 of mortgage loans
and $26,400,000 face amount ($20,700,000 carrying value) of subordinated
REMIC certificates retained from a securitization we completed in 1993. In
the securitization, we sold approximately $121,400,000 face amount of senior
certificates at a weighted average pass-through rate of 6.3% and retained
$34,300,000 face amount of subordinated certificates along with the interest
only certificates. The subordinated and interest only certificates we
retained had an aggregate fair value of approximately $41,400,000 at the time
of the securitization and a weighted average effective yield of 18.9%. Prior
to 1997, we securitized mortgage loans with an aggregate outstanding
principal of approximately $354,827,000. At December 31, 1998, we had
investments in REMIC certificates with an estimated fair value of
$100,595,000.
Financing and Other Transactions. During 1998, we issued 2,000,000 shares of
8.5% Series C Convertible Preferred Stock in a private placement at $19.25 per
share for net proceeds of $37,605.000. The Series C Preferred Stock is
convertible into 2,000,000 shares of our common stock, has a liquidation value
of $19.25 per share and has an annual coupon of 8.5% payable quarterly.
We have a $170,000,000 Senior Unsecured Revolving Line of Credit that expires on
October 3, 2000. As of December 31, 1998, borrowings of $100,000,000 bearing
interest at LIBOR plus 1.25% were outstanding under the revolving credit
facility. Subsequent to December 31, 1998, we obtained a $25,000,000 term loan
that bears interest at LIBOR plus 1.25% and matures on October 2, 2000.
Distribution of LTC Healthcare, Inc. During 1998, we acquired 4,002 shares of
LTC Healthcare non-voting common stock for $2,001,000 in cash. We also
contributed equity securities with a book value of $788,000, 13 real estate
properties with a net book value of $61,462,000 that were encumbered by
mortgage debt of $29,263,000 and a minority interest liability of $3,461,000
on seven of the properties, and other related assets and liabilities with a
book value of $93,000 in exchange for an additional 36,000 shares of LTC
Healthcare non-voting common stock and borrowings by LTC Healthcare under an
unsecured line of credit provided by the Company of $21,396,000. Subsequent
to the contribution of the above assets and liabilities to LTC Healthcare,
they obtained mortgage financing of $17,400,000 from a third-party lender on
four of the unencumbered properties. LTC Healthcare utilized proceeds from
the mortgage debt and cash on hand to repay borrowings of $17,668,000 under
the unsecured line of credit. On September 30, 1998, the 40,002 shares of LTC
Healthcare non-voting common stock we held were converted into 3,335,882
shares of LTC Healthcare voting common stock. Concurrently, we completed the
spin-off of all LTC Healthcare voting common stock through a taxable dividend
distribution to the holders our common stock, Cumulative Convertible Series C
Preferred Stock and convertible subordinated debentures. One share of LTC
Healthcare common stock was distributed to each holder of LTC common stock,
Series C Preferred Stock and convertible subordinated debentures for each ten
shares of our common stock owned or that would have been issued upon
conversion of the convertible subordinated
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debentures and Series C Preferred Stock. Upon completion of the distribution,
LTC Healthcare began operating as a separate public company.
Investment and Other Policies
Objectives and Policies. We currently invest primarily in income-producing
long-term care facilities. Our investments consist of:
o mortgage loans secured by long-term care facilities;
o fee ownership of long-term care facilities which are leased to operators;
or
o participation in such investments indirectly through investments in
partnerships, joint ventures or other entities that themselves make direct
investments in such loans or facilities.
In evaluating potential investments, we consider such factors as:
o type of property;
o the location;
o construction quality, condition and design of the property;
o the property's current and anticipated cash flow and its adequacy to meet
operational needs and lease obligations or debt service obligations;
o the quality and reputation of the property's operator;
o the growth, tax and regulatory environments of the communities in which
the properties are located;
o the occupancy and demand for similar facilities in the area surrounding
the property, and
o the Medicaid reimbursement policies and plans of the state in which the
property is located.
We place primary emphasis on investing in long-term care facilities that have
low investment per bed/unit ratios and do not have to rely on the provision of
ancillary services to cover debt service or lease obligations. In addition, with
respect to skilled nursing facilities, we attempt to invest in facilities that
do not have to rely on a high percentage of private pay patients. We seek to
invest in facilities that are located in suburban and rural areas of states with
improving reimbursement climates. Prior to every investment, we conduct a
facility site review to assess the general physical condition of the facility,
the potential of additional sub-acute services and the quality of care the
operator provides. In addition, we review the environmental reports, state
survey and financial statements of the facility before the investment is made.
We prefer to invest in a facility that has a significant market presence in its
community and where state licensing procedures limit the entry of competing
facilities. Historically, the majority of our investments consisted of mortgage
loans secured by skilled nursing facilities. Due to our belief that assisted
living facilities are an increasingly important sector in the long-term care
market, the majority of our investments in recent years has consisted of direct
ownership of assisted living facilities. We believe that assisted living
facilities represent a lower cost long-term care alternative for senior adults
than skilled nursing facilities. We invest primarily in assisted living
facilities that attract the moderate-income private pay patients in smaller
communities, preferably in states that have adopted Medicaid waiver programs or
are in the process of adopting or reviewing their policies and reimbursement
program to provide funding for assisted living residences. We believe that
locating residences in a state with a favorable regulatory reimbursement climate
should provide a stable source of residents eligible for Medicaid reimbursement
to the extent private-pay residents are not available, and should provide
alternative sources of income for residents when their private funds are
depleted and they become Medicaid eligible.
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The only limitations regarding investments in any one type of property or joint
venture are:
o our Board of Directors has authorized us to invest up to 30% of our
adjusted gross real estate investment portfolio (adjusted to include
mortgage loans to third parties underlying the investment in REMIC
certificates) in assisted living facilities, and
o the terms of our existing revolving credit facility limit our investments
in the education and child care industry to $75 million and limit our
investments outside of health care real estate and the education and child
care industry to $20 million.
Borrowing Policies. We may incur additional indebtedness when, in the opinion of
our Board of Directors, it is advisable. We may incur such indebtedness to make
investments in additional long-term care facilities or to meet the distribution
requirements imposed upon REITs under the Internal Revenue Code of 1986, as
amended. For other short-term purposes, we may, from time to time, negotiate
lines of credit, or arrange for other short-term borrowings from banks or
otherwise. We may also arrange for long-term borrowings through public offerings
or from institutional investors.
In addition, we may incur mortgage indebtedness on real estate which we have
acquired through purchase, foreclosure or otherwise. We may also obtain mortgage
financing for unleveraged or underleveraged properties in which we have invested
or may refinance properties acquired on a leveraged basis. There is no
limitation on the number or amount of mortgages that may be placed on any one
property, and we have no policy with respect to limitations on borrowing,
whether secured or unsecured.
Prohibited Investments and Activities. Our policies, which are subject to change
by our Board of Directors without stockholder approval, impose certain
prohibitions and restrictions on various of our investment practices or
activities including prohibition against:
o acquiring any real property unless the consideration paid for such real
property is based on the fair market value of the property;
o investing in any junior mortgage loan unless by appraisal or other method,
the directors determine that
(a) the capital invested in any such loan is adequately secured on the
basis of the equity of the borrower in the property underlying such
investment and the ability of the borrower to repay the mortgage
loan; or
(b) such loan is a financing device we enter into to establish the
priority of our capital investment over the capital invested by
others investing with us in a real estate project;
o investing in commodities or commodity futures contracts (other than
interest rate futures, when used solely for hedging purposes);
o investing more than 1% of our total assets in contracts for sale of real
estate unless such contracts are recordable in the chain of title;
o holding equity investments in unimproved, non-income producing real
property, except such properties as are currently undergoing development
or are presently intended to be developed within one year, together with
mortgage loans on such property (other than first mortgage development
loans), aggregating to more than 10% of our assets.
Competition
We compete with other REITs, real estate partnerships, health care providers and
other investors, including commercial banks, institutional banks and insurance
companies, many of which will have greater financial resources and lower cost of
funds than we do, in the acquisition, leasing and financing of long-term care
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facilities. The operators compete on a local and regional basis with operators
of facilities that provide comparable services. Operators compete for patients
based on quality of care, reputation, physical appearance of facilities,
services offered, family preferences, physician referrals, staff and price.
Insurance
We obtain title insurance with respect to each of our investments. We
generally require: (i) with respect to each owned property, an American Land
Title Association Extended Coverage Owner's Policy of Title Insurance with an
insured amount equal to the purchase price, insuring that we hold fee simple
title to the property subject only to those liens and encumbrances approved
by us; and (ii) with respect to each mortgaged property, an American Land
Title Association Extended Coverage Lender's Policy of Title Insurance with
an insured amount equal to the loan amount, insuring our first-lien security
interest in the property subject only to those liens and encumbrances
approved by us. However, American Land Title Association Extended Coverage
Policies of Title Insurance are not available in all states, in which event
we require the broadest form of title coverage available in the particular
jurisdiction.
In addition, we require that our tenants (in the case of owned properties) and
borrowers (in the case of mortgaged properties) maintain comprehensive liability
insurance and casualty insurance with policy specifications and insured limits
customarily carried for similar properties and cause their insurers to name us
as an additional insured, loss payee and/or mortgagee, as appropriate depending
on the particular type of policy. In the case of casualty insurance, the insured
limits may not be less than the full replacement cost of the improvements
constructed on the property, and coverage is typically provided in the form of
an "all-risk" policy. However, there are certain types of losses that may either
be uninsurable or not economically insurable. For example, we generally require
our tenants and borrowers to carry flood insurance if the property is located
within a flood plain area as designated by the applicable governmental
authority, and earthquake insurance if the property is located in a state, such
as California, where the risk of earthquake damage is high. Such flood and
earthquake coverage is not always an insurable risk or may not be obtainable in
amounts at least equal to the full replacement cost of the improvements
constructed on the property. Accordingly, there is no assurance that adequate
coverage exists with respect to each investment should there be serious
flooding, seismic activities or other uninsurable casualty in the areas where
the properties constituting our investments are located. Should an uninsured (or
less than fully insured) loss occur, we could lose its investment in, and
anticipated profits and cash flow from, a property.
Employees
We currently employ 21 persons.
Government Financing and Regulation of Health Care
General. Both the federal and state governments are significant sources of
revenues for the operators of skilled nursing facilities who lease properties
from us or who have borrowed money from us and used their properties as
collateral for those borrowings. In addition, the skilled nursing facilities and
our other tenants and borrowers who provide health care related services are
often subject to extensive government regulation.
Government Financing. Medicare is a federal program that provides certain health
care benefits to beneficiaries who are 65 years of age or older, are disabled,
or qualify for the End Stage Renal Disease program. Historically, Medicare
covered the reasonable costs of certain post-hospital extended care services
furnished by skilled nursing facilities, including capital-related costs,
subject to limits on routine operating and capital-related costs.
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Medicaid is a program of medical assistance, funded jointly by the federal
government and the states for certain needy individuals and their dependents,
and certain other eligible persons. Under Medicaid, the federal government
provides grants to states that have medical assistance programs that are
consistent with federal standards. Medicaid programs or the equivalent are
currently in existence in all of the states in which we have nursing facility
investments. While these programs differ in certain respects from state to
state, they are all subject to certain federally imposed requirements, as a
substantial portion of the funds available under these programs is provided by
the federal government. Medicaid programs provide for payments to participating
health care facilities on behalf of the indigent and certain other eligible
persons. California and Texas provide for reimbursement at flat daily rates, as
determined by the responsible state agency and depending on certain levels of
care. In all other states, payments are based upon specific cost reimbursement
formulas established by the applicable state.
Up until July 1, 1998, Medicare and most state Medicaid programs utilized a
cost-based reimbursement system for skilled nursing facilities which reimbursed
these facilities for the reasonable direct and indirect allowable costs incurred
in providing routine services plus, in certain states, a return on equity,
subject to certain cost ceilings. These costs normally included allowances for
administrative and general costs as well as the costs of property and equipment
(depreciation and interest, fair rental allowance or rental expense). In certain
states, cost-based reimbursement was typically subject to retrospective
adjustment through cost report settlement, and for certain states, payments made
to a facility on an interim basis that were subsequently determined to be less
than or in excess of allowable costs could be adjusted through future payments
to the affected facility and to other facilities owned by the same owner. State
Medicaid reimbursement programs varied as to the methodology used to determine
the level of allowable costs which were reimbursed to operators.
o Prospective Payment System
Beginning on July 1, 1998, the congressionally mandated prospective
payment system was implemented for skilled nursing facilities. Under the
prospective payment system, skilled nursing facilities are paid a case-mix
adjusted federal per diem rate for Medicare-covered services provided by
skilled nursing facilities. The per diem rate is calculated to cover
routine service costs, ancillary costs and capital-related costs. The
phased-in implementation of the prospective payment system for skilled
nursing facilities began with the first cost-reporting period beginning in
fiscal years starting on or after July 1, 1998. The prospective payment
system is expected to be fully implemented over three such cost-reporting
periods. The effect of the implementation of the prospective payment
system on a particular skilled nursing facility will vary in relation to
the amount of revenue derived from Medicare patients for each skilled
nursing facility.
Skilled nursing facilities may need to restructure their operations to
accommodate the new Medicare prospective payment system reimbursement. In
part because of the uncertainty as to the effect of the prospective
payment system on skilled nursing facilities, in November 1998, Standard
and Poor's, an international rating agency that provides credit analysis
and information through the rating of financial instruments, placed many
skilled nursing facility companies on a "credit watch" because of the
potential negative impact of the implementation of the prospective payment
system on the financial condition of skilled nursing facilities, including
the ability to make interest and principal payments on outstanding
borrowings. In early March 1999, Standard & Poor's lowered the ratings of
several skilled nursing facility companies, including companies that
operate skilled nursing facilities in which we invest, because of the
impact of the implementation of the prospective payment system,
particularly those companies with substantial debt.
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o Balanced Budget Act of 1997
The Balanced Budget Act of 1997 signed by President Clinton on August 5,
1997 is expected to produce billions in net savings for the Federal
government. In addition, the Balanced Budget Act repealed the Boren
Amendment under which states were required to pay long-term care
providers, including skilled nursing facilities, rates that are
"reasonable and adequate to meet the cost which must be incurred by
efficiently and economically operated facilities." As a result of the
repeal of the Boren Amendment, states are now required by the Balanced
Budget Act to:
o use a public process for determining rates,
o publish proposed and final rates, the methodologies underlying the
rates, and justifications for the rates, and
o give methodologies and justifications.
During rate-setting procedures, states are required to take into account
the situation of facilities that serve a disproportionate number of
low-income patients with special needs. The Secretary of the Department of
Health and Human Services is required to study and report to Congress
within four years concerning the effect of state rate-setting
methodologies on the access to and the quality of services provided to
Medicaid beneficiaries. The Balanced Budget Act also provides the federal
government with expanded enforcement powers to combat waste, fraud and
abuse in delivery of health care services. Though applicable to payments
for services furnished on or after October 1, 1997, the new requirements
are not retroactive. Thus, states that have not proposed changes in their
payment methods or standards, or changes in rates for items and services
furnished on or after October 1, 1997, need not immediately implement a
Balanced Budget Act public approval process.
The Balanced Budget Act also created the Medicare+Choice program which
provides a variety of options for individuals entitled to Medicare Part A
and enrolled in Medicare Part B. The options include coordinated care
plans (including provider-sponsored organization plans), private fee for
service plans, and medical savings accounts plans. Medicare+Choice is
effective as of January 1, 1999. It is not possible at this time to
predict with any certainty the effect of Medicare+Choice on our tenants
and borrowers.
Both the Medicare and Medicaid programs contain specific requirements which must
be adhered to at all times by health care facilities in order to qualify under
the programs. The Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy,
intermediary determinations and governmental funding restrictions, all of which
may materially increase or decrease program reimbursement to health care
facilities. No assurance can be given as to whether the future funding of such
programs will remain at levels comparable to the present levels.
Anti-Fraud Laws and Regulations. There are various federal and state laws
prohibiting fraud by health care providers, including criminal provisions which
prohibit filing false claims or making false statements to receive payment or
certification under Medicare and Medicaid, or failing to refund overpayments or
improper payments. Violation of these federal provisions is a felony punishable
by up to five years imprisonment and/or $25,000 fines. Civil provisions prohibit
the knowing filing of a false claim or the knowing use of false statements to
obtain payment. The penalties for such a violation are fines of not less than
$5,000 nor more than $10,000, plus treble damages, for each claim filed.
There are also laws which govern referrals and financial relationships. The
federal Anti-Kickback Law prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in
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return for, or to induce, the referral of Medicare and Medicaid patients. A wide
array of relationships and arrangements, including ownership interests in a
company by persons who refer or who are in a position to refer patients, as well
as personal services agreements, have under certain circumstances, been alleged
or been found to violate these provisions. In addition to the Anti-Kickback
Statute, the federal government restricts certain financial relationships
between physicians and other providers of health care services.
State and federal governments are devoting increasing attention and resources to
anti-fraud initiatives against health care providers. The Health Insurance
Portability and Accountability Act of 1996 and the Balanced Budget Act expand
the penalties for health care fraud, including broader provisions for the
exclusion of providers from the Medicare and Medicaid programs. Further, under
Operation Restore Trust, a major anti-fraud demonstration project, the Office of
Inspector General of the U.S. Department of Health and Human Services, in
cooperation with other federal and state agencies, has focused on the activities
of skilled nursing facilities, home health agencies, hospices and durable
medical equipment suppliers in certain states in which we have properties. Due
to the success of Operation Restore Trust, the project has been expanded to
numerous other states and to additional providers including providers of
ancillary nursing home services.
Based upon information we periodically receive from our operators over the terms
of their respective leases and loans, we believe that the nursing facilities in
which we have investments are in substantial compliance with the various
regulatory requirements applicable to them, although there can be no assurance
that the operators are in substantial compliance or will remain in compliance in
the future.
Other Regulatory and Licensing Requirements. In addition to the requirements to
be met by skilled nursing facilities for participation in the Medicare and
Medicaid programs, skilled nursing facilities are subject to regulatory and
licensing requirements of federal, state and local authorities. The operator of
each skilled nursing facility is licensed annually by the board of health or
other applicable agency in each state. In granting and renewing licenses,
regulatory agencies consider, among other things, the physical buildings and
equipment, the qualifications of the administrative personnel and nursing staff,
the quality of care and continuing compliance with the laws and regulations
relating to the operation of the facilities. State licensing of facilities is a
prerequisite to certification under the Medicare and Medicaid programs. In the
ordinary course of business, the operators receive notices of deficiencies for
failure to comply with various regulatory requirements and take appropriate
corrective and preventive actions. We believe that the nursing facilities in
which we have investments are in compliance with the applicable licensing or
other regulation although there can be no assurance that the operators are or
will be in compliance at any time.
We have increased our investments in assisted living facilities in recent years.
Assisted living facilities are subject to certain state regulations and
licensing requirements. To qualify as a state licensed facility, assisted living
facilities must comply with regulations which address, among other things,
staffing, physical design, required services and resident characteristics.
Assisted living facilities are also subject to various local building codes and
other ordinances, including fire safety codes. These requirements vary from
state to state and are monitored to varying degrees by state agencies.
Currently, assisted living facilities are not regulated as such by the federal
government. State standards required for assisted living facility providers are
less stringent than those required of other licensed health care operators.
There can be no assurance that federal regulations governing the operation of
assisted living facilities will not be implemented in the future or that
existing state regulations will not be expanded. In addition, only certain
states have adopted laws or regulations permitting individuals with higher
acuity levels to remain in assisted living communities who may otherwise qualify
for placement in a nursing facility. While only certain states presently provide
for any Medicaid reimbursement for assisted living residences, several states
are currently reviewing their policies and reimbursement programs to provide
funding for
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assisted living residences. There can be no assurance that such states will
adopt the Medicaid waiver program.
Uncertainty of Health Care Reform
The health care industry is facing various challenges, including increased
government and private payor pressure on health care providers to control costs.
The pressure to control health care costs intensified during 1994 and 1995 as a
result of the national health care reform debate and continues into 1999 as
Congress attempted to slow the rate of growth of federal health care
expenditures as part of its effort to balance the federal budget.
The Balanced Budget Act enacted significant changes to the Medicare and Medicaid
programs designed to "modernize" payment and health care delivery systems while
achieving substantial budgetary savings. In seeking to limit Medicare
reimbursement for long term care services, Congress established the prospective
payment system for skilled nursing facility services to replace the cost-based
reimbursement system. In addition, there are numerous initiatives at the federal
and state levels for comprehensive reforms affecting the payment for and
availability of health care services. Congress and state legislatures can be
expected to continue to review and assess alternative health care delivery
systems and payment methodologies. Changes in the law, new interpretations of
existing laws, or changes in payment methodology may have a dramatic effect on
the definition of permissible or impermissible activities, the relative costs
associated with doing business and the amount of reimbursement by the government
and other third party payors.
In light of forthcoming regulations and continuing state Medicaid program
reform, no assurance can be given that the implementation of such regulations
and reform will not have a material adverse effect on our financial condition or
results of operations.
Taxation of our Company
General. Our management believes that we have been organized and have operated
in such a manner as to qualify for taxation as a REIT under Sections 856 to 860
of the Internal Revenue Code of 1986, as amended, commencing with our taxable
year ended December 31, 1992, and we intend to continue to operate in such a
manner. No assurance can be given that we have operated or will be able to
continue to operate in a manner so as to qualify or to remain so qualified. This
summary is qualified in its entirety by the applicable Internal Revenue Code
provisions, rules and regulations, and administrative and judicial
interpretations.
If we qualify for taxation as a REIT, we will generally not be subject to
federal corporate income taxes on our net income that is currently distributed
to stockholders. This treatment substantially eliminates the "double taxation"
(i.e., at the corporate and stockholder levels) that generally results from
investment in a corporation. However, we will continue to be subject to federal
income tax under certain circumstances.
Requirements for Qualification. The Internal Revenue Code defines a REIT as a
corporation, trust or association:
(1) which is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest;
(3) which would be taxable, but for Sections 856 through 860 of the
Internal Revenue Code, as a domestic corporation;
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(4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in value
of the outstanding stock of which is owned, actually or
constructively, by five or fewer individuals (including specified
entities); and
(7) which meets certain other tests, described below, regarding the
amount of its distributions and the nature of its income and assets.
The Internal Revenue Code provides that conditions (1) to (4), inclusive, must
be met during the entire taxable year and that condition (5) must be met during
at least 335 days of a taxable year of 12 months, or during a proportionate part
of a taxable year of less than 12 months.
Income Tests. There presently are two gross income requirements that we must
satisfy to qualify as a REIT:
o First, at least 75% of our gross income (excluding gross income from
"prohibited transactions," as defined below) for each taxable year
must be derived directly or indirectly from investments relating to
real property or mortgages on real property, including rents from
real property, or from certain types of temporary investment income.
o Second, at least 95% of our gross income (excluding gross income
from prohibited transactions) for each taxable year must be derived
from income that qualifies under the 75% test and all other
dividends, interest and gain from the sale or other disposition of
stock or securities.
A "prohibited transaction" is a sale or other disposition of property (other
than foreclosure property) held for sale to customers in the ordinary course of
business. Any gain realized from a prohibited transaction is subject to a 100%
penalty tax.
Asset Tests. We, at the close of each quarter of our taxable year, must also
satisfy three tests relating to the nature of our assets.
o First, at least 75% of the value of our total assets must be
represented by real estate assets (including stock or debt
instruments held for not more than one year purchased with the
proceeds of a stock offering or long-term (at least five years)
public debt offering of our company), cash, cash items and
government securities.
o Second, not more than 25% of our total assets may be represented by
securities other than those in the 75% asset class.
o Third, of the investments included in the 25% asset class, the value
of any one issuer's securities owned by us may not exceed 5% of the
value of our total assets and we may not own more than 10% of any
one issuer's outstanding voting securities.
Ownership of a Partnership Interest or Stock in a Corporation. We own interests
in various partnerships. In the case of a REIT that is a partner in a
partnership, Treasury regulations provide that for purposes of the REIT income
and asset tests the REIT will be deemed to own its proportionate share of the
assets of the partnership, and will be deemed to be entitled to the income of
the partnership attributable to such share. The ownership of an interest in a
partnership by a REIT may involve special tax risks, including
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<PAGE>
the challenge by the Internal Revenue Service of the allocations of income and
expense items of the partnership, which would affect the computation of taxable
income of the REIT, and the status of the partnership as a partnership (as
opposed to an association taxable as a corporation) for federal income tax
purposes.
We also own interests in a number of subsidiaries which are intended to be
treated as qualified real estate investment trust subsidiaries. The Internal
Revenue Code provides that such subsidiaries will be ignored for federal income
tax purposes and all assets, liabilities and items of income, deduction and
credit of such subsidiaries will be treated as assets, liabilities and such
items of our company.
We further own 100% of the nonvoting preferred stock in one subsidiary, LTC
Development Company, Inc., which represents approximately 99% of the economic
value of all classes of stock of LTC Development. LTC Development does not
qualify for treatment as a qualified REIT subsidiary.
If any partnership or qualified real estate investment trust subsidiary in which
we own an interest were treated as a regular corporation (and not as a
partnership or qualified real estate investment trust subsidiary) for federal
income tax purposes, we would likely fail to satisfy the REIT asset test
prohibiting a REIT from owning greater than 10% of the voting power of the stock
of any issuer, as described above, and would therefore fail to qualify as a
REIT. We believe that each of the partnerships and subsidiaries in which we own
an interest (except LTC Development) will be treated for tax purposes as a
partnership or qualified real estate investment trust subsidiary, respectively,
although no assurance can be given that the Internal Revenue Service will not
successfully challenge the status of any such organization.
President Clinton's fiscal year 2000 budget proposal contains a provision which
would amend the Internal Revenue Code to prohibit REITs from owning stock of a
corporation (other than a qualified real estate investment trust subsidiary)
possessing greater than 10% of the voting power or value of all classes of stock
of such corporation. This proposal would be effective with respect to stock
acquired on or after the date of the first Congressional committee action with
respect to the proposal. In addition, to the extent that a REIT's ownership of
stock in a subsidiary corporation is exempt from this proposal by virtue of the
proposal's effective date, such "grandfathered" status would terminate if such
subsidiary corporation (1) engaged in a trade or business in which it was not
engaged on the date of the first Congressional committee action on the proposal,
or (2) acquired substantial new assets on or after such date. In the event that
such grandfathered status were so terminated with respect to LTC Development,
and we did not dispose of our interest in LTC Development, we would fail the
third asset test discussed above and therefore fail to qualify as a REIT.
REMIC. A regular or residual interest in a REMIC will be treated as a real
estate asset for purposes of the REIT asset tests, and income derived with
respect to such interest will be treated as interest on an obligation secured by
a mortgage on real property, assuming that at least 95% of the assets of the
REMIC are real estate assets. If less than 95% of the assets of the REMIC are
real estate assets, only a proportionate share of the assets of and income
derived from the REMIC will be treated as qualifying under the REIT asset and
income tests. We believe that our REMIC interests fully qualify for purposes of
the REIT income and asset tests.
Annual Distribution Requirements. In order to qualify as a REIT, we are required
to distribute dividends (other than capital gain dividends) to our stockholders
annually in an amount at least equal to
(1) the sum of:
(A) 95% of our "real estate investment trust taxable income"
(computed without regard to the dividends paid deduction and our net
capital gain); and
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(B) 95% of the net income, if any (after tax), from foreclosure
property; minus
(2) the excess of certain items of non-cash income over 5% of our real
estate investment trust taxable income.
These annual distributions must be paid in the taxable year to which they
relate, or in the following taxable year if:
o declared before we timely file our tax return for such year;
o paid on or before the first regular dividend payment date after such
declaration; and
o we so elect and specify the dollar amount in our tax return.
Amounts distributed must not be preferential; that is, every stockholder of the
class of stock with respect to which a distribution is made must be treated the
same as every other stockholder of that class, and no class of stock may be
treated otherwise than in accordance with its dividend rights as a class.
To the extent that we do not distribute all of our net long-term capital gain or
distribute at least 95%, but less than 100%, of our "real estate investment
trust taxable income," as adjusted, it will be subject to tax on such amounts at
regular corporate tax rates. Furthermore, if we should fail to distribute during
each calendar year (or, in the case of distributions with declaration and record
dates in the last three months of the calendar year, by the end of the following
January) at least the sum of:
(1) 85% of our real estate investment trust ordinary income for such
year;
(2) 95% of our real estate investment trust capital gain income for such
year; and
(3) any undistributed taxable income from prior periods;
we would be subject to a 4% excise tax on the excess of such required
distributions over the amounts actually distributed. Any real estate investment
trust taxable income and net capital gain on which this excise tax is imposed
for any year is treated as an amount distributed during that year for purposes
of calculating such tax.
Failure to Qualify. If we fail to qualify for taxation as a REIT in any taxable
year, and certain relief provisions do not apply, we will be subject to tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. Distributions to stockholders in any year in which we
fail to qualify as a REIT will not be deductible by us, nor will any
distributions be required to be made. Unless entitled to relief under specific
statutory provisions, we will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances we would be entitled to
the statutory relief. Failure to qualify for even one year could substantially
reduce distributions to stockholders and could result in our incurring
substantial indebtedness (to the extent borrowings are feasible) or liquidating
substantial investments in order to pay the resulting taxes.
In addition, President Clinton's fiscal year 2000 budget proposal includes a
provision which, if enacted in its present form, would result in the immediate
taxation of all gain inherent in a C corporation's assets upon an election by
such corporation to become a REIT in taxable years beginning after January 1,
2000, and thus could effectively preclude us from re-electing to be taxed as a
REIT following a loss of its REIT status.
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<PAGE>
State and local taxation. We may be subject to state or local taxation in
various state or local jurisdictions, including those in which we transact
business or reside. The state and local tax treatment of our company may not
conform to the federal income tax consequences discussed above.
Statement Regarding Forward Looking Disclosure
Certain information contained in this annual 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 of
those terms. 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 affecting real estate investment trusts. Exhibit 99 to this annual
report contains a more comprehensive discussion of risks and uncertainties
associated with our business.
Item 2. PROPERTIES
Investment Portfolio
At December 31, 1998, our real estate investment portfolio consisted of
investments in 274 skilled nursing facilities with 31,276 beds, 90 assisted
living facilities with 4,301 units and six schools in 36 states. We had
approximately $410,659,000 (before accumulated depreciation of $26,972,000)
invested in facilities we own and lease to operators, approximately $180,964,000
invested in mortgage loans (before allowance for doubtful accounts of
$1,250,000), and approximately $100,595,000, at estimated fair value, invested
in REMIC certificates.
Skilled nursing facilities provide restorative, rehabilitative and nursing care
for people not requiring the more extensive and sophisticated treatment
available at acute care hospitals. Many skilled nursing facilities provide
ancillary services that include occupational, speech, physical, respiratory and
IV therapies, as well as provide sub-acute care services which are paid either
by the patient, the patient's family, or through federal Medicare or state
Medicaid programs. Assisted living facilities serve elderly persons who require
assistance with activities of daily living, but do not require the constant
supervision skilled nursing facilities provide. Services are usually available
24-hours a day and include personal supervision and assistance with eating,
bathing, grooming and administering medication. The facilities provide a
combination of housing, supportive services, personalized assistance and health
care designed to respond to individual needs.
The schools in our real estate investment portfolio are charter and private
schools. Charter schools provide an alternative to the traditional public
school. Charter schools are generally autonomous entities authorized by the
state or locality to conduct operations independent from the surrounding public
school district. Laws vary by state, but generally charters are granted by state
boards of education either directly or in conjunction with local school
districts or public universities. Operators are granted charters to establish
and operate schools based on the goals and objectives set forth in the charter.
Upon receipt of a charter, schools receive an annuity from the state for each
student enrolled. Unlike public or charter schools, private schools receive a
majority of their revenues from the students' parents.
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<PAGE>
Owned Properties. At December 31, 1998, we owned 54 skilled nursing facilities
with a total of 6,535 beds, 74 assisted living facilities with a total of 3,402
units and five schools in 24 states, representing a net investment of
approximately $383,687,000. The properties are leased pursuant to non-cancelable
leases generally with an initial term of 10 to 12 years. Many of the leases
contain renewal options and some contain options that permit the operators to
purchase the facilities.
The following table sets forth certain information regarding our owned
properties as of December 31, 1998:
<TABLE>
<CAPTION>
No. of No. of No. of No. of Beds Purchase Current Annual
Location SNFs ALFs Schools /Units(3) Encumbrances Lease Term (4) Price Rent Payments
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama 8 1 912 $ 14,392,000 72 $ 29,288,000 $ 3,441,000
Arizona 2 3 3 597 7,452,000 129 37,581,000 3,950,000
California 2 2 346 137 16,516,000 1,601,000
Colorado 4 184 122 11,841,000 1,173,000
Florida 10 5 1,682 103 63,121,000 6,412,000
Georgia 1 100 115 2,500,000 261,000
Idaho 4 148 128 9,756,000 977,000
Illinois 1 148 73 6,627,000 747,000
Indiana 2 78 140 5,070,000 487,000
Iowa 6 1 483 10,431,000 31 12,214,000 1,369,000
Kansas 3 4 290 5,339,000 108 8,917,000 872,000
Minnesota 1 - 178 3,788,000 379,000
Nebraska 4 156 128 9,332,000 959,000
New Jersey 1 1 39 180 9,025,000 931,000
New Mexico 1 109 172 8,432,000 745,000
N. Carolina 1 42 122 2,905,000 278,000
Ohio 6 237 132 15,386,000 1,553,000
Oklahoma 6 221 106 12,315,000 1,193,000
Oregon 1 5 432 4,191,000 127 25,620,000 2,531,000
Tennessee 2 224 115 5,550,000 580,000
Texas 13 13 2,386 20,564,000 87 66,093,000 7,435,000
Virginia 3 443 82 11,013,000 1,273,000
Washington 2 8 497 10,659,000 174 24,959,000 2,529,000
Wyoming 3 183 168 12,810,000 1,115,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 54 74 5 9,937 $73,028,000(1) $ 410,659,000(2) $ 42,791,000
===================================================================================================================================
</TABLE>
(1) Consists of: i) $55,432,000 of non-recourse mortgages payable by the
Company secured by 27 skilled nursing facilities containing a total of
3,265 beds, ii) $8,065,000 of tax-exempt bonds secured by 5 assisted
living facilities in Washington with 184 units, iii) $5,340,000 of capital
lease obligations on 4 assisted living facilities in Kansas with 134
units, and iv) $4,191,000 of multi-unit housing tax-exempt revenue bonds
on one skilled nursing facility in Oregon with 112 units.
(2) Of the total purchase price, $178,762,000 relates to investments in 54
skilled nursing facilities with 6,535 beds, $211,947,000 relates to
investments in 74 assisted living facilities with 3,402 units and
$19,950,000 relates to investments in five schools.
(3) Number of beds/units applies to skilled nursing facilities and assisted
living residences only.
(4) Weighted average remaining months in lease term.
The leases provide for a fixed minimum base rent during the initial and renewal
periods. Most of the leases provide for annual fixed rent increases or increases
based on 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.
At December 31, 1998, three of our controlled partnerships owned five skilled
nursing facilities that were leased to Sensitive Care, Inc., a Ft. Worth,
Texas-based skilled nursing operator. In January 1999, the state of
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Texas took control of the operations at these five facilities and placed a
trustee to oversee resident care. Subsequent to the actions by the state of
Texas, we entered into leases on the five properties with BMW Healthcare, Inc.,
another Texas-based skilled nursing operator. These leases commenced on March 1,
1999 and will continue for 10 years as long as the state of Texas issues
licenses to BMW Healthcare to operate these facilities. Prior to licensure, BMW
Healthcare is operating the properties under trustee supervision.
Mortgage Loans. At December 31, 1998, the Company had 71 mortgage loans secured
by first mortgages on 63 skilled nursing facilities with a total of 7,034 beds,
16 assisted living residences with 899 units and one school located in 23
states. At December 31, 1998, the mortgage loans had a weighted average interest
rate of 10.89%, generally have 25-year amortization schedules, have balloon
payments due from 1999 to 2018 and provide for certain facility fees. The
majority of the mortgage loans provide for annual increases in the interest rate
based upon a specified increase of 10 to 25 basis points.
The following table sets forth certain information regarding our mortgage loans
as of December 31, 1998:
<TABLE>
<CAPTION>
No. of Average Current Annual
No. of No. of No. of Beds Interest Months to Face Amount of Current Amount Debt Service
Location SNFs ALFs Schools /Units Rate % Maturity Mortgage Loans of Mortgage Loans (1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama 1 40 10.00 238 $ 500,000 $ 497,000 $ 58,000
Arizona 2 1 1 479 10.25-11.00 63 17,150,000 16,941,000 2,022,000
Arkansas 2 274 10.25-10.45 149 3,400,000 3,238,000 403,000
California 6 886 9.78-12.75 148 13,076,000 12,799,000 1,612,000
Colorado 5 1 476 8.91-12.52 85 12,440,000 12,270,000 1,399,000
Florida 6 2 908 9.90-12.05 116 25,929,000 25,485,000 3,069,000
Georgia 4 1 445 10.00-11.18 97 11,450,000 11,329,000 1,340,000
Illinois 2 191 9.58-11.30 94 3,150,000 3,121,000 347,000
Iowa 5 590 11.05-12.00 150 8,900,000 8,727,000 1,032,000
Kansas 2 197 10.16-12.13 160 3,600,000 3,560,000 433,000
Mississippi 1 180 11.32 94 5,465,000 5,443,000 662,000
Missouri 2 264 8.88-11.13 129 4,301,000 4,470,000 547,000
Montana 1 34 11.00 181 2,346,000 2,345,000 268,000
Nebraska 3 135 10.23-11.00 117 8,979,000 8,957,000 1,017,000
Nevada 1 100 10.63 141 1,200,000 1,129,000 145,000
N. Carolina 2 4 369 8.91-10.90 89 14,384,000 14,280,000 1,383,000
Ohio 1 150 10.39 88 5,200,000 5,083,000 586,000
Oklahoma 1 161 11.15 152 1,300,000 1,250,000 163,000
S. Carolina 5 3 637 8.91-12.10 94 18,927,000 18,850,000 2,087,000
Tennessee 3 201 10.98 82 4,842,000 4,746,000 574,000
Texas 7 791 10.25-11.70 145 10,145,000 9,909,000 1,243,000
Washington 4 310 10.40-11.90 146 4,500,000 4,387,000 564,000
Wisconsin 1 115 11.00 221 2,200,000 2,148,000 272,000
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL 63 16 1 7,933 $ 183,384,000 $180,964,000(2) $ 21,226,000
===================================================================================================================================
</TABLE>
(1) Includes principal and interest payments.
(2) Of the total current principal balance, $131,550,000, $42,914,000 and
$6,500,000 relates to investments in skilled nursing facilities, assisted
living facilities and schools, respectively.
In general, the mortgage loans may not be prepaid except in the event of the
sale of the collateral facility to a third party that is not affiliated with the
borrower, although partial prepayments (including the prepayment premium) are
often permitted where a mortgage loan is secured by more than one facility upon
a sale of one or more, but not all, of the collateral facilities to a third
party which is not an affiliate of the borrower. The terms of the mortgage loans
generally impose a premium upon prepayment of the loans depending upon the
period in which the prepayment occurs, whether such prepayment was permitted or
required, and certain other conditions such as upon the sale of the facility
under pre-existing purchase option, destruction or condemnation, or other
circumstances as approved by us. On certain loans, such prepayment amount is
based upon a percentage of the then outstanding balance of the loan, usually
declining ratably each year. For other loans, the prepayment
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<PAGE>
premium is based on a yield maintenance formula. In addition to a lien on the
mortgaged property, the loans are generally secured by certain non-real estate
assets of the facilities and contain certain other security provisions in the
form of letters of credit, pledged collateral accounts, security deposits,
cross-default and cross-collateralization features and certain guarantees.
REMIC Certificates. At December 31, 1998, the estimated fair value of the REMIC
certificate investments was $100,595,000 ($100,814,000, at amortized cost). The
REMIC certificates we retain are subordinate in rank and right of payment to the
REMIC certificates sold to third-party investors and as such would bear the
first risk of loss in the event of an impairment to any of the underlying
mortgages. The REMIC certificates are collateralized by four pools consisting of
117 first mortgage loans secured by 184 skilled nursing facilities with a total
of 20,972 beds in 26 states. Each mortgage loan, all of which we originated, is
evidenced by a promissory note and secured by a mortgage, deed of trust, or
other similar instrument that creates a first mortgage lien on a fee simple
estate in real property. The $381,894,000 current principal amount of mortgage
loans represented by the REMIC certificates have a weighted average interest
rate of approximately 11.03%, and scheduled maturities ranging from 1999 to
2028.
The following table sets forth certain information regarding the mortgage loans
securing the REMIC certificates as of December 31, 1998:
Original Current
Principal Principal Amount
Number Amount of of Remaining Current
of Number Remaining Mortgage Loans Annual Debt
Location Facilities of Beds Mortgage Loans (1) Service
- --------------------------------------------------------------------------------
Alabama 9 1,189 $ 22,526,000 $ 21,807,000 $ 2,771,000
Arizona 5 955 26,018,000 25,206,000 2,882,000
California 23 2,532 52,870,000 39,400,000 5,385,000
Colorado 1 177 2,000,000 1,964,000 235,000
Connecticut 4 499 10,656,000 10,299,000 1,316,000
Florida 7 945 32,310,000 31,371,000 3,713,000
Georgia 12 1,318 27,272,000 26,526,000 3,307,000
Illinois 6 679 12,426,000 11,928,000 1,508,000
Iowa 11 810 16,731,000 16,746,000 1,893,000
Kansas 1 66 1,200,000 1,172,000 143,000
Kentucky 1 67 726,000 702,000 89,000
Louisiana 1 127 1,600,000 1,557,000 199,000
Michigan 3 444 6,800,000 6,551,000 848,000
Mississippi 3 400 10,685,000 10,532,000 1,193,000
Missouri 6 645 10,989,000 10,663,000 1,325,000
Montana 6 543 15,508,000 15,130,000 1,778,000
Nebraska 6 570 10,014,000 9,692,000 1,206,000
New Mexico 8 673 20,833,000 20,182,000 2,196,000
N. Carolina 1 168 2,950,000 2,874,000 359,000
Ohio 3 243 7,000,000 6,504,000 823,000
Oklahoma 1 112 1,300,000 1,216,000 169,000
Oregon 2 168 1,610,000 1,595,000 165,000
S. Dakota 1 50 585,000 567,000 66,000
Tennessee 7 650 19,027,000 18,693,000 2,283,000
Texas 52 6,653 88,491,000 84,574,000 10,471,000
Washington 4 289 4,583,000 4,443,000 550,000
- --------------------------------------------------------------------------------
TOTAL 184 20,972 $406,710,000 $381,894,000 $46,873,000
================================================================================
(1) Included in the balances of the mortgages underlying the REMIC
certificates are $55,432,000 of non-recourse mortgages payable by our
subsidiaries. We originated these mortgages which were subsequently
transferred to the REMIC. The properties and the mortgage debt are
reflected in our balance sheet.
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<PAGE>
The mortgage loans underlying the REMIC certificates generally have 25-year
amortization schedules with final maturities due from 1999 to 2028, unless
prepaid prior thereto. Contractual principal and interest distributions with
respect to the $100,814,000 amortized cost basis of REMIC certificates
(excluding unrealized losses on changes in estimated fair value of $219,000) we
retained are subordinated to distributions of interest and principal with
respect to the $299,215,000 of REMIC certificates held by third parties. Thus,
based on the terms of the underlying mortgages and assuming no unscheduled
prepayments occur, contractual principal reductions on the REMIC certificates we
retained will commence in August 2003 with final maturity in April 2028.
Distributions on any of the REMIC certificates will depend, in large part, on
the amount and timing of payments, collections, delinquencies and defaults with
respect to the mortgage loans represented by the REMIC certificates, including
the exercise of certain purchase options under existing facility leases or the
sale of the mortgaged properties. Each of the mortgage loans securing the REMIC
certificates contain similar prepayment and security provisions as our mortgage
loans.
As part of the REMIC transactions discussed above, we serve as the sub-servicer
and, in such capacity, are responsible for performing substantially all of the
servicing duties relating to the mortgage loans represented by the REMIC
certificates. We receive monthly fees equal to a fixed percentage of the then
outstanding mortgage loan balance in the REMIC which, in management's opinion,
represent currently prevailing terms for similar transactions. In addition, we
will act as the special servicer to restructure any mortgage loans in the REMIC
that default.
At December 31, 1998, the REMIC certificates we held had an effective interest
rate of approximately 17.76% based on the expected future cash flows with no
unscheduled prepayments.
Major Operators
As of December 31, 1998, Sun Healthcare Group, Inc. operated 70 facilities
representing 19% ($174.3 million) of our adjusted gross real estate investment
portfolio (adjusted to include the mortgage loans to third parties underlying
the investment in REMIC certificates). Our real estate investments that are
operated by Sun Healthcare consists of $46.3 million of properties we own and
lease directly to Sun Healthcare and $31.7 million of mortgage loans and
mortgage loans underlying the REMIC certificates that are secured by properties
owned directly by Sun Healthcare. The remaining $96.3 million consists of
mortgage loans and mortgage loans underlying the REMIC certificates that are
secured by properties that are owned by independent entities that either lease
the properties to Sun Healthcare or have Sun Healthcare operate the property
pursuant to a management agreement.
Other than Sun Healthcare, no long-term care provider operated over 10% of our
adjusted gross real estate investment portfolio. Sun Healthcare is a publicly
traded company, and as such is subject to the filing requirements of the
Securities and Exchange Commission. Our financial position and our ability to
make distributions may be adversely affected by financial difficulties
experienced by Sun Healthcare, or any of our other major operators, including
bankruptcy, insolvency or general downturn in business of any such operator, or
in the event any such operator does not renew and/or extend its relationship
with us or our borrowers when it expires. See "Exhibit 99 -Risk Factors" for a
more comprehensive discussion of risks and uncertainties.
18
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Item 3. LEGAL PROCEEDINGS
From time to time, we are a party to various claims and lawsuits arising
in the ordinary course of business which, in our opinion, are not
singularly or in the aggregate material to our results of operations or
financial condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 4a. EXECUTIVE OFFICERS
Name Age Position
- --------------------------- --------
Andre C. Dimitriadis 58 Chairman, Chief Executive Officer and Director
James J. Pieczynski 36 President, Chief Financial Officer, and Director
Christopher T. Ishikawa 35 Senior Vice President and Chief Investment Officer
Raad K. Shawaf 33 Senior Vice President and General Counsel
Mr. Dimitriadis founded LTC in 1992 and was employed by Beverly Enterprises,
Inc., an owner/operator of long-term care facilities, retirement living
facilities and pharmacies, from October 1989 to May 1992, where he served as
Executive Vice President and Chief Financial Officer. Prior to that, he was
employed by American Medical International, Inc., an owner/operator of
hospitals, from 1985 to 1989, where he served as Executive Vice President -
Finance, Chief Financial Officer and Director. Mr. Dimitriadis is a member of
the board of Magellan Health Services.
Mr. Pieczynski has served as President and Director since September 8, 1997 and
Chief Financial Officer of LTC since May 1994. From May 1994 to September 1997,
he also served as Senior Vice President of LTC. He joined LTC in December 1993
as Vice President and Treasurer. Prior to that, he was employed by American
Medical International, Inc., an owner/operator of hospitals, from May 1990 to
December 1993, where he served as Assistant Controller and Director of
Development.
Mr. Ishikawa has served as Senior Vice President and Chief Investment Officer
since September 8, 1997. Prior to that, he served as Vice President and
Treasurer of LTC since April 1995. Prior to joining LTC, he was employed by
MetroBank from December 1991 to March 1995, where he served as First Vice
President and Controller. From December 1989 to November 1991, he was employed
by Mercantile National Bank where he served as Assistant Treasurer.
Mr. Shawaf has served as Senior Vice President and General Counsel since March
1, 1999. Prior to that, he served as Vice President and Assistant General
Counsel of LTC since September 1997. Prior to joining LTC, he was employed by
Pamela J. Privett, A Professional Law Corporation, which served as outside
General Counsel to LTC from June 1997 to September 1997. From November 1996 to
June 1997, he was the sole owner of Raad K. Shawaf, Attorney At Law, a real
estate law practice. From June 1993 to June 1996, he was an associate attorney
at Stern, Neubauer, Greenwald & Pauly.
19
<PAGE>
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock is listed on the New York Stock Exchange. Set forth below
are the high and low reported sale prices for our common stock as reported
on the NYSE.
1998 1997
----------------------- -------------------------
High Low High Low
-------- -------- -------- -----------
First Quarter $21.9375 $18.9375 $ 18.625 $ 16.625
Second Quarter 20.3125 18.00 18.25 16.125
Third Quarter 19.00 16.25 19.3125 18.00
Fourth Quarter 18.00 15.5625 21.50 18.8125
(b) As of December 31, 1998, we had approximately 927 stockholders of record
of our common stock.
(c) We declared total cash distributions as set forth below:
1998 1997
--------- ---------
First Quarter $ .365 $ .34
Second Quarter .39 .365
Third Quarter .39 .365
Fourth Quarter .39 .365
--------- ---------
$ 1.535 $ 1.435
========= =========
In addition, in connection with our distribution of our investment in LTC
Healthcare common stock to our common stockholders, Series C preferred
stockholders and convertible debenture holders, we declared a stock dividend in
the form of LTC Healthcare common stock equal to $0.469 per share.
We intend to distribute to its stockholders a majority of our funds from
operations and, in any event, an amount at least sufficient to satisfy the
distribution requirements of a REIT. Cash flows from operating activities
available for distribution to stockholders will be derived primarily from
interest and rental payments from its real estate investments. All
distributions will be made subject to approval of the Board of Directors and
will depend on the earnings of LTC, its financial condition and such other
factors as the Board of Directors deem relevant. In order to qualify for the
beneficial tax treatment accorded to REITs by Sections 856 through 860 of the
Internal Revenue Code, we are required to make distributions to holders of our
shares equal to at least 95% of our "REIT taxable income."
20
<PAGE>
Item 6. SELECTED FINANCIAL INFORMATION
The following table of selected financial information should be read in
conjunction with LTC's financial statements and related notes thereto included
elsewhere in this Annual Report on Form 10-K.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Operating Information:
Revenues $ 89,391 $ 73,434 $ 54,930 $ 35,569 $ 27,641
Expenses:
Interest expense 22,267 23,795 20,604 9,407 6,563
Depreciation and amortization 12,561 9,132 6,298 3,072 1,781
Amortization of founders' stock -- 31 114 221 372
Provision for loan losses 600 -- -- -- 550
Minority interest 1,415 1,205 898 57 --
Operating and other expenses 5,084 4,393 4,479 2,772 3,037
--------- --------- --------- --------- ---------
Total expenses 41,927 38,556 32,393 15,529 12,303
--------- --------- --------- --------- ---------
Other income (loss) 3,129 885 6,173 (1,656) 667
--------- --------- --------- --------- ---------
Income before cumulative effect of change in
accounting 50,593 35,763 28,710 18,384 16,005
Cumulative effect of accounting change -- -- -- -- 1,205
--------- --------- --------- --------- ---------
Net income 50,593 35,763 28,710 18,384 17,210
Preferred dividends (12,896) (6,075) -- -- --
--------- --------- --------- --------- ---------
Net income available to common stockholders $ 37,697 $ 29,688 $ 28,710 $ 18,384 $ 17,210
========= ========= ========= ========= =========
Per share Information:
Basic net income before cumulative effect of
accounting change $ 1.39 $ 1.26 $ 1.51 $ 1.02 $ 1.05
Cumulative effect of change in method
of accounting for REMIC Certificates -- -- -- -- 0.08
--------- --------- --------- --------- ---------
Basic net income $ 1.39 $ 1.26 $ 1.51 $ 1.02 $ 1.13
========= ========= ========= ========= =========
Diluted net income $ 1.39 $ 1.25 $ 1.44 $ 1.01 $ 1.11
========= ========= ========= ========= =========
Distributions declared (1) $ 1.535 $ 1.435 $ 1.335 $ 1.21 $ 1.10
========= ========= ========= ========= =========
Balance Sheet Information:
Real estate investments, net $ 663,996 $ 640,733 $ 488,134 $ 340,441 $ 220,025
Total assets 689,814 656,664 500,538 357,378 241,241
Total debt 229,695 249,724 283,472 174,083 55,835
Total liabilities 237,900 259,378 299,207 185,458 66,148
Minority interest 10,514 11,159 10,528 1,098 --
Total stockholders' equity 441,400 386,127 190,803 170,822 175,093
Other Information:
Cash flows from operating activities $ 61,885 $ 43,230 $ 33,789 $ 24,197 $ 19,242
Cash flows (used in) investing activities (51,529) (150,800) (90,317) (111,422) (73,546)
Cash flows provided by (used in) financing
activities (13,827) 109,396 58,242 74,393 65,465
Funds from operations $ 47,559 $ 38,735 $ 28,793 $ 23,944 $ 17,078
Basic funds from operations per share $ 1.76 $ 1.65 $ 1.52 $ 1.33 $ 1.12
Diluted funds from operations per share $ 1.71 $ 1.57 $ 1.44 $ 1.29 $ 1.09
</TABLE>
(1) Distributions may exceed current or accumulated net income.
21
<PAGE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Operating Results
Year ended December 31, 1998 compared to year ended December 31, 1997
Revenues for the year ended December 31, 1998 increased $15,957,000 or 22% to
$89,391,000 from $73,434,000 in 1997. The increase in revenues resulted from
increased rental income of $11,732,000, increased interest income from REMIC
certificates of $2,756,000 and an increase in interest and other income of
$4,381,000. Partially offsetting the above increases was a decrease of
approximately $2,912,000 in interest income on mortgage loans.
Rental income increased $5,814,000 as a result of property acquisitions
completed during 1997 and $7,941,000 due to property acquisitions completed
during 1998. "Same-store" rents increased $955,000 due to the receipt of
contingent rents and rental increases as provided for in the lease agreements.
Partially offsetting the above increases in rental income was a decrease of
$2,978,000 resulting from the sale of properties. During May 1998, the Company
completed its fourth securitization transaction resulting in an increase in
interest income from REMIC certificates and a decrease in interest income on
mortgage loans. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -Liquidity and Capital Resources." Increased interest
and other income for 1998 resulted primarily from interest income on notes
receivable from stockholders and increased commitment fees.
Total expenses for the year ended December 31, 1998 decreased to 47% of net
revenues compared to 53% in 1997. The decrease was primarily due to a decrease
in total interest expense as a result of the conversion of subordinated
debentures. Depreciation and amortization increased due the larger investment
base of owned properties in 1998 versus 1997. During 1998, a $600,000 provision
for loan losses was recorded for two loans that are currently on non-accrual
status. The increase in operating and other expenses is due to increased
salaries and benefits attributable to an increase in the number of full time
employees.
Other income for the year ended December 31, 1998 includes a gain of
approximately $9,926,000 on the sale of three skilled nursing facilities.
Offsetting the increase in other income attributable to the gain on the sale of
real estate was a decrease in the estimated fair value of REMIC certificates
that resulted in an unrealized loss of $6,797,000 during the current period as
compared to the prior period's unrealized gain of $57,000.
During the year ended December 31, 1998, the Company declared cash dividends of
$41,837,000 ($1.535 per share) and a stock dividend in the form of LTC
Healthcare common stock of $10,724,000 (fair value of $0.469 per share,
unaudited) on its common stock and dividends on its preferred stock totaling
$12,896,000. The dividends on the preferred stock represent the regular annual
dividend of $2.375 per share on the Series A Cumulative Preferred Stock and
$2.25 per share on the Series B Cumulative Preferred Stock and a partial
dividend on its Series C Convertible Preferred Stock (issued in September 1998).
Dividends declared during the year ended December 31, 1997 represent a partial
dividend for the month of March 1997 and the regular monthly dividend for the
remainder of the year on the Series A Cumulative Preferred Stock (issued in
March 1997) and a partial dividend for the month of December 1997 on the Series
B Cumulative Preferred Stock (issued in December 1997).
22
<PAGE>
As a result of the changes in revenues and expenses discussed above, net income
available to common stockholders increased $8,009,000 to $37,697,000 for the
year ended December 31, 1998 from $29,688,000 in 1997.
Year ended December 31, 1997 compared to the year ended December 31, 1996
Revenues for the year ended December 31, 1997 increased by $18,504,000 or 34% to
$73,434,000 from $54,930,000. The increase in revenues resulted primarily from
increased rental income of $10,273,000 and increased mortgage interest income of
$8,444,000. Rental income increased $5,932,000 as a result of property
acquisitions of $118,564,000 during 1997 and $4,530,000 as a result of a full
year's rental revenue from facilities acquired during 1996. Same-store rental
income increased $275,000 due to contingent rents and rental increases as
provided for in the lease agreements. Partially offsetting the above increases
in rental income was a decrease of $464,000 related to the sale of properties.
The increase in mortgage interest income resulted from the higher mortgage
investment base in 1997 as compared to 1996.
Total expenses for the year ended December 31, 1997, were 53% of total revenues
versus 59% for 1996. The decrease is due in large part to a reduction in
interest expense as a percentage of total revenues. The reduction in interest
expense is the result of the conversion of approximately $44,005,000 of
convertible subordinated debentures into common stock, lower interest rates and
the utilization of equity to fund financing activities during 1997. Depreciation
expense decreased slightly to 30% of rental income in 1997 compared to 31% of
rental income in 1996. Minority interest expense increased due to the inclusion
of a full years expense for the six partnerships formed during 1996.
During 1997, the estimated fair value of REMIC Certificates increased $57,000
compared to an increase of $6,173,000 in 1996 resulting in a significant
decrease in other income. Also decreasing other income were charges of
$1,120,000 recognized in connection with the accelerated vesting of 64,000
shares of restricted common stock and non-cash impairment charge of $1,866,000.
Partially offsetting these decreases in other income were gains of $1,015,000 on
the sale of the Company's investment in Home and Community Care, Inc. and
$2,799,000 on the sale of real estate investments.
During 1997, the Company declared dividends of $5,913,000 on its Series A
Cumulative Preferred Stock issued in March 1997 and a partial dividend of
$162,000 on its Series B Cumulative Preferred Stock issued in December 1997.
As a result of the changes in revenues and expenses discussed above, net income
available to common stockholders increased $978,000 to $29,688,000 in 1997 from
$28,710,000 in 1996.
Liquidity and Capital Resources
As of December 31, 1998, the Company's real estate investment portfolio
consisted of approximately $410,659,000 invested primarily in owned skilled
nursing and assisted living facilities (before accumulated depreciation of
$26,972,000), approximately $180,464,000 invested in mortgage loans (before
allowance for doubtful accounts of $1,250,000) and approximately $100,595,000
(fair value) in REMIC Certificates. As of December 31, 1998, the outstanding
certificate principal balance and the weighted average pass-through rate for the
senior REMIC Certificates (all held by outside third parties) was $299,215,000
and 7.29%, respectively. The effective yield on the subordinated REMIC
certificates held by the Company, based on expected future cash flows discounted
to give effect to potential risks associated with prepayments and unanticipated
credit losses was 17.76% at December 31, 1998. The Company's portfolio consists
of 274 skilled nursing facilities, 90 assisted living facilities and six schools
in 36 states.
23
<PAGE>
As of December 31, 1998, $100,000,000 was outstanding under the Company's
$170,000,000 Senior Unsecured Revolving Line of Credit which expires on October
3, 2000. The Revolving Credit Facility pricing varies between LIBOR plus 1.25%
and LIBOR plus 1.5% depending on the Company's leverage ratio. Currently the
pricing is LIBOR plus 1.25%. On March 8, 1999, the Company obtained a
$25,000,000 term loan that bears interest at LIBOR plus 1.25% and matures on
October 2, 2000.
As of December 31, 1998 the Company had $581,323,000 of unencumbered real estate
investments consisting of $300,264,000 in owned properties (before accumulated
depreciation), $180,464,000 in mortgage loans (before allowance for doubtful
accounts) and $100,595,000 in REMIC certificates. The Company believes that its
current cash from operations available for distribution or reinvestment, its
borrowing capacity (including borrowings against unencumbered real estate
investments), and the Company's ability to access the capital markets are
sufficient to provide for payment of its operating costs, provide funds for
distribution to its stockholders and to fund additional investments.
During the year ended December 31, 1998, the Company completed approximately
$204,776,000 in new investments consisting of approximately $47,452,000 in
mortgage loans and approximately $157,324,000 in owned properties. The Company
financed its investments with proceeds from its recently completed
securitization transaction as discussed below and the sale of real estate
properties, the assumption of mortgage loans and bonds of $11,224,000 bearing
interest at a weighted average rate of 11.6%, issuance of $3,432,000 in minority
interests, short-term borrowings and cash on hand.
During June 1998, the Company sold a skilled nursing facility that was acquired
in 1992 for approximately $11,600,000 and in September 1998 sold two skilled
nursing facilities that were acquired in 1994 for approximately $5,106,000. The
Company's initial and net investment in these three facilities was approximately
$7,654,000 and $6,332,000, respectively. In connection with the sale, proceeds
of approximately $4,271,000 were used to repay an outstanding mortgage loan
secured by one of the facilities. The mortgage loan was payable to the pool of
mortgage loans securing the Company's investment in REMIC Certificates. The
remaining proceeds were used to repay borrowings outstanding under the Company's
line of credit. The Company recognized a gain of approximately $9,926,000 on the
sale of these facilities.
During May 1998, the Company completed a securitization of approximately
$129,300,000 of mortgage loans with a weighted average interest rate of 10.2%
and $26,400,000 face amount ($20,700,000 carrying value) of subordinated
certificates, retained from a securitization completed in 1993, with an interest
rate of 9.78% on the face value (15.16% on the amortized cost) (the "1998-1
Pool"). As part of the securitization, the Company sold approximately
$121,400,000 face amount of senior certificates at a weighted average
pass-through rate of 6.3% and retained $34,300,000 face amount of subordinated
certificates along with the interest only certificates. The subordinated and
interest only certificates retained by the Company had an aggregate fair value
of approximately $41,400,000 at the time of the securitization and a weighted
average effective yield of 18.9%. Included in the 1998-1 Pool were 40 mortgage
loans, including mortgage loans of approximately $25,741,000 with a weighted
average interest rate of approximately 8.7% provided to wholly owned
subsidiaries and limited partnerships of the Company. Net proceeds of
approximately $108,613,000 from the above securitization were used to repay
borrowings outstanding under the Company's line of credit.
On September 2, 1998, the Company issued 2,000,000 shares of 8.5% Series C
Convertible Preferred Stock at $19.25 per share for net proceeds of $37,605,000.
The Series C Preferred Stock is convertible into 2,000,000 shares of the
Company's common stock, has a liquidation value of $19.25 per share and has an
annual coupon of 8.5%, payable quarterly. During 1998, the Company repurchased
and retired 200,000 shares of common stock for an aggregate purchase price of
approximately $3,345,000. On February 3,
24
<PAGE>
1999, the Company announced a stock repurchase plan of up to $5,000,000 of
common stock. As of March 19, 1999, the Company had repurchased and retired
316,800 shares of common stock for an aggregate purchase price of approximately
$4,108,000 under this plan.
On July 1, 1998, the Company redeemed the outstanding $90,000 principal amount
of its 8.5% Convertible Subordinated Debentures due 2000 (the "8.5% Debentures")
and the outstanding $20,000 principal amount of its 9.75% Convertible
Subordinated Debentures due 2004 (the "9.75% Debentures"). Including conversions
made in connection with the redemption of the 8.5% Debentures and the 9.75%
Debentures, during the year ended December 31, 1998, holders of approximately
$35,046,000 in principal amount of convertible subordinated debentures elected
to convert the debentures into 2,283,213 shares of common stock at prices
ranging from $15.00 to $17.25 per share. At December 31, 1998, the Company had
$56,667,000 principal amount of convertible subordinated debentures outstanding
which were convertible into 3,512,089 shares of common stock.
During 1998, LTC acquired 4,002 shares of LTC Healthcare, Inc. ("Healthcare")
non-voting common stock for $2,001,000 in cash. LTC also contributed equity
securities with a book value of $788,000, 13 real estate properties with a net
book value of $61,462,000 that were encumbered by mortgage debt of $29,263,000
and a minority interest liability of $3,461,000 on seven of the properties, and
other related assets and liabilities with a book value of $93,000 in exchange
for an additional 36,000 shares of Healthcare non-voting common stock and
borrowings by Healthcare under the unsecured line of credit provided by the
Company of $21,396,000. During 1998, the Company provided additional funding of
$8,635,000 under the unsecured line of credit. Subsequent to the contribution of
the above assets and liabilities by the Company to Healthcare, Healthcare
obtained mortgage financing of $17,400,000 from a third-party lender on four of
the unencumbered properties. Healthcare 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 the Company.
On September 30, 1998, the 40,002 shares of Healthcare non-voting common stock
held by the Company were converted into 3,335,882 shares of Healthcare voting
common stock. Concurrently, the Company completed the spin-off of all Healthcare
voting common stock through a taxable dividend distribution to the holders of
Company common stock, Cumulative Convertible Series C Preferred Stock ("Series C
Preferred Stock") and Convertible Subordinated Debentures (the "Debentures").
One share of Healthcare common stock was distributed to each holder of Company
common stock, Series C Preferred Stock and Debentures for each ten shares of
Company common stock owned and for each ten shares of Company common stock that
would have been issued upon conversion of the Debentures and Series C Preferred
Stock. The Company incurred costs of approximately $500,000 in connection with
the distribution. Upon completion of the distribution, Healthcare began
operating as a separate public company.
For book purposes, no gain was recognized on the distribution of Healthcare
common stock which had a net book value of approximately $10,724,000. The
distribution was a taxable dividend distribution and accordingly, for tax
purposes, the net assets were transferred at their net fair market value of
approximately $15,650,000 ($4.69 per share of Healthcare common stock) which
resulted in a taxable gain of approximately $4,900,000.
The Company and Healthcare have entered into various agreements which, among
other things, provide for a sharing of corporate overhead under an
administrative services agreement. During the year ended December 31, 1998, the
Company charged Healthcare an administrative services fee of approximately
$350,000. In addition, the Company provided Healthcare with a $20.0 million
unsecured line of credit that bears interest at 10% and matures in March 2008.
As of December 31, 1998 approximately $16,528,000 was outstanding under the line
of credit. The Company recorded interest income related to the unsecured line of
credit of $711,000 for the year ended December 31, 1998.
25
<PAGE>
During 1998 but subsequent to the spin-off, the Company acquired 299,900 shares
of Healthcare common stock, representing approximately 9.0% of Healthcare's
outstanding common stock, for an aggregate purchase price of approximately
$659,000.
On November 2, 1998, the Company entered into an interest rate swap agreement
whereby the Company effectively fixed the interest rate on LIBOR based variable
rate debt. Under this agreement, which expires in November 2000, the Company
will be credited interest at three month LIBOR and will incur interest at a
fixed rate of 4.74% on a notional amount of $50,000,000. The notional amounts of
interest rate agreements are used to measure interest to be paid or received and
do not represent the amount of exposure to credit loss.
The Company expects its future income and ability to make distributions from
cash flows from operations to depend on the collectibility of its mortgage loans
receivable, REMIC Certificates and rents. The collection of these loans,
certificates and rents will be dependent, in large part, upon the successful
operation by the operators of the skilled nursing facilities, assisted living
residences and schools owned by or pledged to the Company. The operating results
of the facilities will depend on various factors over which the operators/owners
may have no control. Those factors include, without limitation, the status of
the economy, changes in supply of or demand for competing long-term care
facilities, ability to control rising operating costs, and the potential for
significant reforms in the long-term care industry. In addition, the Company's
future growth in net income and cash flow may be adversely impacted by various
proposals for changes in the governmental regulations and financing of the
long-term care industry. The Company cannot presently predict what impact these
proposals may have, if any. The Company believes that an adequate provision has
been made for the possibility of loans proving uncollectible but will
continually evaluate the status of the operations of the skilled nursing and
assisted living facilities, the Company's borrowers and the underlying
collateral for mortgage loans and will make future revisions to the provision,
if considered necessary.
The Company's investments, principally its investments in mortgage loans, REMIC
Certificates, and owned properties, are subject to the possibility of loss of
their carrying values as a result of changes in market prices, interest rates
and inflationary expectations. The effects on interest rates may affect the
Company's costs of financing its operations and the fair market value of its
financial assets. The Company generally makes loans which have predetermined
increases in interest rates and leases which have agreed upon annual increases.
In as much as the Company initially funds its investments with its Revolving
Credit Facility, the Company is at risk of net interest margin deterioration if
medium and long-term rates were to increase between the time the Company
originates the investment and replaces the short-term variable rate borrowings
with a fixed rate financing. To help reduce the negative impact of changes in
interest rates, the Company partially hedges, or locks in, its net interest rate
spread on its investments with interest rate swaps, as previously described.
The REMIC certificates retained by the Company are subordinate in rank and right
of payment to the certificates sold to third-party investors and as such would,
in most cases, bear the first risk of loss in the event of an impairment to any
of the underlying mortgages. The returns on the Company's investment in REMIC
certificates are subject to certain uncertainties and contingencies including,
without limitation, the level of prepayments, estimated future credit losses,
prevailing interest rates, and the timing and magnitude of credit losses on the
underlying mortgages collateralizing the securities that are a result of the
general condition of the real estate market or long-term care industry. As these
uncertainties and contingencies are difficult to predict and are subject to
future events that may alter management's estimations and assumptions, no
assurance can be given that current yields will not vary significantly in future
periods. To minimize the impact of prepayments, the mortgage loans underlying
the REMIC certificates generally prohibit prepayment unless the property is sold
to an unaffiliated third party (with respect to the borrower).
26
<PAGE>
Certain of the REMIC certificates retained by the Company have designated
certificate principal balances and a stated certificate interest "pass-through"
rate. These REMIC certificates are subject to credit risk to the extent that
there are estimated or realized credit losses on the underlying mortgages, and
as such their effective yield would be negatively impacted by such losses. The
Company also retains the interest-only (I/O) Certificates, which provide cash
flow (interest-only) payments that result from the difference between the
interest collected from the underlying mortgages and interest paid on all the
outstanding pass-through rate certificates. In addition to the risk from credit
losses, the I/O Certificates are also subject to prepayment risk, in that
prepayments of the underlying mortgages reduce future interest payments of which
a portion flows to the I/O Certificates, thus, reducing their effective yield.
The Certificates' fair values are estimated, in part, based on a spread over the
applicable U.S Treasury rate, and consequently, are inversely affected by
increases or decreases in such interest rates. There is no active market in
these securities from which to readily determine their value. The estimated fair
values of both classes of Certificates are subject to change based on the
estimate of future prepayments and credit losses, as well as fluctuations in
interest rates and market risk. Although the Company is required to report its
REMIC Certificate investments at fair value, many of the factors considered in
estimating their fair value are difficult to predict and are beyond the control
of the Company's management, consequently, changes in the reported fair values
may vary widely and may not be indicative of amounts immediately realizable if
the Company was forced to liquidate any of the Certificates. See "Exhibit 99
- -Risk Factors" for a more comprehensive discussion of risks and uncertainties.
The Company believes that its current cash flow from operations available for
distribution or reinvestment, its borrowing capacity and the Company's ability
to access the capital markets are sufficient to provide for payment of its
operating costs, fund investments and provide funds for distribution to its
stockholders. In addition to its borrowing capacity, the Company is considering
various other proposals for additional long-term financing to meet the needs of
the Company.
Funds From Operations
The Company has adopted the definition of Funds From Operations ("FFO")
prescribed by the National Association of Real Estate Investment Trusts
("NAREIT"). FFO is defined as net income applicable to common stockholders
(computed in accordance with GAAP) excluding gains (or losses) from debt
restructuring and sales of property, plus depreciation of real property and
after adjustments for unconsolidated entities in which a REIT holds an interest.
In addition, the Company excludes any unrealized gains or losses resulting from
temporary changes in the estimated fair value of its REMIC Certificates from the
computation of FFO.
The Company believes that FFO is an important supplemental measure of operating
performance. FFO should not be considered as an alternative to net income or any
other GAAP measurement of performance as indicator of operating performance or
as an alternative to cash flows from operations, investing or financing
activities as a measure of liquidity. The Company believes that FFO is helpful
in evaluating a real estate investment portfolio's overall performance
considering the fact that historical cost accounting implicitly assumes that the
value of real estate assets diminishes predictably over time. FFO provides an
alternative measurement criteria, exclusive of certain non-cash charges included
in GAAP income, by which to evaluate the performance of such investments. FFO,
as used by the Company in accordance with the NAREIT definition may not be
comparable to similarly entitled items reported by other REITs that have not
adopted the NAREIT definition.
27
<PAGE>
The following table reconciles net income available to common stockholders to
FFO available to common stockholders (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income available to common stockholders $ 37,697 $ 29,688 $ 28,710
Real estate depreciation 12,561 9,104 6,256
Real estate depreciation included in equity earnings 430 -- --
Gain on sale of real estate (9,926) -- --
Unrealized (gain) loss on REMIC Certificates 6,797 (57) (6,173)
-------- -------- --------
FFO available to common stockholders $ 47,559 $ 38,735 $ 28,793
======== ======== ========
Diluted FFO available to common stockholders $ 55,871 $ 47,533 $ 38,764
======== ======== ========
Basic FFO per share $ 1.76 $ 1.65 $ 1.52
======== ======== ========
Diluted FFO per share $ 1.71 $ 1.57 $ 1.44
======== ======== ========
Shares for basic FFO per share 27,077 23,511 18,983
Shares for diluted FFO per share 32,762 30,281 26,828
</TABLE>
Year 2000
Currently many computer programs assume the first two digits of a year are "19"
and simply identify a year by the last two digits. It is widely anticipated
that, beginning in the year 2000 when the first two digits of a year are "20"
rather than "19", these computer programs will incorrectly identify the year
(i.e. the year 2000 will be incorrectly identified as 1900). Such
miscalculations could result in the disruption of operations that are reliant on
these computer programs. Computer programs that identify a year by four digits
are deemed to be year 2000 compliant. The statements in this section include
year 2000 readiness disclosure within the meaning of the Year 2000 Information
and Readiness Disclosure Act of 1998.
Status of the Company's Information Technology Systems and Non-Information
Technology Systems. Our primary use of information technology systems is its
internal accounting and information management software (collectively the
"Systems"). We have evaluated the Systems to assess whether they will function
properly with respect to dates in the year 2000 and beyond. Systems that were
determined to be non-compliant with the year 2000 and beyond will be upgraded or
replaced. Implementation of year 2000 compliant Systems and upgrades to existing
Systems are expected to be completed by mid-1999. The total cost associated with
modifications required to become year 2000 compliant will not be material to our
financial position, results of operations or liquidity. Due to our limited
reliance on complex Systems, we believe the year 2000 issue, as it relates to
its internal Systems, will not have a material adverse effect upon our financial
position, results of operations or liquidity.
We will also have year 2000 exposure in non-information technology areas as it
relates to owned properties and our leased corporate offices. There is a risk
that embedded chips in elevators, security systems, electrical systems and
similar technology-driven devices may stop functioning on January 1, 2000. All
of our owned properties are leased under triple-net leases and as such, the cost
to repair any of these items will be paid by the lessee. While any disruption in
services at our corporate offices due to failure of non-information technology
systems may be inconvenient and disruptive to day-to-day activities,
28
<PAGE>
it is not expected to have a material adverse effect on our financial position,
results of operations or liquidity.
Exposure to Third Party Year 2000 Issues. We depend upon the following third
parties:
o our tenants and borrowers for rents and cash flows;
o our financial institutions for availability of working capital and capital
markets financing; and
o our transfer agent to maintain and track investor information.
If our primary tenants or borrowers are not year 2000 compliant, or if they face
disruptions in their cash flows due to year 2000 issues, we could face
significant temporary disruptions in our cash flows after that date. These
disruptions could be compounded if the commercial banks that process our cash
receipts and disbursements are not year 2000 compliant. If there are significant
disruptions to the capital markets as a result of year 2000 issues, our ability
to access the capital markets to fund investments could be impaired.
Neither we nor our lessees or mortgagors can be assured that the federal and
state governments, upon which our lessees rely for Medicare and Medicaid
revenue, will be in compliance in a timely manner. The General Accounting Office
has reported that the Health Care Financing Administration, which runs Medicare,
is behind schedule in taking steps to deal with the year 2000 issue and that it
is highly unlikely that all of the Medicare systems will be compliant in time to
ensure the delivery of uninterrupted benefits and services into the year 2000.
The General Accounting Office has also reported that, based upon its survey of
the states, the District of Columbia and three territories, less than 16% of the
automated systems used by state and local government to administer Medicaid are
reported to be year 2000 compliant. Due to the general uncertainty surrounding
the readiness of third-party tenants and other third-parties, including the
federal and state governments, with which our lessees do business, we are unable
at this time to determine whether non-compliance with the year 2000 issue by
third-parties will have a material impact on our financial position, results of
operations or liquidity.
Contingency Plan. In the event we experience a significant disruption in cash
receipts due to the a delay in Medicare or Medicaid receipts by our tenants or
due to other year 2000 non-compliance issues, we would seek additional liquidity
from our lenders and slow our investment activity.
Readers are cautioned that forward-looking statements contained in the above
discussion regarding year 2000 compliance should be read in conjunction with the
disclosure under the heading "-Statement Regarding Forward Looking Disclosure"
set forth below.
Statement Regarding Forward Looking Disclosure
Certain information contained in this annual 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 of those terms. 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 affecting real estate investment trusts. Exhibit 99 to this annual
report contains a more comprehensive discussion of risks and uncertainties
associated with our business.
29
<PAGE>
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Readers are cautioned that statements contained in this section "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.
We are exposed to market risks associated with changes in interest rates as they
relate to our mortgage loans receivable, investments in REMIC certificates and
debt. Interest rate risk is 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.
To modify and manage the interest characteristics of our outstanding debt and
limit the effects of interest rates on our operations, we may utilize a variety
of financial instruments, including interest rate swaps, caps, floors and other
interest rate exchange contracts. The use of these types of instruments to hedge
our exposure to changes in interest rates carries additional risks such as
counter-party credit risk and legal enforceability of hedging contracts. We do
not enter into any transactions for speculative or trading purposes.
Our future earnings, cash flows and estimated fair values relating to financial
instruments are dependent upon prevalent market rates of interest, such as LIBOR
or term rates of U.S. Treasury Notes. Changes in interest rates generally impact
the fair value, but not future earnings or cash flows, of mortgage loans
receivable, our investment in REMIC certificates and fixed rate debt. For
variable rate debt, such as our revolving line of credit, changes in interest
rates generally do not impact the fair value, but do affect future earnings and
cash flows. We have partially mitigated the impact of interest rate changes on
our revolving line of credit with an interest rate swap agreement.
At December 31, 1998, based on the prevailing interest rates for comparable
loans and estimates made by management, the fair value of our mortgage loans
receivable was approximately $181.7 million. A 1% increase in such rates would
decrease the estimated fair value of our mortgage loans by approximately $7.5
million while a 1% decrease in such rates would increase their estimated fair
value by approximately $8.2 million. A 1% increase or decrease in applicable
interest rates would not have a material impact on the fair value of our
investment in REMIC certificates or fixed rate debt.
Assuming the borrowings outstanding under our revolving line of credit at
December 31, 1998 remain constant and after giving effect to our interest rate
swap agreement, a 1% increase in interest rates would increase annual interest
expense on our revolving line of credit by approximately $500,000. Conversely, a
1% decrease in interest rates would decrease annual interest expense on our
revolving line of credit by $500,000.
These estimated impact of changes in interest rates discussed above are
determined by considering the impact of the hypothetical interest rates on our
borrowing costs, interest rate swap agreement, lending rates and current U.S.
Treasury rates from which our financial instruments may be priced. We do not
believe that future market rate risks related to our financial instruments will
be material to our financial position or results of operations. These analyses
do not consider the effects of industry specific events, changes in the real
estate markets, or other overall economic activities that could increase or
decrease the fair value of our financial instruments. If such events or changes
were to occur, we would consider taking actions to mitigate and/or reduce any
negative exposure to such chantes. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in our capital structure.
30
<PAGE>
Item 8. FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors ............................................ 32
Consolidated Balance Sheets as of December 31, 1998 and 1997 .............. 33
Consolidated Statements of Income for the years ended
December 31, 1998, 1997 and 1996 ....................................... 34
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996 ................................. 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 ....................................... 36
Notes to Consolidated Financial Statements ................................ 37
31
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LTC Properties, Inc.
We have audited the accompanying consolidated balance sheets of LTC Properties,
Inc. as of December 31, 1998 and 1997 and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. Our audits also included the financial statement
schedules listed in the index at Item 14(a). 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LTC Properties,
Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
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
January 19, 1999
32
<PAGE>
LTC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Real Estate Investments:
Buildings and improvements, net of accumulated depreciation and
amortization: 1998 - $26,972; 1997 - $20,042 $ 366,891 $ 282,582
Land 16,796 16,246
Mortgage loans receivable held for sale, net of allowance for doubtful accounts:
1998 - $1,250; 1997 - $1,000 179,714 254,094
REMIC Certificates at estimated fair value 100,595 87,811
--------- ---------
Real estate investments, net 663,996 640,733
Other Assets:
Cash and cash equivalents 1,503 4,974
Debt issue costs, net 2,040 3,733
Interest receivable 3,350 3,862
Prepaid expenses and other assets 2,397 3,362
Note receivable from LTC Healthcare, Inc. 16,528 --
--------- ---------
25,818 15,931
--------- ---------
Total assets $ 689,814 $ 656,664
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible subordinated debentures due 1999 - 2002 $ 56,667 $ 91,823
Bank borrowings 100,000 87,500
Mortgage loans payable 55,432 56,785
Bonds payable and capital lease obligations 17,596 13,616
Accrued interest 3,135 4,453
Accrued expenses and other liabilities 4,085 4,429
Distributions payable 985 772
--------- ---------
Total liabilities 237,900 259,378
Minority interest 10,514 11,159
Commitments -- --
Stockholders' equity:
Preferred stock $0.01 par value; 10,000,000 shares authorized;
shares issued and outstanding: 1998 - 7,080,000; 1997 - 5,080,000 165,500 127,000
Common stock $0.01 par value; 40,000,000 shares authorized; shares issued
and outstanding: 1998 - 27,660,712; 1997 - 25,025,003 277 250
Capital in excess of par value 311,113 277,732
Cumulative net income 158,270 107,677
Notes receivable from stockholders (11,200) (9,429)
Cumulative distributions (182,560) (117,103)
--------- ---------
Total stockholders' equity 441,400 386,127
--------- ---------
Total liabilities and stockholders' equity $ 689,814 $ 656,664
========= =========
</TABLE>
See accompanying notes
33
<PAGE>
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Rental income $ 42,534 $ 30,802 $ 20,529
Interest income from mortgage loans 23,030 25,942 17,498
Interest income from REMIC Certificates 16,945 14,189 14,383
Interest and other income 6,882 2,501 2,520
-------- -------- --------
Total revenues 89,391 73,434 54,930
-------- -------- --------
Expenses:
Interest expense 22,267 23,795 20,604
Depreciation and amortization 12,561 9,163 6,412
Provision for loan losses 600 -- --
Minority interest 1,415 1,205 898
Operating and other expenses 5,084 4,393 4,479
-------- -------- --------
Total expenses 41,927 38,556 32,393
-------- -------- --------
Other income /(loss):
Unrealized holding gain/(loss) on changes in
estimated fair value of REMIC Certificates (6,797) 57 6,173
Gain on sales of real estate investments 9,926 -- --
Other income, net -- 828 --
-------- -------- --------
Total other income, net 3,129 885 6,173
-------- -------- --------
Net income 50,593 35,763 28,710
Preferred dividends 12,896 6,075 --
-------- -------- --------
Net income available to
common stockholders $ 37,697 $ 29,688 $ 28,710
======== ======== ========
Net Income Per Common Share:
Basic net income per common share $ 1.39 $ 1.26 $ 1.51
======== ======== ========
Diluted net income per common share $ 1.39 $ 1.25 $ 1.44
======== ======== ========
</TABLE>
See accompanying notes
34
<PAGE>
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Shares Notes
---------------------- Capital in Cumulative Receivable
Preferred Common Preferred Common Excess of Net from Cumulative
Stock Stock Stock Stock Par Value Income Stockholders Distributions
---------- --------- --------- --------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 -- 18,297 $ -- $ 183 $ 178,453 $ 43,204 $ -- $ (51,018)
Amortization of Founders' stock -- -- -- -- 114 -- -- --
Exercise of stock options -- 3 -- -- 39 -- -- --
Conversion of debentures -- 1,304 -- 13 18,521 -- -- --
Repurchase of common stock -- (120) -- (1) (1,830) -- -- --
Net income -- -- -- -- -- 28,710 -- --
Common stock distributions
($1.335 per share) -- -- -- -- -- -- -- (25,585)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance-December 31, 1996 -- 19,484 -- 195 195,297 71,914 -- (76,603)
--------- --------- --------- --------- --------- --------- --------- ---------
Amortization of Founders' stock -- -- -- -- 31 -- -- --
Issuance of Series A
Preferred Stock 3,080 -- 77,000 -- (3,200) -- -- --
Issuance of Series B
Preferred Stock 2,000 -- 50,000 -- (2,200) -- -- --
Issuance of common stock -- 2,000 -- 20 35,045 -- -- --
Exercise of stock options -- 718 -- 7 8,205 -- (9,862) --
Payments on stockholder notes -- -- -- -- -- -- 433 --
Amortization of restricted stock -- 91 -- 1 1,639 -- -- --
Conversion of debentures -- 2,732 -- 27 42,915 -- -- --
Net income -- -- -- -- -- 35,763 -- --
Preferred stock dividends -- -- -- -- -- -- -- (6,075)
Common stock distributions
($1.435 per share) -- -- -- -- -- -- -- (34,425)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance - December 31, 1997 5,080 25,025 127,000 250 277,732 107,677 (9,429) (117,103)
--------- --------- --------- --------- --------- --------- --------- ---------
Issuance of Series C
Preferred Stock 2,000 -- 38,500 -- (895) -- -- --
Exercise of stock options -- 147 -- 2 1,557 -- (2,313) --
Payments on stockholder notes -- -- -- -- -- -- 542 --
Conversion of debentures -- 2,283 -- 23 34,622 -- -- --
Repurchase of common stock -- (200) -- (2) (3,343) -- -- --
Issuance of restricted stock -- 406 -- 4 (4) -- -- --
Amortization of restricted stock -- -- -- -- 1,491 -- -- --
Conversion of partnership units -- -- -- -- (47) -- -- --
Net income -- -- -- -- -- 50,593 -- --
Preferred stock dividends -- -- -- -- -- -- -- (12,896)
Common stock distributions - cash
($1.535 per share) -- -- -- -- -- -- -- (41,837)
Common stock distributions - stock
($0.469 per share) -- -- -- -- -- -- -- (10,724)
--------- --------- --------- --------- --------- --------- --------- ---------
Balance - December 31, 1998 7,080 27,661 $ 165,500 277 $ 311,113 158,270 (11,200) $(182,560)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes
35
<PAGE>
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 50,593 $ 35,763 $ 28,710
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 12,561 9,163 6,412
Unrealized holding (gain)/loss on estimated fair value of REMIC
Certificates 6,797 (57) (6,173)
Gain on sale of real estate investments (9,926) (2,799) --
Gain on disposition of other assets -- (1,015) --
Expense related to vesting of restricted stock 1,491 1,120 --
Non-cash impairment charge -- 1,866 --
Other non-cash charges 2,220 1,832 1,883
(Increase) decrease in interest receivable 512 (1,204) (875)
(Increase) in prepaid, other assets and allowance (122) (1,249) (99)
Increase (decrease) in accrued interest (1,118) (1,562) 2,819
Increase (decrease) in accrued expenses and other liabilities (1,123) 1,372 1,112
--------- --------- ---------
Net cash provided by operating activities 61,885 43,230 33,789
INVESTING ACTIVITIES:
Investment in real estate mortgages (47,452) (107,487) (99,440)
Acquisition of real estate properties, net (142,668) (114,891) (95,285)
Proceeds from sale of real estate properties, net 16,706 29,004 7,589
Proceeds from sale of REMIC Certificates, net 108,613 11,811 86,674
Principal payments on mortgage loans receivable 10,758 24,977 2,272
Investment in LTC Healthcare, Inc. (2,001) -- --
Advances to LTC Healthcare, Inc. (12,800) -- --
Repayment of advances to LTC Healthcare, Inc. 17,668 -- --
Return of investment in unconsolidated affiliates -- 5,000 --
Proceeds from sale of investments, net -- 1,015 --
Restricted cash -- -- 8,300
Other (353) (229) (427)
--------- --------- ---------
Net cash used in investing activities (51,529) (150,800) (90,317)
FINANCING ACTIVITIES:
Proceeds from issuance of convertible debentures -- -- 60,000
Proceeds from issuance of common stock, net -- 35,065 39
Proceeds from issuance of preferred stock, net 37,605 121,600 --
Debt issue costs -- (1,877) (2,167)
Distributions paid (54,520) (46,407) (24,670)
Bank borrowings 276,000 445,032 219,000
Repayment of bank borrowings (263,500) (436,932) (188,070)
Principal payments on mortgage loans, notes payable
and capital lease obligations (5,077) (5,869) (3,893)
Repurchase of common stock (3,345) -- (1,831)
Other (990) (1,216) (166)
--------- --------- ---------
Net cash provided by financing activities (13,827) 109,396 58,242
--------- --------- ---------
Increase (decrease) in cash and cash equivalents (3,471) 1,826 1,714
Cash and cash equivalents, beginning of year 4,974 3,148 1,434
--------- --------- ---------
Cash and cash equivalents, end of year $ 1,503 $ 4,974 $ 3,148
========= ========= =========
Supplemental disclosure of cash flow information:
Interest paid $ 22,478 $ 23,985 $ 16,631
</TABLE>
See accompanying notes
36
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
LTC Properties, Inc. (the "Company"), a Maryland corporation, commenced
operations on August 25, 1992. The Company is a real estate investment trust
("REIT") that invests primarily in long-term care facilities through mortgage
loans, facility lease transactions and other investments. As of December 31,
1998, the Company had investments in 274 skilled nursing facilities, 90 assisted
living residences and 6 schools in 36 states.
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 its
controlled partnerships. All intercompany accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made to the
prior period financial statements to conform to the current year presentation.
Use of Estimates. Preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Cash Equivalents. Cash equivalents consist of highly liquid investments with a
maturity of three months or less and are stated at cost which approximates
market.
Land, Buildings and Improvements. Land, buildings and improvements are recorded
at cost. Impairment losses are recorded when events or changes in circumstances
indicate the asset is impaired and the estimated undiscounted cash flows to be
generated by the asset are less than its carrying amount. Management assesses
the impairment of properties individually and impairment losses are calculated
as the excess of the carrying amount of the real estate over its fair value.
Depreciation is provided on a straight-line basis over the estimated useful
lives of the assets ranging from 7 years for equipment to 40 years for
buildings.
Mortgage Loans Receivable. The Company may securitize certain of the mortgage
loans it originates in transactions accounted for as sales when a securitization
provides the best available form of capital to fund additional long-term
investments. Historically, the Company has sold its mortgage loans solely in
connection with its REMIC securitizations and does not anticipate selling any
mortgage loans other than in the course of completing future securitizations.
However, since certain mortgage loans may be securitized in the future, direct
investments in mortgage loans are classified as held for sale and carried at the
lower of cost or market. If the mortgage loans aggregate cost basis exceeds
their aggregate market value, a valuation allowance is established and the
resulting amount is included in the determination of net income. Changes in the
valuation allowance are included in current period earnings. In determining the
estimated market value for mortgage loans, the Company considers estimated
prices and yields, based in part on a spread over the applicable U.S. Treasury
Note Rate, sought by qualified institutional buyers of the REMIC Certificates
originated in the Company's securitizations.
Investments in REMIC Certificates. Generally, the Company maintains a long-term
investment interest in mortgage loans it securitizes through the retention of a
portion of the resulting REMIC Certificates which are carried at fair value.
Significant judgment is used in estimating the REMIC Certificates' fair value
since no ready market exists. Management considers factors which affect the
REMIC
37
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Certificates' projected cash flows including, but not limited to, actual and
estimated prepayments, projected credit losses, if any, on the underlying
mortgages, as well as general economic and regulatory factors affecting the
long-term care industry and prevailing market interest rate conditions. Since
many of these factors are difficult to predict and are beyond the control of
management, changes in the reported fair values may vary widely and may not be
indicative of amounts immediately realizable if the Company were forced to
liquidate its investment in REMIC Certificates. Changes in the estimated fair
value of REMIC Certificates are recorded as a separate component of earnings.
Mortgage Servicing Rights. The Company sub-services mortgage loans that are
collateral for REMIC Certificates issued in its securitization transactions for
which it receives servicing fees, based on market rates for such services at the
time the securitization is completed, equal to a fixed percentage of the
outstanding principal on the collateral loans. A separate asset for servicing
rights is not recognized since the servicing fees received only adequately
compensate the Company for the cost of servicing the loans. The fair value of
servicing rights for mortgage loans originated and retained by the Company are
estimated based on the fees received for servicing mortgage loans that serve as
collateral for REMIC Certificates. All costs to originate mortgage loans are
allocated to the mortgage loans since the fair value of servicing rights only
sufficiently covers the servicing costs.
Interest Rate Contracts. Firm commitments subject the Company to interest rate
risk to the extent that debt or other fixed rate financing will be used to
finance the commitments. The Company may elect to enter into interest rate
contracts to hedge such financing thereby reducing its exposure to interest rate
risk. Interest rate contracts are designated as hedges of assets intended for
securitization when the significant characteristics and expected terms of the
securitization are identified and it is probable the securitization will occur.
These contracts are entered into in notional amounts that generally correspond
to the principal amount of the assets to be securitized. The Company effectively
locks in its net interest margin on the securitization when the interest rate
contract is entered into since changes in the market value of these contracts
respond inversely to changes in the market value of the hedged assets. Gains or
losses on interest rate contracts designated as hedges of assets to be
securitized are deferred and recognized upon the completion of the
securitization. The Company may also manage interest rate risk by entering into
interest rate swap agreements whereby the Company effectively fixes the interest
rate on variable rate debt. The differential between interest paid and received
on interest rate swaps is recognized as an adjustment to interest expense.
Revenue Recognition. Interest income on mortgage loans and REMIC Certificates is
recognized using the effective interest method. Base rent under operating leases
are accrued as earned over the terms of the leases. Contingent rental income,
equal to a percentage of increased revenue over defined base period revenue of
the long-term care facility operations, is recognized as earned.
Federal Income Taxes. The Company qualifies as a REIT under the Internal Revenue
Code of 1986, as amended and as such, no provision for Federal income taxes has
been made. A REIT may deduct distributions to its stockholders from its taxable
income. If at least 100% of a REIT's taxable income is distributed to its
stockholders and it complies with other Internal Revenue Code requirements, a
REIT generally is not subject to Federal income taxation.
For Federal tax purposes, depreciation is generally calculated at a rate of 3.6%
based on the assets' tax basis (which approximates cost) using the straight-line
method over a period of 27.5 years. At Earnings and profits, which determine the
taxability of dividends to stockholders, differ from net
38
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
income for financial statement purposes due to the treatment of certain interest
income and expense items and depreciable lives and basis of assets under the
Internal Revenue Code.
Concentrations of Credit Risks. Financial instruments which potentially subject
the Company to concentrations of credit risk consist primarily of cash and cash
equivalents, REMIC Certificates, mortgage loans receivable, operating leases on
owned properties and interest rate swaps. The Company's financial instruments,
principally REMIC Certificates and mortgage loans receivable, are subject to the
possibility of loss of carrying value as a result of the failure of other
parties to perform according to their contractual obligations or changes in
market prices which may make the instrument less valuable. The Company obtains
various collateral and other protective rights, and continually monitors these
rights, in order to reduce such possibilities of loss. In addition, the Company
provides reserves for potential losses based upon management's periodic review
of its portfolio.
The Company's REMIC Certificates are subordinate in rank and right of payment to
the certificates sold to third-party investors and as such, in most cases, would
bear the first risk of loss in the event of an impairment to any of the
underlying mortgages. The returns on the REMIC Certificates are subject to
certain uncertainties and contingencies including, without limitation, the level
of prepayment, prevailing interest rates and the timing and magnitude of credit
losses on the mortgages underlying the securities that are a result of the
general condition of the real estate market or long-term care industry. These
uncertainties and contingencies are difficult to predict and are subject to
future events that may alter management's estimations and assumptions therefore,
no assurance can be given that current yields will not vary significantly in
future periods. To minimize the impact of prepayments, the mortgage loans
underlying the REMIC Certificates generally prohibit prepayment unless the
property is sold to an unaffiliated third party (with respect to the borrower).
Certain of the REMIC Certificates retained by the Company have designated
certificate principal balances and a stated certificate interest "pass-through"
rate. These REMIC Certificates are subject to credit risk to the extent that
there are estimated or realized credit losses on the underlying mortgages, and
as such their effective yield would be negatively impacted by such losses. The
Company also retains the interest-only certificates ("I/O Certificates"), which
provide cash flow payments that result from the difference between the interest
collected from the underlying mortgages and interest paid on the outstanding
pass-through rate certificates. In addition to the risk from credit losses, the
I/O Certificates are also subject to prepayment risk, in that prepayments of the
underlying mortgages reduce future interest payments of which a portion flows to
the I/O Certificates, thus, reducing their effective yield. The I/O
Certificates' fair values are estimated, in part, based on a spread over the
applicable U.S Treasury rate, and consequently, are inversely affected by
increases or decreases in such interest rates. There is no active market in
these securities from which to readily determine their value. The estimated fair
values of both classes of Certificates are subject to change based on the
estimate of future prepayments and credit losses, as well as fluctuations in
interest rates and market risk.
As of December 31, 1998, Sun Healthcare Group, Inc. ("Sun") operated 70
facilities representing 19% ($174.3 million) of the Company's adjusted gross
real estate investment portfolio (adjusted to include the mortgage loans to
third parties underlying the investment in REMIC Certificates). Our real estate
investments that are operated by Sun consists of $46.3 million of properties we
own and lease directly to Sun Healthcare and $31.7 million of mortgage loans and
mortgage loans underlying the REMIC certificates that are secured by
39
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
properties owned directly by Sun. The remaining $96.3 million consists of
mortgage loans and mortgage loans underlying the REMIC certificates that are
secured by properties that are owned by independent entities that either lease
the properties to Sun or have Sun operate the property pursuant to a management
agreement.
Sun is a publicly traded company, and as such is subject to the filing
requirements of the Securities and Exchange Commission. The financial position
of the Company and its ability to make distributions may be adversely affected
by financial difficulties experienced by Sun, or any other major operator of the
Company, including bankruptcy, insolvency or general downturn in business of any
such operator, or in the event any such operator does not renew and/or extend
its relationship with the Company or its borrowers as it expires.
Net Income Per Share. Basic earnings per share is calculated using the weighted
average shares of common stock outstanding during the period excluding common
stock equivalents. Diluted earnings per share includes the effect of all
dilutive common stock equivalents.
Securitization Transactions. SFAS No. 125 provides specific criteria for
determining whether a transfer of assets is a sale or a secured borrowing. To
qualify as a sale, the following conditions must be met: 1) the transferred
assets must be isolated from the transferor, 2) the transferee obtains the right
free of any conditional constraints to pledge or exchange the assets, or the
transferee is a qualifying special purpose entity of which the holders of the
beneficial interests have the right free of any conditional constraints to
pledge or exchange those interests, and 3) the transferor does not maintain
effective control over the transferred assets. Management believes the structure
of its securitization transactions meets the sales accounting standards
established by SFAS No. 125. To the extent that recent or future interpretations
of SFAS No. 125 would require modification to the structure of the
securitization transactions, the Company would make the necessary modifications
to allow future securitizations to be accounted for as sales.
Transfers of mortgage loans to a Real Estate Mortgage Investment Conduit
("REMIC"), a qualifying special-purpose entity, are accounted for as a sale and
any gain or loss is recorded in earnings. The gain or loss is equal to the
excess or deficiency of the cash proceeds and fair market value of any
subordinated certificates received when compared with the carrying value of the
mortgages sold, net of any transaction costs incurred and any gains or losses
associated with an underlying hedge. Subordinated certificates received by the
Company are recorded at their fair value at the date of the transaction. The
Company has no controlling interest in the REMIC since the majority of the
beneficial ownership interests (in the form of REMIC Certificates) are sold to
third-party investors. Consequently, the financial statements of the REMIC Trust
are not consolidated with those of the Company for financial reporting purposes.
Stock-Based Compensation. The Company has adopted the disclosure requirements of
SFAS No. 123, "Accounting for Stock-Based Compensation" but continues to account
for stock-based compensation using the intrinsic value method prescribed by APB
Opinion No. 25, as permitted by SFAS No. 123.
New Accounting Pronouncements. In 1998, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which is
effective for fiscal years beginning after June 1999. SFAS No. 133 requires all
derivatives to be recorded at fair value and establishes unique accounting for
fair value hedges. Because of the Company's limited use of derivatives,
management does not anticipate that the adoption of SFAS No. 133 will have a
significant effect on the Company's financial position or results of operations.
The FASB also issued SFAS No. 134, "Accounting for Mortgage-Backed
40
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Securities Retained after the Securitization of Mortgage Loans Held For Sale by
a Mortgage Banking Entity" which is effective for the first fiscal quarter
beginning after December 15, 1998. See Note.4 Real Estate Investments -REMIC
Certificates for a discussion regarding the impact of the adoption of SFAS No.
134.
3. Supplemental Cash Flow Information
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------
<S> <C> <C> <C>
Non-cash investing and financing transactions:
Exchange of mortgage loans for REMIC Certificates $129,300 $ -- $ 80,962
Exchange of previously issued REMIC Certificates for
REMIC Certificates 20,700
Issuance of mortgage loans payable for REMIC Certificates -- -- 31,525
Conversion of debentures into common stock 35,046 44,005 18,813
Assumption of mortgage loans payable relating
to acquisitions of real estate properties 11,224 3,026 9,641
Distribution of investment in LTC Healthcare, Inc. 10,724 -- --
Note payable for investment in unconsolidated affiliate -- 5,000 --
Notes receivable related to exercise of stock options 2,313 9,862 --
Conversion of mortgage loans into owned properties 7,301 9,348 --
Minority interest 3,432 647 8,932
</TABLE>
4. Real Estate Investments
The Company may invest 30% of its adjusted gross real estate investment
portfolio (adjusted to include the mortgage loans to third parties underlying
the $100,595,000 investment in REMIC Certificates) in assisted living
residences. At December 31, 1998, aggregate investments in assisted living
residences were $254,861,000 or 28% of its adjusted gross real estate investment
portfolio.
During 1998, the Company began making investments in the child-care and
education industry consisting of investments in private and charter schools from
pre-school through twelfth grade. The Company's existing line of credit was
amended to permit the Company to invest up to $75 million in the child-care and
education industry. As of December 31, 1998, the Company's total investment in
the child-care and education industry was $26,450,000.
Mortgage Loans. During 1998, the Company invested $47,452,000 in mortgage loans,
net of conversion of construction loans on eight assisted living residences
totaling $5,467,000 to permanent mortgage financing. The mortgage loans are
secured by, among other things, 6 skilled nursing facilities with a total of 762
beds, 11 assisted living residences with a total of 471 units and one school.
The loans contain certain guarantees, have initial interest rates of 8.9% to
11.0%, have stated maturities of 10 to 20 years, generally have 25-year
amortization schedules, and provide for certain facility fees. Most of the loans
provide for an annual increase in the interest rate of 10 to 25 basis points.
For the year ended December 31,1998, sale/lease-back financing was provided on
six assisted living facilities that were previously financed with construction
loans of $7,301,000. In addition, prepayments totaling $9,099,000 were received
on two loans originally scheduled to mature in 2004 and 2006 and scheduled
principal payments totaling $1,659,000 were received.
41
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
At December 31, 1998, the investment in mortgage loans consisted of 71 mortgage
loans secured by first mortgages on 63 skilled nursing facilities with 7,034
beds, 16 assisted living residences with 899 units and one school. The mortgage
loans have a gross carrying amount of $180,964,000 and a weighted average
interest rate of 10.9% at December 31, 1998. At December 31, 1998 and 1997, the
fair value of mortgage loans was approximately $181,666,000 and $268,000,000,
respectively. Scheduled principal payments on mortgage loans are $4,986,000,
$3,932,000, $7,191,000, $2,103,000, $21,265,000 and $141,487,000 in 1999, 2000,
2001, 2002, 2003 and thereafter.
Owned Properties and Lease Commitments. During 1998, the Company acquired seven
skilled nursing facilities with a total of 816 beds, 23 assisted living
residences with a total of 1,500 units and five schools for $153,700,000.
Included in this amount were six assisted living residences with 260 units that
were purchased for $9,877,000 net of the construction loans discussed above of
$7,301,000. The Company also invested approximately $3,624,000 in the expansion
and improvement of existing facilities.
During 1998, the Company sold three skilled nursing facilities for aggregate
gross proceeds of $16,706,000 and recognized a gain of $9,926,000. The total
initial investment in these facilities was $7,654,000 and the total net
investment was $6,332,000. Proceeds of $4,271,000 from the sale were used to
repay an outstanding mortgage loan secured by one of the facilities that was
payable to the pool of mortgage loans securing the Company's investment in REMIC
Certificates. The remaining proceeds were used to repay borrowings outstanding
under the line of credit.
During 1997, the Company evaluated three skilled nursing facilities located in
Kansas for impairment and as a result recorded a non-cash impairment charge of
$1,866,000. Impairment was due to adverse changes in local market conditions
resulting in current operating losses, anticipated future losses and inadequate
cash flows. The impairment charge was determined based on undiscounted cash
flows of each facility and is included as a component of other income, net.
Owned facilities are leased pursuant to non-cancelable operating leases
generally with an initial term of ten to twelve years. Many of the leases
contain renewal options and some contain options that permit the operators to
purchase the facilities. The leases provide for 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. Certain of the leases provide for additional rent through
revenue participation (as defined in the lease agreements) 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 all taxes, insurance, maintenance and repair,
capital and non-capital expenditures and other costs necessary in the operations
of the facilities. Contingent rent income for the years ended December 31, 1998,
1997 and 1996 was immaterial.
Depreciation expense on buildings and improvements, including facilities owned
under capital leases, was $11,959,000, $9,041,000 and $6,214,000 for the years
ended December 31, 1998, 1997 and 1996.
Future minimum base rents receivable under the remaining non-cancelable terms of
operating leases are: $43,199,000, $42,217,000, $41,048,000, $41,130,000,
$41,057,000 and $199,553,000 for the years ending December 31, 1999, 2000, 2001,
2002 and 2003 and thereafter.
REMIC Structure. The Company is a REIT and, as such, makes its investments with
the intent to hold them for long-term purposes. However, mortgage loans may be
transferred to a REMIC
42
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(securitization) when a securitization provides the Company with the best
available form of capital to fund additional long-term investments. When
contemplating a securitization, consideration is given to the Company's current
and expected future interest rate posture and liquidity and leverage position,
as well as overall economic and financial market trends. As of December 31, 1998
the Company has completed four securitization transactions.
A securitization is completed in a two-step process. First, a wholly owned
special-purpose bankruptcy remote corporation (the "REMIC Corp.") is formed.
Mortgage loans selected for securitization are sold to the REMIC Corp. without
recourse. Second, the REMIC Corp. transfers the loans to a trust (the "REMIC
Trust") in exchange for commercial mortgage pass-through certificates (the
"REMIC Certificates") which represent beneficial ownership interests in the
REMIC Trust assets (the underlying mortgage loans). The REMIC Certificates
include various levels of senior, subordinated, interest only and residual
classes. The subordinated REMIC Certificates generally provide a level of credit
enhancement to the senior REMIC Certificates. The senior and residual REMIC
Certificates (which historically have represented between 66% and 81% of the
total REMIC Certificates) are then sold to outside third-party investors through
a private placement under Rule 144A of the Securities Act of 1933, as amended.
The subordinated REMIC Certificates along with the cash proceeds from the sale
of the senior REMIC Certificates are retained by the REMIC Corp. as
consideration for the initial transfer of the mortgage loans to the REMIC Trust.
Neither the Company nor the REMIC Corp. is obligated to purchase any of the
REMIC Trust assets or assume any liabilities.
Description of the REMIC Certificates. REMIC Certificates represent beneficial
ownership interests in the REMIC Trust and can be grouped into four categories;
senior, subordinated, subordinated interest-only ("I/O"). The REMIC Certificates
sold to third-party investors are the senior certificates and the REMIC
Certificates retained by the Company as part of the sale proceeds are the
subordinated certificates. The senior and the subordinated certificates have
stated principal balances and stated interest rates ("pass-through rates"). The
I/O REMIC Certificates have no stated principal but are entitled to interest
distributions. Interest distributions on the I/O REMIC Certificates are
typically based on the spread between the monthly interest received by the REMIC
Trust on the underlying mortgage collateral and the monthly pass-through
interest paid by the REMIC Trust on the outstanding pass-through rate REMIC
Certificates. After payment of the pass-through interest on the outstanding
REMIC Certificates and interest distributions on the I/O Certificates, the REMIC
Trust distributes the balance of the payments received on the underlying
mortgages as a distribution of principal. Interest and principal distributions
are made in order of REMIC Certificate seniority. As such, to the extent there
are defaults or unrecoverable losses on the underlying mortgages resulting in
reduced cash flows, the subordinated certificates held by the Company would in
general bear the first risk of loss. As of December 31, 1998, none of the REMIC
pools had experienced any realized losses nor had any of the Company's REMIC
Certificate investments been determined to be permanently impaired.
REMIC Transactions. In May 1998, the Company completed a securitization of
approximately $129,300,000 of mortgage loans with a weighted average interest
rate of 10.2% and $26,400,000 face amount ($20,700,000 carrying value) of
subordinated certificates, retained from a securitization completed in 1993,
with an interest rate of 9.78% on the face value (15.16% on the amortized cost)
(the "1998-1 Pool"). In the securitization, the Company sold approximately
$121,400,000 face amount of senior certificates at a weighted average
pass-through rate of 6.3% and retained $34,300,000 face amount of subordinated
certificates along with the interest only certificates. The
43
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
subordinated and interest only certificates retained by the Company had an
aggregate fair value of approximately $41,400,000 at the time of the
securitization and a weighted average effective yield of 18.9%. Included in the
1998-1 Pool were 40 mortgage loans, including mortgage loans of approximately
$25,741,000 with a weighted average interest rate of approximately 8.7% provided
to wholly owned subsidiaries and limited partnerships of the Company. Net
proceeds of approximately $108,613,000 from the above securitization were used
to repay borrowings outstanding under the Company's line of credit.
In 1996, the Company securitized approximately $112,487,000 of mortgage loans
(the "1996-1 Pool"). As part of the securitization, the Company sold
approximately $90,552,000 of senior certificates at an effective interest rate
of 7.19% and retained $21,935,000 face amount of subordinated certificates
(including I/O Certificates). The net proceeds from the securitization were used
to repay borrowings outstanding under the Company's lines of credit. The 1996-1
Pool consisted of 34 mortgage loans with an initial weighted average interest
rate of 10.69%, including loans totaling $31,525,000 provided to wholly owned
subsidiaries and limited partnerships of the Company. Concurrently with the
closing of the securitization, an interest rate swap agreement entered into in
May 1995 was terminated at a cost of approximately $1,500,000 and was included
as a component of the transaction cost in the determination of the fair value of
the assets received.
During 1993 and 1994, the Company completed securitizations of approximately
$242,340,000 of mortgage loans (the "1993-1 Pool" and the "1994-1 Pool",
respectively). As part of these securitizations, the Company sold approximately
$158,664,000 of senior certificates and retained approximately $83,676,000 face
amount of subordinated certificates.
REMIC Certificates. The outstanding principal balance and the weighted-average
pass through rate for the senior certificates (held by third parties) and the
estimated fair value of the subordinated certificates (held by the Company) as
of December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- ---------------------------------------
Subordinated Subordinated
Senior Certificates Certificates Senior Certificates Certificates
----------------------- ------------- ---------------------- ------------
Principal Rate Fair Value Principal Rate Fair Value
----------- ---- ------------- ---------- ---- ------------
<S> <C> <C> <C> <C> <C> <C>
1993-1 Pool $ 78,570,000 8.3% $ 6,351,000 $ 52,829,000 7.6% $ 25,994,000
1994-1 Pool 37,495,000 9.2% 38,896,000 42,864,000 9.2% 38,242,000
1996-1 Pool 89,156,000 7.4% 16,088,000 96,048,000 7.4% 23,575,000
1998-1 Pool 120,394,000 6.3% 39,260,000 -- -- --
</TABLE>
Included in the total assets securing the 1998-1 Pool is a senior certificate
from the 1993-1 Pool with principal of $26,400,000 and an interest rate of 9.78%
that was previously held by the Company. In June 1997, the Company sold
$11,811,000 face amount of subordinated certificates from the 1996-1 Pool and
recognized a gain of $1,231,000. The gain is recorded in other income, net.
At December 31, 1998 and 1997, the aggregate effective yield of the subordinated
certificates, based on expected future cash flows with no unscheduled
prepayments, was 17.8% and 16.7%, respectively.
44
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income on the subordinated certificates was as follows for the years ended
December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
1993-1 Pool $ 2,656,000 $ 4,992,000 $ 5,603,000
1994-1 Pool 4,898,000 4,650,000 5,118,000
1996-1 Pool 3,908,000 4,547,000 3,662,000
1998-1 Pool 5,483,000 -- --
----------- ----------- -----------
$16,945,000 $14,189,000 $14,383,000
----------- ----------- -----------
</TABLE>
As sub-servicer for all of the above REMIC pools, the Company is responsible for
performing substantially all of the servicing duties relating to the mortgage
loans underlying the REMIC Certificates and will act as the special servicer to
restructure any mortgage loans that default. At December 31, 1998, payments on
all of the mortgage loans underlying the REMIC Certificates were current.
The Company will adopt SFAS No. 134 in the first quarter of 1999. Currently,
under the provisions of SFAS No. 115, the Company is required to classify its
investment in REMIC Certificates as trading securities, without regard to
investment intent or the ability to hold such securities, which are accounted
for at fair value with unrealized holding gains and losses recorded in earnings.
SFAS No. 134 permits the transfer of mortgage-backed securities from the trading
category to the available-for-sale or held-to-maturity categories based on the
Company's ability and intent, as of the date of adoption of SFAS No. 134, to
hold such investments. For the year ended December 31, 1998, the Company
recorded an unrealized holding loss on its REMIC Certificates of $6,797,000. For
the years ended December 31, 1997 and 1996, the Company recorded unrealized
holding gains of $57,000 and $6,173,000, respectively, on its REMIC
Certificates.
Upon application of SFAS No. 134, based on the Company's intent and investment
posture and the marketability of the subordinated certificates, the Company will
transfer its investment in REMIC Certificates to the following categories at the
current fair value: (i) certificates with an investment rating of "BB" or above
and interest only certificates with no stated principal balance will be
classified as available-for-sale securities, and (ii) certificates with an
investment rating of "B" or lower and unrated will be classified as
held-to-maturity securities. The transfer of REMIC Certificates rated "B" or
lower to held-to-maturity at fair value will create a discount or premium that
will be amortized as an adjustment to the current yield. The transfer of the
"BB" rated and I/O certificates to available-for-sale, will have no effect other
than unrealized holding gains and losses on changes in fair value will be
reported as a separate component of stockholders' equity rather than in current
period earnings. As of December 31, 1998, subordinated certificates that will be
transferred into the available-for-sale category had a fair value of
$49,248,000, amortized cost of $47,630,000 and a weighted average yield of
approximately 25%. Held-to-maturity certificates will be accounted for at
amortized cost and fair value disclosure will be provided. As of December 31,
1998, subordinated certificates that will be transferred into the
held-to-maturity category had a fair value of $51,347,000, amortized cost of
$53,205,000 and a weighted average yield of approximately 11%. After adoption of
SFAS No. 134 on January 1,1999 the Company's available-for-sale REMIC
Certificates and held-to-maturity REMIC Certificates will have an amortized cost
equal to their fair value of $49,248,000 and $51,347,000, respectively and a
weighted average yield of 23% and 12%, respectively.
45
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. Disposition of Other Assets
LTC Healthcare, Inc. ("Healthcare"). During 1998, LTC acquired 4,002 shares of
LTC Healthcare, Inc. ("Healthcare") non-voting common stock for $2,001,000 in
cash. LTC also contributed equity securities with a book value of $788,000, 13
real estate properties with a net book value of $61,462,000 that were encumbered
by mortgage debt of $29,263,000 and a minority interest liability of $3,461,000
on seven of the properties, and other related assets and liabilities with a book
value of $93,000 in exchange for an additional 36,000 shares of Healthcare
non-voting common stock and borrowings by Healthcare under the unsecured line of
credit provided by the Company of $21,396,000. During 1998, the Company provided
additional funding of $12,800,000 under the unsecured line of credit. Subsequent
to the contribution of the above assets and liabilities by the Company to
Healthcare, Healthcare obtained mortgage financing of $17,400,000 from a
third-party lender on four of the unencumbered properties. Healthcare 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 the Company.
On September 30, 1998, the 40,002 shares of Healthcare non-voting common stock
held by the Company were converted into 3,335,882 shares of Healthcare voting
common stock. Concurrently, the Company completed the spin-off of all Healthcare
voting common stock through a taxable dividend distribution to the holders of
Company common stock, Cumulative Convertible Series C Preferred Stock ("Series C
Preferred Stock") and Convertible Subordinated Debentures (the "Debentures").
One share of Healthcare common stock was distributed to each holder of Company
common stock, Series C Preferred Stock and Debentures for each ten shares of
Company common stock owned and for each ten shares of Company common stock that
would have been issued upon conversion of the Debentures and Series C Preferred
Stock. The Company incurred costs of approximately $500,000 in connection with
the distribution. Upon completion of the distribution, Healthcare began
operating as a separate public company.
For book purposes, no gain was recognized on the distribution of Healthcare
common stock which had a net book value of approximately $10,724,000. The
distribution was a taxable dividend distribution and accordingly, for tax
purposes, the net assets were transferred at their net fair market value of
approximately $15,650,000 ($4.69 per share of Healthcare common stock -
unaudited) which resulted in a taxable gain of approximately $4,900,000
(unaudited).
The Company and Healthcare have entered into various agreements which, among
other things, provide for a sharing of corporate overhead under an
administrative services agreement. During 1998, the Company charged Healthcare
an administrative services fee of approximately $350,000. In addition, the
Company provided Healthcare with a $20.0 million unsecured line of credit that
bears interest at 10% and matures in March 2008. As of December 31,1998
approximately $16,528,000 was outstanding under the line of credit. During 1998,
the Company recorded interest income related to the unsecured line of credit of
$711,000.
As of December 31, 1998, the Company acquired 299,900 shares of Healthcare
common stock, representing approximately 9% of Healthcare's outstanding common
stock, for an aggregate purchase price of $659,000.
Home and Community Care, Inc. ("HCI"). During 1997, the Company acquired
non-voting common stock of HCI, an owner, operator and developer of assisted
living residences, for $5,000,000.
46
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Subsequently, the Company received a distribution of $5,000,000 representing a
return of investment and Assisted Living Concepts, Inc. ("ALC") acquired all of
the outstanding common stock of HCI for which the Company received gross
proceeds of $2,000,000. Certain benefits were accelerated for officers who ended
their employment with the Company to become employees of ALC. A net gain of
$1,015,000 was recorded on the sale and is included in other income, net. During
1998, the Company received additional payments of $698,000 for units under
development by HCI at the date of the acquisition.
6. Debt Obligations
Bank Borrowings. During 1997, the Company refinanced all amounts outstanding
under various bank financing agreements with a $170,000,000 Senior Unsecured
Revolving Line of Credit (the "Revolving Credit Facility") which expires on
October 3, 2000. The Revolving Credit Facility pricing varies between LIBOR plus
1.25% and LIBOR plus 1.5% depending on the Company's leverage ratio. At December
31, 1998, borrowings of $100,000,000 bearing interest at LIBOR plus 1.25% were
outstanding under the Revolving Credit Facility.
During 1998, the Revolving Credit Facility was amended to permit the Company to
invest up to $75 million in the education and child-care industry. The Revolving
Credit Facility contains financial covenants including, but not limited to,
maximum leverage ratios, minimum debt service coverage ratios, cash flow
coverage ratios and minimum consolidated tangible net worth.
On November 2, 1998, the Company entered into an interest rate swap agreement
whereby the Company effectively fixed the interest rate on LIBOR based variable
rate debt. Under this agreement, which expires in November 2000, the Company
will be credited interest at three month LIBOR and will incur interest at a
fixed rate of 4.74% on a notional amount of $50,000,000. The notional amount of
the interest rate swap is used to measure interest to be paid or received and
does not represent the amount of exposure to credit loss. The differential paid
or received on the interest rate swap is recognized as an adjustment to interest
expense.
Convertible Subordinated Debentures.
Conversion Outstanding Principal at
Interest Price per December 31,
Rate Maturity Share 1998 1997
- ---- -------------- ------ ---------- ----------
9.75% June 2004 $10.00 $ -- $ 549,000
8.50% January 2000 $15.00 -- 19,476,000
8.50% January 2001 $15.50 22,969,000 30,048,000
8.25% September 1999 $15.50 10,000,000 10,000,000
7.75% January 2002 $16.50 4,518,000 9,765,000
8.25% July 2001 $17.25 19,180,000 21,985,000
---------- ----------
$56,667,000 $91,823,000
========== ==========
On July 1, 1998, the Company redeemed the outstanding $90,000 principal amount
of its 8.5% Convertible Subordinated Debentures due 2000 and $20,000 principal
amount of its 9.75% Convertible Subordinated Debentures due 2004. The 8.5%
debentures due 2001, the 8.25% debentures due 1999 and the 8.25% debentures due
2001 are not redeemable by the Company. The 7.75% debentures are not redeemable
by the Company prior to January 1, 2001. During 1998, the
47
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
maturity for the 8.25% debentures originally scheduled to mature in January 1999
was extended to September 1999.
As of December 31, 1998, the convertible subordinated debentures outstanding
were convertible into 3,512,089 shares of common stock. Based on the quoted
market price of the Company's common stock and the conversion price of the
convertible debentures, the fair value of the debentures approximated
$58,388,000 and $120,419,000 at December 31, 1998 and 1997, respectively.
Mortgage Loans Payable. During 1998, the Company acquired five skilled nursing
facilities that were subject to mortgage loans of approximately $7,018,000.
These mortgage loans have a current weighted average interest rate of 12%, are
due in September 2002 and are payable to a REMIC formed by the Company in 1993.
The Company also provided non-recourse mortgage loans of approximately
$11,826,000 to a wholly owned subsidiary and a newly formed limited partnership.
In May 1998, the Company completed a securitization transaction that included
loans provided to wholly owned subsidiaries and limited partnerships of the
Company of approximately $25,741,000. Such loans included $11,826,000 of loans
originated in 1998 and approximately $13,915,000 of loans originated in 1996.
In 1998, in connection with the sale of a skilled nursing facility, a mortgage
loan of $4,271,000 that was secured by the facility was repaid. See "Note 2.
Real Estate Investments -Owned Properties." Mortgage loans totaling $29,263,000
that secured seven properties were included in the contribution of net assets to
Healthcare. See "Note 5. Disposition of Other Assets -LTC Healthcare, Inc."
Mortgage loans and weighted average interest rates for loans payable to REMIC's
formed by the Company were:
December 31, 1998 Rate December 31, 1997 Rate
----------------- ---- ----------------- ----
1993-1 Pool $ 22,283,000 12.0% $ 18,826,000 12.0%
1994-1 Pool 2,992,000 11.4 3,021,000 11.3
1996-1 Pool 16,312,000 9.8 34,938,000 9.5
1998-1 Pool 13,845,000 9.3 -- --
------------- -------------
$ 55,432,000 $ 56,785,000
============= =============
Bonds Payable and Capital Leases. At December 31, 1998 and 1997, the Company had
outstanding principal of $8,065,000 on multifamily tax-exempt revenue bonds.
These bonds bear interest at a variable rate that is reset weekly and mature
during 2015. For the year ended December 31, 1998, the weighted average interest
rate, including letter of credit fees, on the outstanding bonds was 5.1%. In May
1998, the Company acquired a skilled nursing facility subject to a multi-unit
housing tax-exempt revenue bond of approximately $4,206,000. As of December 31,
1998, principal of $4,191,000 was outstanding on the bond which bears interest
at 10.9% and matures in 2025.
At December 31, 1998 and 1997, the Company had outstanding principal of
$5,340,000 and $5,551,000, respectively, under capital lease obligations. The
capital leases are secured by four assisted living residences, have a weighted
average interest rate of 7.6% and mature at various dates through 2013.
Scheduled Principal Payments. Total scheduled principal payments for the
mortgage loans payable, bonds payable and capital lease obligations as of
December 31, 1998 were $1,219,000, $1,060,000, $1,156,000, $8,999,000,
$14,781,000 and $45,813,000 in 1999, 2000, 2001, 2002, 2003 and thereafter.
48
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. Interest Rate Contracts
As of December 31, 1997, the Company was party to a seven year forward interest
rate swap agreement whereby the Company was credited interest at the six month
LIBOR and incurred interest at a fixed rate of 6.655% on a notional amount of
$60,000,000. The Company was also party to a Treasury lock agreement whereby the
Company locked into a rate of 6.484% on the seven year Treasury Note Rate on a
notional amount of $65,000,000. As of December 31, 1997, these agreements were
accounted for as hedges and were entered into to minimize the Company's exposure
to interest rate risk on mortgage loans that the Company anticipated to
securitize. In May 1998, the interest rate swap and the Treasury lock agreements
were terminated in connection with the completion of the securitization
transaction and the Company made an aggregate payment of approximately
$5,000,000 that was included in the cost of the recently completed
securitization transaction. See "Note 2. Real Estate Investments -REMIC
Certificates -REMIC Transactions."
On November 2, 1998, the Company entered into an interest rate swap agreement
whereby the Company effectively fixed the interest rate on LIBOR based variable
rate debt. See "Note 6. Debt Obligations -Bank Borrowings."
8. Stockholders' Equity
Issuance of Stock. On September 2, 1998, the Company issued 2,000,000 shares of
8.5% Series C Convertible Preferred Stock (the "Series C Preferred Stock") at
$19.25 per share for net proceeds of $37,605,000. The Series C Preferred Stock
is convertible into 2,000,000 shares of the Company's common stock, has a
liquidation value of $19.25 per share and has an annual coupon of 8.5%, payable
quarterly.
During 1997, the Company completed public offerings for 2,000,000 shares of
common stock resulting in aggregate net proceeds of $35,065,000. In addition,
the Company issued 3,080,000 shares of 9.5% Series A Cumulative Preferred Stock
("Series A Preferred Stock") and 2,000,000 shares of 9.0% Series B Cumulative
Preferred Stock ("Series B Preferred Stock") for net proceeds of $121,600,000.
Dividends on the Series A Preferred Stock and Series B Preferred Stock are
cumulative from the date of original issue and are payable monthly to
stockholders of record on the first day of each month. Dividends on the Series A
Preferred Stock and the Series B Preferred Stock accrue at 9.5% and 9.0% per
annum, respectively, on the $25 liquidation preference per share (equivalent to
a fixed annual amount of $2.375 and $2.25 per share, respectively). The Series A
Preferred Stock is not redeemable prior to April 1, 2001 and the Series B
Preferred Stock is not redeemable prior to January 1, 2002, except in certain
circumstances relating to preservation of the Company's qualification as a REIT.
The net proceeds from these offerings were used to repay short-term borrowings
outstanding under the Company's lines of credit.
Stock Based Compensation Plans. During 1998, the Company adopted and its
stockholders approved the 1998 Equity Participation Plan under which 500,000
shares of common stock have been reserved for stock based compensation awards.
The 1998 Equity Participation Plan and the Company's Restated 1992 Stock Option
Plan under which 500,000 shares of common stock were reserved (collectively "the
Plans") provide 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
Plans 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. As of
49
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 1998, all grants of stock based compensation awards were made under
the Company's Restated 1992 Stock Option Plan. Total shares available for grant
under the Plans as of December 31, 1998, 1997 and 1996 were 507,000, 31,000 and
358,000, respectively.
Nonqualified stock option activity for the years ended December 31, 1998, 1997
and 1996 was as follows:
<TABLE>
<CAPTION>
Shares Weighted Average Price
----------------------------------------------- ----------------------------------
1998 1997 1996 1998 1997 1996
--------------- --------------- --------------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, January 1 169,500 873,300 861,500 $11.21 $11.30 $11.23
Granted -- 15,000 18,000 $ - $17.00 $15.13
Exercised (146,500) (717,800) (3,200) $10.64 $11.44 $12.17
Canceled -- (1,000) (3,000) $ - $12.00 $12.25
-------------- -------------- --------------
Outstanding, December 31 23,000 169,500 873,300 $14.86 $11.21 $11.30
============== ============== ==============
Exercisable, December 31 12,000 31,500 436,466 $13.83 $11.21 $11.88
============== ============== ==============
</TABLE>
All options outstanding as of December 31, 1998 vest over three years from the
original date of grant. Unexercised options expire seven years after the date of
vesting.
Restricted stock activity for the years ended December 31, 1998, 1997 and 1996
was as follows:
1998 1997 1996
----------- ----------- -----------
Outstanding, January 1 382,000 160,000 --
Granted 24,000 313,000 160,000
Vested (13,000) (91,000) --
Canceled -- -- --
----------- ----------- -----------
Outstanding, December 31 393,000 382,000 160,000
=========== =========== ===========
Compensation Expense $ 1,492,000 $ 1,640,000 $ --
=========== =========== ===========
Outstanding shares of restricted stock under the 1996 grant vest equally over
three years beginning January 1, 2000 and shares under the 1997 grant vest
equally over four years beginning January 1, 2001. Dividends are payable on the
restricted shares to the extent and on the same date as dividends are paid on
all of the Company's common stock.
As of December 31, 1998, 1997 and 1996, there were 18,000, 31,000 and 44,000
options outstanding, respectively, subject to the disclosure requirements of
SFAS No. 123. The fair value of these options was estimated utilizing the
Black-Scholes valuation model and assumptions as of each respective grant date.
In determining the estimated fair values for the options granted in 1997 and
1996, the weighted average expected life assumption was three years for 1997 and
seven years for 1996, the weighted average volatility was .16, and .15,
respectively and the weighted average risk free interest rate was 6.6%. The
weighted average fair value of the options granted was estimated to be $.67 and
$.63 in 1997 and 1996, respectively. There was no material effect on net income
or earnings per share for the years ended December 31, 1997 and 1996. The
weighted average exercise price of the options was $15.65, $14.99 and $13.55 and
the weighted average remaining contractual life was 6.9, 7.6 and 7.7 years as of
December 31, 1998, 1997 and 1996, respectively.
Notes Receivable from Stockholders. In 1997, the Board of Directors adopted a
loan program designed to encourage executives, key employees, consultants and
directors to acquire common stock
50
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
through the exercise of options. Under the program, the Company may make full
recourse, secured loans to participants equal to the exercise price of vested
options plus up to 50% of the taxable income resulting from the exercise of
options. Such loans will bear interest at the then current Applicable Federal
Rate and are payable in quarterly installments over nine years. For the first
five years the principal due each quarter will be equal to 50% of the difference
between the cash dividends received on the shares purchased and the quarterly
interest due. In addition, 25% of cash bonuses and 50% of the dividends on
restricted stock granted in 1997 received by the borrower must be used to reduce
the principal balance. The loans will convert to fully amortizing loans with 16
quarterly payments beginning in year six. Unless the Board of Directors approves
otherwise, loans must be repaid within 90 days after termination of employment
for any reason, other than in connection with a change in control of the
Company. In 1998 and 1997, the Company's management, consultants and directors
purchased 146,500 and 686,500 of the Company's common stock under the loan
program. At December 31, 1998 and 1997, loans totaling $11,200,000 and
$9,429,000 bearing interest at rates ranging from 5.77% to 6.63% per annum were
outstanding. These loans are secured by a pledge of the shares of common stock
acquired through the exercise of options and are full recourse to the borrower.
The market value of the common stock securing these loans was $13,849,000 at
December 31, 1998.
9. Distributions
The Company must distribute at least 95% of its taxable income in order to
continue to qualify as a REIT. Annual distributions may exceed the Company's
earnings and profits due to non-cash expenses such as depreciation and
amortization. Under special tax rules for REITs, dividends declared in the
last quarter of the calendar year and paid by January 31 of the following
year are treated as paid on December 31 of the year declared. Distributions
for 1997 and 1996 were cash distributions. The 1998 distribution consisted of
$1.535 per share in cash and $.469 per share (unaudited) in the form of
Healthcare common stock. See "Note 5. Disposition of Other Assets -LTC
Healthcare, Inc."
The Federal income tax classification of the per share common stock
distributions are as follows (unaudited):
1998 1997 1996
--------- --------- ---------
Ordinary income $ 1.355 $ 1.293 $ 1.228
Non-taxable distribution 0.397 0.037 0.107
Section 1250 capital gain 0.051 0.030 --
Long term capital gain 0.201 0.075 --
--------- --------- ---------
Total $ 2.004 $ 1.435 $ 1.335
========= ========= =========
51
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. Net Income Per Share
Basic and diluted net income per share were as follows (in thousands, except per
share amounts):
1998 1997 1996
-------- -------- --------
Net income $ 50,593 $ 35,763 $ 28,710
Preferred dividends (12,896) (6,075) --
-------- -------- --------
Net income for basic net income per share 37,697 29,688 28,710
7.75% debentures due 2002 516 -- 2,187
8.5% debentures due 2001 -- -- 4,509
8.5% debentures due 2000 684 -- 2,350
8.25% debentures due 1999 860 -- --
Other dilutive securities 192 32 977
-------- -------- --------
Net income for diluted net income per share $ 39,949 $ 29,720 $ 38,733
======== ======== ========
Shares for basic net income per share 27,077 23,511 18,983
Stock options 11 277 374
7.75% debentures due 2002 417 -- 1,757
8.5% debentures due 2001 -- -- 3,174
8.5% debentures due 2000 497 -- 1,751
8.25% debentures due 1999 645 -- --
Other dilutive securities 176 75 824
-------- -------- --------
Shares for diluted net income per share 28,823 23,863 26,863
======== ======== ========
Basic net income per share $ 1.39 $ 1.26 $ 1.51
======== ======== ========
Diluted net income per share $ 1.39 $ 1.25 $ 1.44
======== ======== ========
12. Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Quarter ended
----------------------------------------------------------------------------
March 31 June 30 September 30 December 31
----------------- --------------- ---------------------- -------------------
1998
<S> <C> <C> <C> <C>
Revenues $ 21,219 $ 22,579 $ 23,251 $ 22,342
Net income available to
Common stockholders 8,551 17,124 3,537 8,485
Basic net income per share 0.33 0.64 0.13 0.30
Diluted net income per share 0.33 0.59 0.13 0.30
Dividends per share 0.365 0.39 0.39 0.39
1997
Revenues $ 16,487 $ 18,115 $ 18,809 $ 20,023
Net income 6,107 8,098 7,545 7,938
Basic net income per share 0.28 0.35 0.32 0.31
Diluted net income per share 0.27 0.35 0.31 0.31
Dividends per share 0.34 0.365 0.365 0.365
</TABLE>
52
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 25, 1999, to be filed
pursuant to Regulation 14A.
Item 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 25, 1999, to be filed
pursuant to Regulation 14A.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 25, 1999, to be filed
pursuant to Regulation 14A.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 25, 1999, to be filed
pursuant to Regulation 14A.
Item 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K.
(a) Financial Statement Schedules
The financial statement schedules listed in the accompanying index to
financial statement schedules are filed as part of this annual report.
(b) Exhibits
The exhibits listed in the accompanying index to exhibits are filed as
part of this annual report.
(c) Reports on Form 8-K
None.
53
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
(Item 14(a))
VII. Valuation and Qualifying Accounts ................................... 55
XI. Real Estate and Accumulated Depreciation............................ 56
XII. Mortgage Loans on Real Estate ...................................... 59
All other schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule.
54
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE VII
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Beginning Charge to Balance at
of Period Operations End of Period
-------------------- ---------- ---------------
Allowance for Doubtful
Accounts:
1998 $1,000 $ 250 $1,250
1997 $1,000 -- $1,000
1996 $ 997 3 $1,000
55
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at which Carried
Initial Cost to Company Costs at December 31, 1998
----------------------- Capitalized -----------------------------
Building and Subsequent Building and
Encumbrances Land Improvements to Acquisition Land Improvements Total (1)
------------ ---- ------------ -------------- ---- ------------ ---------
Skilled Nursing
Facilities:
<S> <C> <C> <C> <C> <C> <C> <C>
Demopolis, AL $10,528(3) $ 71 $ 2,141 $ -- $ 71 $ 2,141 $ 2,212
Fort Payne, AL (3) 37 3,588 -- 37 3,588 3,625
Jackson, AL (3) 64 2,620 -- 64 2,620 2,684
Madison, AL (3) 30 2,328 -- 30 2,328 2,358
Phoenix, AL (3) 59 2,123 -- 59 2,123 2,182
Bradenton, FL -- 330 2,720 -- 330 2,720 3,050
Clearwater, FL -- 454 2,903 -- 454 2,903 3,357
Crestview, FL -- 140 2,306 -- 140 2,306 2,446
San Destin, FL -- 175 3,875 -- 175 3,875 4,050
Gulf Breeze, FL -- 600 6,020 -- 600 6,020 6,620
Lecanto, FL -- 351 2,665 2,247 351 4,912 5,263
Pensacola, FL -- 190 4,295 -- 190 4,295 4,485
Pensacola, FL -- 230 4,663 -- 230 4,663 4,893
Starke, FL -- 113 4,783 -- 113 4,783 4,896
Chicago Heights, IL -- 221 6,406 -- 221 6,406 6,627
Rusk, TX -- 34 2,399 -- 34 2,399 2,433
Chesapeake, VA -- 373 3,298 -- 373 3,298 3,671
Richmond,h VA -- 373 3,298 -- 373 3,298 3,671
Tappahannock, VA -- 373 3,298 -- 373 3,298 3,671
Toppanish, WA 2,594 132 2,654 -- 132 2,654 2,786
Vancouver, WA (4) 60 3,031 -- 60 3,031 3,091
Jefferson, IA 10,431 36 1,933 -- 36 1,933 1,969
Houston, TX 7,100 202 4,458 -- 202 4,458 4,660
Houston, TX 6,746 361 3,773 -- 361 3,773 4,134
Montgomery, AL 3,864 144 5,426 -- 144 5,426 5,570
Carroll, IA (5) 60 1,020 -- 60 1,020 1,080
Houston, TX (9) 202 4,458 -- 202 4,458 4,660
Woodbury, TN -- 100 2,900 -- 100 2,900 3,000
Whiteright, TX 1,112 100 2,923 -- 100 2,923 3,023
Granger,IA (5) 93 1,325 -- 93 1,325 1,418
Bedford, TX (5) 345 3,195 -- 345 3,195 3,540
Midland, TX 2,017 32 2,285 -- 32 2,285 2,317
Tiptonville, TN -- 100 2,450 -- 100 2,450 2,550
Gardendale, AL -- 84 6,316 -- 84 6,316 6,400
Polk City, IA (5) 88 1,351 -- 88 1,351 1,439
Atmore, AL (6) 23 2,985 -- 23 2,985 3,008
Mesa, AZ 4,460 305 6,909 1,696 305 8,605 8,910
Houston, TX (10) 572 5,965 -- 572 5,965 6,537
Roberta, GA -- 100 2,400 -- 100 2,400 2,500
Norwalk, IA (5) 45 1,035 -- 45 1,035 1,080
Altoona, IA (5) 102 2,312 -- 102 2,312 2,414
Los Angeles, CA -- 100 2,475 -- 100 2,475 2,575
Sacramento, CA -- 220 2,929 -- 220 2,929 3,149
Coffeyville, KS -- 100 335 148 100 483 583
Salina, KS -- 100 1,153 352 100 1,505 1,605
South Haven, KS -- -- 13 -- -- 13 13
Portland, OR -- 100 1,925 393 100 2,318 2,418
Nacogdoches, TX -- 100 1,738 -- 100 1,738 1,838
Cushing, TX -- 100 1,679 -- 100 1,679 1,779
Mesa, AZ 2,992 420 4,258 32 420 4,290 4,710
Wells, TX 2,265 100 1,649 7 100 1,656 1,756
Corrigan, TX (7) 100 1,649 7 100 1,656 1,756
Grosebeck, TX 1,323 100 1,649 7 100 1,656 1,756
Tampa, FL -- 100 6,402 42 100 6,444 6,544
-------- -------- -------- -------- -------- -------- --------
SNFs 55,432 9,144 164,687 4,931 9,144 169,618 178,762
-------- -------- -------- -------- -------- -------- --------
<CAPTION>
Construction/
Accum Renovation Acquisition
Deprec.(2) Date Date
---------- ---- ----
Skilled Nursing
Facilities:
<S> <C> <C> <C>
Demopolis, AL $ 262 1972 Jun. 1995
Fort Payne, AL 473 1967/73 Jun. 1995
Jackson, AL 312 1964 Jun. 1995
Madison, AL 298 1964/74 Jun. 1995
Phoenix, AL 280 1969 Jun. 1995
Bradenton, FL 489 1989 Sep. 1993
Clearwater, FL 620 1965/93 Sep. 1993
Crestview, FL 358 1988 Jun. 1994
San Destin, FL 535 1986 Feb. 1995
Gulf Breeze, FL 932 1984 Jun. 1994
Lecanto, FL 763 1988 Sep. 1993
Pensacola, FL 676 1972 Jun. 1994
Pensacola, FL 723 1991 Jun. 1994
Starke, FL 738 1989 Jun. 1994
Chicago Heights, IL 975 1988 Sep. 1994
Rusk, TX 476 1969 Mar. 1994
Chesapeake, VA 379 1977 Oct. 1995
Richmond,h VA 649 1970/75/80 Oct. 1995
Tappahannock, VA 323 1977/78 Oct. 1995
Toppanish, WA 342 1960/70 Jun. 1995
Vancouver, WA 403 1952/94 Jun. 1995
Jefferson, IA 192 1968/72 Jan. 1996
Houston, TX 451 1961 Jun. 1996
Houston, TX 380 1964/68 Jun. 1996
Montgomery, AL 551 1967/74 Jan. 1996
Carroll, IA 106 1969 Jan. 1996
Houston, TX 399 1967 Jun. 1996
Woodbury, TN 275 1972/75/90 May 1996
Whiteright, TX 321 1962/64/65 Jan. 1996
Granger,IA 138 1979 Jan. 1996
Bedford, TX 343 1960 Jan. 1996
Midland, TX 248 1973 Feb. 1996
Tiptonville, TN 252 1975 May 1996
Gardendale, AL 542 1976/84 May 1996
Polk City, IA 135 1976 Jan. 1996
Atmore, AL 296 1967/74 Jan. 1996
Mesa, AZ 635 1975/96 Jun. 1996
Houston, TX 658 1967 Jun. 1996
Roberta, GA 236 1964 May 1996
Norwalk, IA 107 1975 Jan. 1996
Altoona, IA 227 1973 Jan. 1996
Los Angeles, CA 184 1963 Jan. 1997
Sacramento, CA 213 1968 Feb. 1997
Coffeyville, KS 185 1962 May 1997
Salina, KS 492 1985 May 1997
South Haven, KS 13 1969 May 1997
Portland, OR 124 1956/74 Jun. 1997
Nacogdoches, TX 77 1973 Oct. 1997
Cushing, TX 73 1973/84 Oct. 1997
Mesa, AZ 145 1972 Oct. 1997
Wells, TX 58 1980 Jan. 1998
Corrigan, TX 58 1985 Jan. 1998
Grosebeck, TX 58 1972 Jan. 1998
Tampa, FL 122 Jun. 1998
--------
SNFs 19,300
--------
</TABLE>
56
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at which Carried
Initial Cost to Company Costs at December 31, 1998
----------------------- Capitalized -----------------------------
Building and Subsequent Building and
Encumbrances Land Improvements to Acquisition Land Improvements Total (1)
------------ ---- ------------ -------------- ---- ------------ ---------
Assisted Living
Facilities:
<S> <C> <C> <C> <C> <C> <C> <C>
Dodge City, KS 1,566 88 1,663 -- 88 1,663 1,751
Great Bend, KS 1,318 87 1,563 17 87 1,580 1,667
McPherson, KS 1,141 75 1,575 -- 75 1,575 1,650
Salina, KS 1,314 72 1,578 -- 72 1,578 1,650
Longview, TX -- 38 1,568 -- 38 1,568 1,606
Marshall, TX -- 38 1,568 450 38 2,018 2,056
Walla Walla, WA 8,065(8) 100 1,940 -- 100 1,940 2,040
Greenville, TX -- 42 1,565 -- 42 1,565 1,607
Camas, WA (8) 100 2,175 -- 100 2,175 2,275
Grandview, WA (8) 100 1,940 -- 100 1,940 2,040
Vancouver, WA (8) 100 2,785 -- 100 2,785 2,885
Athens, TX -- 96 1,512 -- 96 1,512 1,608
Lufkin, TX -- 100 1,950 -- 100 1,950 2,050
Kennewick. WA (8) 100 1,940 -- 100 1,940 2,040
Gardendale, AL -- 16 1,234 -- 16 1,234 1,250
Jacksonville, TX -- 100 1,900 -- 100 1,900 2,000
Kelso, WA -- 100 2,500 -- 100 2,500 2,600
Battleground, WA -- 100 2,500 -- 100 2,500 2,600
Hayden, ID -- 100 2,450 243 100 2,693 2,793
Klamath Falls, OR -- 100 2,300 -- 100 2,300 2,400
Newport, OR -- 100 2,050 -- 100 2,050 2,150
Tyler, TX -- 100 1,800 -- 100 1,800 1,900
Wichita Falls, TX -- 100 1,850 -- 100 1,850 1,950
Ada, OK -- 100 1,650 -- 100 1,650 1,750
Nampa, ID -- 100 2,240 23 100 2,263 2,363
Tulsa, OK -- 200 1,650 -- 200 1,650 1,850
Durant, OK -- 100 1,769 -- 100 1,769 1,869
San Antonio, TX -- l00 1,900 -- 100 1,900 2,000
Troy,OH -- l00 2,435 306 100 2,741 2,841
Waco, TX -- 100 2,235 -- 100 2,235 2,335
Tulsa, OK -- 100 2,395 -- 100 2,395 2,495
San Antonio, TX -- 100 2,055 -- 100 2,055 2,155
Norfolk, NE -- 100 2,123 -- 100 2,123 2,223
Wahoo, NE -- 100 2,318 -- 100 2,318 2,418
York, NE -- 100 2,318 -- 100 2,318 2,418
Hoquiam, WA -- 100 2,500 -- 100 2,500 2,600
Tiffin, OH -- 100 2,435 -- 100 2,435 2,535
Millville, NJ -- 100 2,825 -- 100 2,825 2,925
Fremont, OH -- 100 2,435 -- 100 2,435 2,535
Lake Havasu, AZ -- 100 2,420 -- 100 2,420 2,520
Greeley, CO -- 100 2,310 270 100 2,580 2,680
Springfield, OH -- 100 2,035 270 100 2,305 2,405
Watauga, TX -- 100 1,667 -- 100 1,667 1,767
Bullhead Ctiy, AZ -- 100 2,500 -- 100 2,500 2,600
Arvada, CO -- 100 2,810 276 100 3,086 3,186
Edmond, OK -- 100 1,365 526 100 1,891 1,991
Wetherford, OK -- 100 1,668 592 100 2,260 2,360
Eugene, OR -- 100 2,600 -- 100 2,600 2,700
Caldwell, ID -- 100 2,200 -- 100 2,200 2,300
Burley, ID -- 100 2,200 -- 100 2,200 2,300
Wheelersburg, OH -- 100 2,435 -- 100 2,435 2,535
Loveland, CO -- 100 2,865 270 100 3,135 3,235
Wichita Falls,TX -- 100 2,750 -- 100 2,750 2,850
Beatrice, NE -- 100 2,173 -- 100 2,173 2,273
Madison, IN -- 100 2,435 -- 100 2,435 2,535
Newark, OH -- 100 2,435 -- 100 2,435 2,535
<CAPTION>
Construction/
Accum Renovation Acquisition
Deprec.(2) Date Date
---------- ---- ----
<S> <C> <C> <C>
Assisted Living
Facilities:
Dodge City, KS 150 1995 Dec. 1995
Great Bend, KS 141 1995 Dec. 1995
McPherson, KS 142 1994 Dec. 1995
Salina, KS 142 1994 Dec. 1995
Longview, TX 137 1995 Oct. 1995
Marshall, TX 158 1995 Oct. 1995
Walla Walla, WA 147 1996 Apr. 1996
Greenville, TX 130 1995 Jan. 1996
Camas, WA 153 1996 May 1996
Grandview, WA 152 1996 Mar. 1996
Vancouver, WA 195 1996 Jun. 1996
Athens, TX 125 1995 Jan. 1996
Lufkin, TX 147 1996 Apr. 1996
Kennewick. WA 155 1996 Feb. 1996
Gardendale, AL 103 1988 May 1996
Jacksonville, TX 149 1996 Mar. 1996
Kelso, WA 146 1996 Nov. 1996
Battleground, WA 140 1996 Nov. 1996
Hayden, ID 144 1996 Dec. 1996
Klamath Falls, OR 130 1996 Dec. 1996
Newport, OR 112 1996 Dec.1996
Tyler, TX 100 1996 Dec. 1996
Wichita Falls, TX 102 1996 Dec. 1996
Ada, OK 92 1996 Dec. 1996
Nampa, ID 123 1997 Jan. 1997
Tulsa, OK 85 1997 Feb. 1997
Durant, OK 82 1997 Apr. 1997
San Antonio, TX 87 1997 May 1997
Troy,OH 112 1997 May 1997
Waco, TX 96 1997 Jun. 1997
Tulsa, OK 102 1997 Jun. 1997
San Antonio, TX 89 1997 Jun. 1997
Norfolk, NE 87 1997 Jun. 1997
Wahoo, NE 89 1997 Jul. 1997
York, NE 89 1997 Aug. 1997
Hoquiam, WA 95 1997 Aug. 1997
Tiffin, OH 93 1997 Aug. 1997
Millville, NJ 107 1997 Aug. 1997
Fremont, OH 93 1997 Aug. 1997
Lake Havasu, AZ 92 1997 Aug. 1997
Greeley, CO 93 1997 Aug. 1997
Springfield, OH 79 1997 Aug. 1997
Watauga, TX 62 1996 Aug. 1997
Bullhead Ctiy, AZ 90 1997 Aug. 1997
Arvada, CO 105 1997 Aug. 1997
Edmond, OK 62 1996 Aug. 1997
Wetherford, OK 73 1996 Aug. 1997
Eugene, OR 93 1997 Sep. 1997
Caldwell, ID 80 1997 Sep. 1997
Burley, ID 80 1997 Sep. 1997
Wheelersburg, OH 82 1997 Sep. 1997
Loveland, CO 100 1997 Sep. 1997
Wichita Falls,TX 98 1997 Sep. 1997
Beatrice, NE 69 1997 Oct. 1997
Madison, IN 77 1997 Oct. 1997
Newark, OH 77 1997 Oct. 1997
</TABLE>
57
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at which Carried
Initial Cost to Company Costs at December 31, 1998
----------------------- Capitalized -----------------------------
Building and Subsequent Building and
Encumbrances Land Improvements to Acquisition Land Improvements Total (1)
------------ ---- ------------ -------------- ---- ------------ ---------
Assisted Living
Facilities
(continued):
<S> <C> <C> <C> <C> <C> <C> <C>
Elkhart, IN -- 100 2,435 -- 100 2,435 2,535
Newport Richey, FL -- 100 5,845 28 100 5,873 5,973
Freemont, CA -- 100 3,080 212 100 3,292 3,392
Eugene, OR -- 100 8,100 31 100 8,131 8,231
Rio Rancho, NM -- 100 8,300 32 100 8,332 8,432
Fort Meyers, FL -- 100 2,728 9 100 2,737 2,837
Tallahassee, FL -- 100 3,075 -- 100 3,075 3,175
Niceville, FL -- 100 2,680 -- 100 2,680 2,780
Longmont, CO -- 100 2,640 -- 100 2,640 2,740
Shelby, NC -- 100 2,805 -- 100 2,805 2,905
Spring Hill, FL -- 100 2,650 -- 100 2,650 2,750
Portland, OR 4,192 100 7,622 -- 100 7,622 7,722
Tuscon, AZ -- 100 8,700 -- 100 8,700 8,800
Denison, IA -- 100 2,713 -- 100 2,713 2,813
Roseville, CA -- 100 7,300 -- 100 7,300 7,400
Cheyenne, WY -- 100 5,290 -- 100 5,290 5,390
Casper, WY -- 100 3,610 -- 100 3,610 3,710
Laramie, WY -- 100 3,610 -- 100 3,610 3,710
------ ----- ------- ----- ----- ------- -------
ALFs 17,596 7,152 201,240 3,555 7,152 204,795 211,947
------ ----- ------- ----- ----- ------- -------
Private and
Charter Schools:
Phoeniz, AZ -- 100 1,833 -- 100 1,833 1,933
Paradise Valley, AZ -- 100 2,728 -- 100 2,728 2,828
Egan, MN -- 100 3,688 -- 100 3,688 3,788
Phoeniz, AZ -- 100 5,201 -- 100 5,201 5,301
Trenton, NJ -- 100 6,000 -- 100 6,000 6,100
------- ------- -------- ------ ------- -------- --------
Schools -- 500 19,450 -- 500 19,450 19,950
------- ------- -------- ------ ------- -------- --------
Total $73,028 $16,796 $385,377 $8,486 $16,796 $393,863 $410,659
======= ======= ======== ====== ======= ======== ========
<CAPTION>
Construction/
Accum Renovation Acquisition
Deprec.(2) Date Date
---------- ---- ----
<S> <C> <C> <C>
Assisted Living
Facilities (continued):
Elkhart, IN 66 1997 Dec. 1997
Newport Richey, FL 172 1986/95 Jan. 1998
Freemont, CA 62 1998 Jan. 1998
Eugene, OR 155 1998 Mar. 1998
Rio Rancho, NM 159 1998 Mar. 1998
Fort Meyers, FL 54 1998 Mar. 1998
Tallahassee, FL 55 1998 Mar. 1998
Niceville, FL 36 1998 Jun. 1998
Longmont, CO 35 1998 Jun. 1998
Shelby, NC 38 1998 Jun. 1998
Spring Hill, FL 36 1998 Jun. 1998
Portland, OR 98 1998 Jun. 1998
Tuscon, AZ 111 1998 Jun. 1998
Denison, IA 36 1998 Jun. 1998
Roseville, CA 94 1998 Jun. 1998
Cheyenne, WY 69 1998 Jun. 1998
Casper, WY 48 1998 Jun. 1998
Laramie, WY 39 1998 Jul. 1998
-------
ALFs 7,496
-------
Private and
Charter Schools:
Phoeniz, AZ 27 1980/97/98 May 1998
Paradise Valley, AZ 45 1988/95 Jun. 1998
Egan, MN 61 1987/97 Jun. 1998
Phoeniz, AZ 43 1998 Sep. 1998
Trenton, NJ -- 1930/98 Dec. 1998
--------
Schools 176
--------
Total $26,972
========
</TABLE>
(1) The aggregate basis for federal income tax purposes approximates the
carrying values.
(2) Depreciation for building is calculated rising a 35 year life for skilled
nursing facilities, a 30 year life for schools 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 five facilities in Alabama.
(4) Single note backed by two facilities in Washington,
(5) Single note backed by six facilities in Iowa and one facility in Texas.
(6) Single note backed by two facilities in Alabama.
(7) Single note backed by two facilities in Texas.
(8) Single note backed by five facilities in Washington.
(9) Single note backed by two facilities in Texas.
(10) Single note backed by two facilities in Texas.
Activity for the years ended December 31, 1996, 1997 and 1998 is as
follows:
Real Estate Accumulated
& Equipment Depreciation
-------------------------------
Balance at December 31, 1995 $117,269 $5,487
Additions 113,959 6,214
Cost of real estate sold (7,650) (61)
--------------------------
Balance at December 31, 1996 223,578 11,640
Additions 127,937 9,040
Write-down of assets (1,400) --
Cost of real estate sold (31,245) (638)
--------------------------
Balance at December 31, 1997 318,870 20,042
Additions 164,625 11,959
Cost of real estate sold (7,654) (1,309)
Spin-off of real estate to Healthcare (65,182) (3,720)
--------------------------
Balance at December 31, 1998 $410,659 $26,972
==========================
58
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
(Dollars in thousands)
<TABLE>
<CAPTION>
Final Carrying Amount Current
Number of Interest Maturity Balloon Face Amount of Mortgages Monthly
State Facilities Units/Beds Rate (1) Date Amount (2) of Mortgages December 31,1998 Debt Service
- ----- ------------------------- -------- -------- ---------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SC 5 509 12.10% 2003 $ 11,119 $11,250 $ 11,173 $ 117
AZ 1 n/a 11.00% 2003 6,262 6,500 6,500 64
CO 2 230 11.38% 2007 5,412 6,000 5,937 61
MS 1 180 11.32% 2006 5,033 5,465 5,443 55
Various (4) 71 7,014 8.88-13.40% 1999-2018 84,425 153,839 151,911 1,472
----------------- -------- -------- -------- ------
80 7,933 $112,251 $183,054 $ 180,964(3) $ 1,769
================= ======== ======== ========= =======
</TABLE>
(1) Represents current stated interest rate. Generally, the loans have 25 year
amortization with principal and interest payable at varying amounts over
the life to maturity with annual interest adjustments through specified
fixed rate increases effective either on the first anniversary or calendar
year of the loan.
(2) Balloon payment is due upon maturity, generally the 10th year of the loan,
with various prepayment penalties (as defined in the loan agreement).
(3) The carrying amount equals the aggregate cost for federal income tax
purposes. No loan has been extended or renewed or has any prior liens. At
December 31, 1998, loan with a total principal balance of $3,266,000 were
subject to delinquent principal or interest.
(4) Includes 69 first-lien mortgage loans:
No. of
Loans Original loan amounts,
-------------------------------
34 $ 305 - $2,000
22 $2,001 - $3,000
7 $3,001 - $4,000
3 $4,001 - $5,000
3 $5,001 - $5,400
Activity for the years ended December 31, 1996, 1997 and 1998 is as follows:
Balance at December 31, 1995 $162,056
New Mortgage loans 130,965
Sales of notes to REMIC (112,487)
Collections of principal (2,272)
---------
Balance at December 31, 1996 178,262
New Mortgage loans 111,157
Conversion of notes to owned properties (9,348)
Collections of principal (24,977)
---------
Balance at December 31, 1997 255,094
New Mortgage loans 47,452
Sales of notes to REMIC (103,523)
Conversion of notes to owned properties (7,301)
Collections of principal (10,758)
---------
Balance at December 31, 1998 $180,964
=========
59
<PAGE>
INDEX TO EXHIBITS
(Item 14(b))
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Articles of Incorporation of LTC Properties,
Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties,
Inc.'s Current Report on Form 8-K dated June 19, 1997)
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit 3.1 to LTC Properties, Inc.'s Form 10-Q for the
quarter ended June 30, 1996)
3.3 Articles Supplementary Classifying 3,080,000 shares of 9.5% Series A
Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by
reference to Exhibit 3.2 to LTC Properties, Inc.'s Current Report on
Form 8-K dated June 19, 1997)
3.4 Articles of Amendment of LTC Properties, Inc. (incorporated by
reference to Exhibit 3.3 to LTC Properties, Inc.'s Current Report on
Form 8-K dated June 19, 1997)
3.5 Articles Supplementary Classifying 2,000,000 Shares of 9.0% Series B
Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by
reference to Exhibit 2.5 to LTC Properties, Inc.'s Registration
Statement on Form 8-A filed on December 15, 1997)
3.6 Certificate of Amendment to Amended and Restated Bylaws of LTC
Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC
Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.)
3.7 Articles Supplementary Classifying 2,000,000 Shares of 8.5% Series C
Cumulative Convertible Preferred Stock of LTC Properties, Inc.
(incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998.)
4.1 Indenture dated September 23, 1994 between LTC Properties, Inc. and
Harris Trust and Savings Bank, as trustee (incorporated by reference
to Exhibit 4.2 to LTC Properties, Inc.'s Form 10-K for the year
ended December 31, 1994)
4.2 Second Supplemental Indenture dated as of September 21, 1995 to
Indenture dated September 23, 1994 between LTC Properties, Inc. and
Harris Trust and Savings Bank, as trustee with respect to
$51,500,000 in principal amount of 8.5% Convertible Subordinated
Debentures due 2001 (incorporated by reference to Exhibit 10.17 to
LTC Properties, Inc.'s Form 10-Q for the quarter ended September 30,
1995)
4.3 Third Supplemental Indenture dated as of September 26, 1995 to
Indenture dated September 23, 1994 between LTC Properties, Inc. and
Harris Trust and Savings Bank, as trustee with respect to
$10,000,000 in principal amount of 8.25% Convertible Subordinated
Debentures due 1999 (incorporated by reference to Exhibit 10.19 to
LTC Properties, Inc.'s Form 10-Q for the quarter ended September 30,
1995)
4.4 Fourth Supplemental Indenture dated as of February 5, 1996 to
Indenture dated September 23, 1994 between LTC Properties, Inc. and
Harris Trust and Savings Bank, as trustee with respect to
$30,000,000 in principal amount of 7.75% Convertible Subordinated
Debentures due 2002 (incorporated by reference to Exhibit 4.6 to LTC
Properties, Inc.'s Form 10-K for the year ended December 31, 1995)
4.5 Fifth Supplemental Indenture dated as of August 23, 1996 to
Indenture dated September 23, 1994 between LTC Properties, Inc. and
Harris Trust and Savings Bank, as trustee with respect to
$10,000,000 in principal amount of 8.25% Convertible Subordinated
Debentures due 1999
4.6 Sixth Supplemental Indenture dated as of December 30, 1998 to
Indenture dated September 23, 1994 between LTC Properties, Inc. and
Harris Trust and Savings Bank, as trustee with respect to
$10,000,000 in principal amount of 8.25% Convertible Subordinated
Debentures due 1999
4.7 Seventh Supplemental Indenture dated as of January 14, 1999 to
Indenture dated September 23, 1994 between LTC Properties, Inc. and
Harris Trust and Savings Bank, as trustee with respect to
$10,000,000 in principal amount of 8.25% Convertible Subordinated
Debentures due 1999
10.1 Master Repurchase Agreement dated May 14, 1993 between LTC
Properties, Inc. and Goldman
60
<PAGE>
INDEX TO EXHIBITS
(Item 14(b))
Exhibit
Number Description
- ------ -----------
Sachs Mortgage Company (incorporated by reference to Exhibit 10.5 to
LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30,
1993)
10.2 Purchase Agreement dated July 28, 1993 between LTC Properties, Inc.,
LTC REMIC Corporation and Goldman
Sachs Mortgage Company (incorporated by reference to Exhibit 10.6 to
LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30,
1993)
10.3 Transfer and Repurchase Agreement, dated as of July 20, 1993,
between LTC Properties, Inc. and LTC REMIC Corporation (incorporated
by reference to Exhibit 10.10 to LTC Properties, Inc.'s Form 10-K
for the year ended December 31, 1994)
10.4 Pooling and Servicing Agreement, dated as of July 20, 1993, among
LTC REMIC Corporation, as depositor, Bankers Trust Company, as
master servicer, LTC Properties, Inc., as special servicer and
originator and Union Bank, as trustee (incorporated by reference to
Exhibit 10.11 to LTC Properties, Inc.'s Form 10-K for the year ended
December 31, 1994)
10.5 Transfer and Repurchase Agreement, dated as of November 1, 1994,
between LTC Properties, Inc. and LTC REMIC Corporation (incorporated
by reference to Exhibit 10.12 to LTC Properties, Inc.'s Form 10-K
for the year ended December 31, 1994)
10.6 Pooling and Servicing Agreement, dated as of November 1, 1994, among
LTC REMIC Corporation, as depositor, Bankers Trust Company, as
master servicer, LTC Properties, Inc., as special servicer and
originator and Marine Midland Bank, as trustee (incorporated by
reference to Exhibit 10.13 to LTC Properties, Inc.'s Form 10-K dated
December 31, 1994)
10.7 Amended Deferred Compensation Plan (incorporated by reference to
Exhibit 10.17 to LTC Properties, Inc.'s Form 10-K for the year ended
December 31, 1995)
10.8 Pooling and Servicing Agreement dated as of March 1, 1996, among LTC
REMIC Corporation, as depositor, GMAC Commercial Mortgage
Corporation, as Master Servicer, LTC Properties, Inc., as Special
Servicer and Originator, LaSalle National Bank, as Trustee and ABN
AMRO Bank, N.V., as fiscal agent (incorporated by reference to
Exhibit 10.1 to LTC Properties, Inc.'s Form 10-Q for the quarter
ended March 31, 1996)
10.9 Transfer and Repurchase Agreement by and between LTC Properties,
Inc. and LTC REMIC Corporation dated as of March 1, 1996
(incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.'s
Form 10-Q for the quarter ended March 31, 1996)
10.10 Amended and Restated 1992 Stock Option Plan (incorporated by
reference to Exhibit 10.22 to LTC Properties, Inc.'s Form 10-K for
the year ended December 31, 1996)
10.11 Subservicing Agreement dated as July 20, 1993 by and between Bankers
Trust Company, as Master Servicer and LTC Properties, Inc., as
Special Servicer (incorporated by reference to Exhibit 10.25 to LTC
Properties, Inc.'s Form 10-K/A for the year ended December 31, 1996)
10.12 Custodial Agreement dated as of July 20, 1993 by and among Union
Bank, as Trustee, LTC REMIC Corporation, as Depositor, and Bankers
Trust Company as Master Servicer and Custodian (incorporated by
reference to Exhibit 10.26 to LTC Properties, Inc.'s Form 10-K/A for
the year ended December 31, 1996)
10.13 Form of Certificates as Exhibit as filed herewith to the Pooling and
Servicing Agreement dated as of July 20, 1993 among LTC REMIC
Corporation, as Depositor, Bankers Trust Company, as Master
Servicer, LTC Properties, Inc. as Special Servicer and Originator
and Union Bank as Trustee (incorporated by reference to Exhibit
10.11 to LTC Properties, Inc.'s Form 10-K for the year ended
December 31, 1994)
10.14 Purchase Agreement dated November 16, 1994 between LTC REMIC
Corporation, LTC Properties, Inc. and Goldman Sachs & Co. Trustee
(incorporated by reference to Exhibit 10.28 to LTC Properties,
Inc.'s Form 10-K/A for the year ended December 31, 1996)
61
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
(Item 14(b))
Exhibit
Number Description
- ------ -----------
10.15 Form of Certificates, Form of Custodial Agreement and Form of
Subservicing Agreement as Exhibits as filed herewith to the Pooling
and Servicing Agreement dated as of November 1, 1994 among LTC REMIC
Corporation, as Depositor, Bankers Trust Company, as Master
Servicer, LTC Properties, Inc. as Special Servicer and Originator
and Marine Midland Bank as Trustee (incorporated by reference to
Exhibit 10.13 to LTC Properties, Inc.'s Form 10-K for the year ended
December 31, 1994)
10.16 Purchase Agreement dated March 27, 1996 between LTC REMIC
Corporation, LTC Properties, Inc. and Goldman Sachs & Co.
(incorporated by reference to Exhibit 10.30 to LTC Properties,
Inc.'s Form 10-K/A for the year ended December 31, 1996)
10.17 Form of Certificates, Form of Custodial Agreement and Form of
Subservicing Agreement as Exhibits as filed herewith to the Pooling
and Servicing Agreement dated as of March 1, 1996 among LTC REMIC
Corporation, as Depositor, GMAC Commercial Mortgage Corporation, as
Master Servicer, LTC Properties, Inc. as Special Servicer and
Originator and LaSalle National Bank as Trustee and ABN AMRO Bank
N.V., as Fiscal Agent (incorporated by reference to Exhibit 10.1 to
LTC Properties, Inc.'s Form 10-Q for the quarter ended March 31,
1996)
10.18 Senior Unsecured Revolving Line of Credit Agreement dated October 3,
1997 between LTC Properties, Inc. and Banque National de Paris,
Sanwa Bank, California and The Sumitomo Bank (incorporated by
reference to Exhibit 10.2 to LTC Properties, Inc.'s Form 10-Q for
the quarter ended September 30, 1997)
10.19 Transfer and Repurchase Agreement dated as of April 20, 1998, by and
between LTC REMIC IV Corporation and LTC Properties, Inc.
(incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998)
10.20 Purchase Agreement dated as of May 11, 1998, by and between LTC
REMIC IV Corporation, LTC Properties, Inc. and Goldman Sachs & Co.
(incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998)
10.21 Subservicing Agreement dated as of May 14, 1998, by and between GMAC
Commercial Mortgage Corporation, as Master Servicer, LTC Properties,
Inc. as Subservicer(incorporated by reference to Exhibit 10.3 to LTC
Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998)
10.22 Pooling and Servicing Agreement dated as of April 20, 1998 among LTC
REMIC IV Corporation, LaSalle National Bank and LTC Properties, Inc.
(incorporated by reference to Exhibit 10.4 to LTC Properties, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998)
10.23 Distribution Agreement, dated as of September 30, 1998, by and
between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated
by reference to Exhibit 10.5 to LTC Properties, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998)
10.24 Administrative Services Agreement, dated as of September 30, 1998,
by and between LTC Properties, Inc. and LTC Healthcare, Inc.
(incorporated by reference to Exhibit 10.6 to LTC Properties, Inc.'s
Quarterly Report on Form 10-Q for the quarter ended September 30,
1998)
10.25 Intercompany Agreement, dated as of September 30, 1998, by and
between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated
by reference to Exhibit 10.7 to LTC Properties, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998)
10.26 Tax Sharing Agreement, dated as of September 30, 1998, by and
between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated
by reference to Exhibit 10.8 to LTC Properties, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998)
62
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
(Item 14(b))
Exhibit
Number Description
- ------ -----------
10.27 Amended and Restated Promissory Note, dated as of May 19, 1998,
between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated
by reference to Exhibit 10.9 to LTC Properties, Inc.'s Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998)
10.28 LTC Properties, Inc. 1998 Equity Participation Plan
10.29 Term Loan Agreement among LTC Properties, Inc. and Bank of Montreal,
as Administrative Agent, and Sanwa Bank California, as Documentation
Agent dated March 8, 1999
10.30 Second Amended and Restated Employment Agreement between Andre C.
Dimitriadis and LTC Properties, Inc. dated March 26, 1999
10.31 Amended and Restated Employment Agreement between James J.
Pieczynski and LTC Properties, Inc. dated March 26, 1999
10.32 Amended and Restated Employment Agreement between Christopher T.
Ishikawa and LTC Properties, Inc. dated March 26, 1999
21.1 List of subsidiaries
23.1 Consent of Ernst & Young LLP with respect to the financial
information of the Company
27.1 Financial data schedule for the year ended December 31, 1998
63
<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 Properties, Inc.
Registrant
Dated: March 31, 1999 By: /s/ JAMES J. PIECZYNSKI
------------------------
JAMES J. PIECZYNSKI
President, Chief Financial Officer and Director
/s/ ANDRE C. DIMITRIADIS Chairman of the Board, March 31, 1999
- --------------------------- Chief Executive Officer and
ANDRE C. DIMITRIADIS Director
/s/ JAMES J. PIECZYNSKI President, Chief Financial March 31, 1999
- --------------------------- Officer and Director
JAMES J. PIECZYNSKI
/s/ EDMUND C. KING Director March 31, 1999
- ---------------------------
EDMUND C. KING
/s/ WENDY L. SIMPSON Director March 31, 1999
- ---------------------------
WENDY L. SIMPSON
/s/ SAM YELLEN Director March 31, 1999
- ---------------------------
SAM YELLEN
64
<PAGE>
LTC PROPERTIES, INC.
EXHIBIT 4.5
FIFTH SUPPLEMENTAL INDENTURE
FIFTH SUPPLEMENTAL INDENTURE, dated as of August 23, 1996 between
LTC Properties, Inc., a Maryland corporation (the "Company"), and Harris Trust
and Savings Bank, an Illinois state banking association (the "Trustee"), to that
certain Indenture, dated as of September 23, 1994, between the Company and the
Trustee (the "Indenture").
WHEREAS, the parties hereto have entered into the Indenture which
provides for the issuance by the Company of the individual series of securities
thereunder, upon the Company and Trustee entering into a supplemental indenture
to the Indenture authorizing such series; and
WHEREAS, the Company wishes to issue its fifth series of securities
thereunder, designated its 8.25% Convertible Subordinated Debentures due 2001
(the "Debentures"); and
WHEREAS, all acts necessary to constitute this Fifth Supplemental
Indenture as a valid, binding and legal obligation of the Company have been done
and performed.
NOW, THEREFORE, witnesseth that, in consideration of the premises
and of the covenants contained herein, it is hereby agreed as follows:
ARTICLE ONE
The Terms of the Debentures
In accordance with Sections 2.01 and 2.02 of the Indenture, the
Company will issue its series of Debentures in the aggregate principal amount of
$30,000,000. Each Debenture shall be substantially in the following form:
<PAGE>
LTC PROPERTIES, INC.
8.25% Convertible Subordinated Debenture Due 2001
LTC PROPERTIES, INC., a Maryland corporation, promises to pay to
S P E C I M E N
or registered assigns, the principal sum of __________ Million Dollars, on
____________, 2001
Cusip 502175AF9
Interest Payment Dates: January 1 and July 1
Record Dates: December 15 and June 15
Additional provisions of this Security are set forth on the other
side of this Security.
Dated: August 23, 1996
CERTIFICATE OF AUTHENTICATION
HARRIS TRUST AND
SAVINGS BANK, as
Trustee, certifies that
this is one of the
Securities referred to
in the within mentioned
Indenture.
By:
--------------------
Authorized Signatory
2
<PAGE>
SEAL
Dated: August 23, 1996
LTC PROPERTIES, INC.
By:
---------------------
Chairman of the Board
By:
---------------------
President
The rest of this page intentionally left blank.
3
<PAGE>
LTC PROPERTIES, INC.
8.25% Convertible Debenture Due 2001
1. Interest. LTC Properties, Inc., a Maryland corporation (the
"Company"), promises to pay interest on the principal amount of this Security at
the rate per annum shown above. The Company will pay interest semiannually on
January 1 and July 1 of each year beginning January 1, 1997. Interest on the
Securities will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from August 23, 1996; provided that, if there
is no existing Default in the payment of interest, and if this Security is
authenticated between a record date referred to on the face hereof and the next
succeeding interest payment date, interest shall accrue from such interest
payment date. Interest will be computed on the basis of a 360-day year of twelve
30-day months.
2. Method of Payment. The Company will pay interest on the
Securities (except defaulted interest) to the Persons who are the registered
Holders of the Securities at the close of business on the December 15 or June 15
next preceding the interest payment date. Holders must surrender Securities to a
Paying Agent to collect principal payments. The Company will pay principal and
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. The Company, however, may pay
principal and interest by its check payable in such money. It may mail an
interest check to a Holder's registered address.
The final installment of principal of and premium, if any, on this
Security shall be payable only upon surrender of this Security at the office or
agency of the Trustee in the Borough of Manhattan, City and State of New York or
the City of Chicago, State of Illinois. Payments of principal of and premium, if
any, and interest on this Security shall be made at the office or agency of the
Trustee maintained in the Borough of Manhattan, City and State of New York or
the City of Chicago, State of Illinois, or, in the case of any such payments
other than the final payment of principal and premium, if any, at the Company's
option, by check mailed to the Person entitled thereto at such Person's address
last appearing on the Company's register.
3. Registrar and Agents. Initially, Harris Trust and Savings Bank
will act as Registrar, Paying Agent, Conversion Agent and agent for service of
notices and demands. The Company may change any Registrar, co-registrar, Paying
Agent, Conversion Agent and agent for service of notices and demands without
notice. The Company or any of its Subsidiaries may act as Paying Agent or
Conversion Agent. The address of Harris Trust and Savings Bank is 311 West
Monroe Street, 12th Floor, Chicago, Illinois 60606.
4. Indenture; Limitations. The Company issued the Securities under
an Indenture dated as of September 23, 1994 (the "Basic Indenture") between the
Company and Harris Trust and Savings Bank (the "Trustee"), as supplemented by a
First Supplemental Indenture dated as of September 23, 1994, by a Second
Supplemental Indenture dated as of September 21, 1995, by a Third Supplemental
Indenture dated as of September 26, 1995, and by a Fourth Supplemental Indenture
dated as of February 5, 1996, each between the Company and the Trustee (as used
herein, the term "Indenture" means the Basic Indenture together with the First
Supplemental Indenture, the Second Supplemental Indenture, the Third
Supplemental Indenture and the Fourth Supplemental Indenture). Capitalized terms
herein are used as defined in the Indenture unless otherwise defined herein. The
terms of the Securities include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.
Code ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture. The
Securities are subject to all such terms, and the Holders of the Securities are
referred to the Indenture and said Act for a statement of them.
Reverse of Note
Page 1 of 7
<PAGE>
The Securities are general unsecured obligations of the Company
limited to $30,000,000 aggregate principal amount. The Indenture imposes certain
limitations on the ability of the Company to, among other things, make payments
in respect of its Capital Stock, merge or consolidate with any other Person and
sell, lease, transfer or otherwise dispose of its properties or assets.
5. Redemption by the Company. The Company may redeem the Securities,
in whole or from time to time in part, only as necessary for the Company to
continue to qualify for Federal tax treatment as a real estate investment trust
("REIT") under Sections 856 through 860 of the Internal Revenue Code. These
Securities will be immediately redeemable by the Company to the extent, but only
to the extent, deemed sufficient by the Board of Directors to prevent the Holder
of such Securities or any other person having an interest therein (if the
Securities were thereupon converted) from being deemed to own shares of Capital
Stock in excess of the limits prescribed in Article Ninth of the Company's
Amended and Restated Articles of Incorporation. The Redemption Price shall be
equal to the lesser of (1) the price paid by the Holder in the transaction that
caused such Securities to exceed the amount necessary for the Company to
continue as a REIT (or, in the case of a devise or gift, the Market Price (as
such term is defined in Section 3.01(a) of the Indenture) at the time of such
devise or gift); (2) the Market Price on the date the Company mails the notice
of redemption required under Paragraph 6 below; and (3) 100% of the principal
amount thereof, in each case together with accrued interest.
6. Notice of Redemption. Notice of redemption will be mailed at
least 30 days, but not more than 60 days before the Redemption Date to each
Holder of Securities to be redeemed at his registered address. Securities in
denominations larger than $1,000 principal amount may be redeemed in part, but
only in whole multiples thereof. On and after the Redemption Date interest
ceases to accrue on Securities or portions of them called for redemption.
7. Conversion. A Holder of a Security may convert such Security into
shares of common stock of the Company at any time prior to maturity. The initial
conversion price is $17.25 per share, subject to adjustment in certain events.
To determine the number of shares issuable upon conversion of a Security, divide
the principal amount to be converted by the conversion price in effect on the
conversion date. The Company will deliver a check for any fractional share.
To convert a Security, a Holder must (1) complete and sign the
conversion notice on the back of the Security, (2) surrender the Security to the
Conversion Agent, (3) furnish appropriate endorsements and transfer documents if
required by the Registrar or Conversion Agent and (4) pay any transfer or
similar tax if required. No payment or adjustment is to be made on conversion
for interest accrued hereon or for dividends on shares of common stock issued on
conversion; provided, however, that if a Security is surrendered for conversion
after the record date for a payment of interest and on or before the interest
payment date, then, notwithstanding such conversion, the interest falling due to
such interest payment date will be paid to the Person in whose name the Security
is registered at the close of business on such record date and any Security
surrendered for conversion during the period from the close of business on any
regular record payment date to the opening of business on the corresponding
interest payment date must be accompanied by payment of an amount equal to the
interest payable on such interest payment date. A Holder may convert a portion
of a Security if the portion is $1,000 principal amount or an integral multiple
thereof.
If the Company is a party to a consolidation or merger or a transfer
or lease of all or substantially all of its assets, the right to convert a
Security into shares of common stock may be changed into a right to convert it
into securities, cash or other assets of the Company or another Person.
Reverse of Note
Page 2 of 7
<PAGE>
NOTWITHSTANDING ANYTHING HEREIN TO THE CONTRARY, A HOLDER SHALL NOT
BE ENTITLED TO EFFECT THE CONVERSION OF, AND NEITHER THE COMPANY, THE CONVERSION
AGENT NOR THE REGISTRAR SHALL BE REQUIRED TO TAKE ANY STEPS TO EFFECT THE
CONVERSION OF, ANY SECURITY OR SECURITIES OF ANY SERIES IF SUCH CONVERSION, IN
THE GOOD FAITH OPINION OF THE BOARD OF DIRECTORS OR AN OFFICER, (A) MIGHT CAUSE
THE COMPANY TO FAIL TO COMPLY WITH ANY REQUIREMENT NECESSARY FOR THE CONTINUED
QUALIFICATION OF THE COMPANY AS A REIT UNDER THE CODE OR (B) WOULD RESULT IN A
SINGLE PERSON BEING AN OWNER (OR UPON CONVERSION OF ANY SECURITIES OR CONVERSION
OR EXCHANGE OF ANY OTHER SECURITIES OF THE COMPANY THEREUPON BEING AN OWNER) OF
MORE THAN 9.8% OF THE COMPANY'S OUTSTANDING COMMON STOCK (INCLUDING THE
COMPANY'S COMMON STOCK RESERVED FOR ISSUANCE UPON CONVERSION OF SECURITIES HELD
BY SUCH PERSON OR CONVERSION OR EXCHANGE OF OTHER SECURITIES OF THE COMPANY HELD
BY SUCH PERSON). ANY ATTEMPTED CONVERSION OF A SECURITY OR SECURITIES BY A
HOLDER IN VIOLATION OF THE LIMITS SET FORTH ABOVE SHALL BE NULL AND VOID AB
INITIO.
8. Subordination. This Security is subordinated to all Senior
Indebtedness of the Company. To the extent and in the manner provided in the
Indenture, Senior Indebtedness must be paid before any payment may be made to
any Holders of Securities. Any Securityholder by accepting this Security agrees
to the subordination and authorizes the Trustee to give it effect.
In addition to all other rights of Senior Indebtedness described in
the Indenture, the Senior Indebtedness shall continue to be Senior Indebtedness
and entitled to the benefits of the subordination provisions irrespective of any
amendment, modification or waiver of any term of any instrument relating to the
Senior Indebtedness or extension or renewal of the Senior Indebtedness.
9. Denominations, Transfer, Exchange. This Security is one of a duly
authorized issue of Securities of the Company designated as its 8.25%
Convertible Subordinated Debentures due 2001 limited in aggregate principal
amount to $30,000,000. The Securities are in registered form without coupons in
denominations of $1,000 principal amount and integral multiples thereof. A
Holder may register the transfer of or exchange Securities in accordance with
the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities selected for redemption or
register the transfer of or exchange any Securities for a period of 15 days
before a selection of Securities to be redeemed.
Neither the Company nor the Registrar shall be required to register
the transfer of any Securities if such transfer, in the good faith opinion of
the Board of Directors or an Officer, (a) might cause the Company to fail to
comply with any requirement necessary for the continued qualification of the
Company as a REIT under the Code or (b) would result in a single person being an
Owner (or upon conversion of any Securities or conversion or exchange of any
other securities of the Company thereupon being an Owner) of more than 9.8% of
the Company's outstanding common stock (including the Company's common stock
reserved for issuance upon conversion of Securities held by such person or
conversion or exchange of other securities of the Company held by such person).
The Company shall advise the Registrar in writing promptly of any such
determination by the Board of Directors or an Officer with respect to any
Security, identifying such Security by Holder and other appropriate method, and
shall instruct the Registrar not to register the transfer of such Security. The
Registrar shall not be liable to the Company, Holders of Securities or any other
persons for transfers of such Securities effected
Reverse of Note
Page 3 of 7
<PAGE>
prior to its receipt of such written instructions from the Company and the
Company shall indemnify the Registrar for all claims, costs and expenses
incurred by it in connection with refusing to transfer Securities as instructed
by the Company.
10. Persons Deemed Owners. The registered Holder of a Security may
be treated as its owner for all purposes.
11. Unclaimed Money. If money for the payment of principal or
interest on any Securities remains unclaimed for three years, the Trustee and
the Paying Agent will pay the money back to the Company at its request. After
that, Holders may look only to the Company for payment.
12. Discharge Prior to Redemption or Maturity. The Indenture will be
discharged and canceled except for certain sections thereof upon payment of all
the Securities, or upon the irrevocable deposit with the Trustee of funds or
U.S. Government Obligations maturing on or before such payment date or
Redemption Date, sufficient to pay principal, premium, if any, and interest on
such payment or redemption.
13. Amendment and Waiver. Subject to certain exceptions, without
notice to the Holders of the Securities, the Indenture or the Securities may be
amended with the consent of the Holders of at least a majority in principal
amount of the Securities then outstanding and any existing default or compliance
with any provision may be waived with the consent of the Holders of a majority
in principal amount of the Securities then outstanding. Without the consent of
or notice to any Securityholder, the Company may amend the Indenture or the
Securities to, among other things, provide for uncertificated Securities, to
establish another series of securities as permitted by the Indenture, to cure
any ambiguity, defect or inconsistency or make any other change that does not
adversely, affect the rights of any Securityholder.
14. Successors. When a successor assumes all the obligations of its
predecessor under the Securities and the Indenture, the predecessor will be
released from those obligations.
15. Defaults and Remedies. If an Event of Default, as defined in the
Indenture, occurs and is continuing, the Trustee or the Holders of a majority in
principal amount of Securities may declare all the Securities to be due and
payable immediately in the manner and with the effect provided in the Indenture.
Holders of Securities may not enforce the Indenture or the Securities except as
provided in the Indenture. The Trustee may require indemnity satisfactory to it,
subject to the provisions of the TIA, before it enforces the Indenture or the
Securities. Subject to certain limitations, Holders of a majority in principal
amount of the Securities then outstanding may direct the Trustee in its exercise
of any trust or power with respect to the Securities. The Company is required to
file periodic reports with the Trustee as to the absence of any Default or Event
of Default.
16. Trustee Dealings with the Company. Harris Trust and Savings
Bank, the Trustee under the Indenture, in its individual or any other capacity,
may make loans to, accept deposits from, and perform services for the Company or
its Affiliates, and may otherwise deal with the Company or its Affiliates, as if
it were not Trustee.
17. No Recourse Against Others. No stockholder, director, officer or
incorporator, as such, past, present or future, of the Company or any successor
corporation or trust shall have any liability for any obligation of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of, such obligations or their creation. Each Holder of a Security
by
Reverse of Note
Page 4 of 7
<PAGE>
accepting a Security waives and releases all such liability. This waiver and
release are part of the consideration for the issuance of the Securities.
18. Authentication. This Security shall not be valid until the
Trustee or an authenticating agent appointed by the Trustee signs the
certificate of authentication on the other side of this Security.
19. Abbreviations. Customary abbreviations may be used in the name
of a Securityholder or an assignee, such as: TEN COM (=tenants in common), TEN
ENT (=tenants by the entireties), JT TEN (=joint tenants with rights of
survivorship and not as tenants in common), CUST (=Custodian), and U/G/M/A
(=Uniform Gifts to Minors Act).
The Company will furnish to any Securityholder upon written request
and without charge a copy of the Indenture. It also will furnish the text of
this Security in larger type. Requests may be made to: LTC Properties, Inc., 300
Esplanade Drive, Suite 1860, Oxnard, California 93030, Attention: President.
Reverse of Note
Page 5 of 7
<PAGE>
ASSIGNMENT FORM
If you the Holder want to assign this Security, fill in the form below and have
your signature guaranteed:
For value received, I or we assign and transfer this Security to
(INSERT ASSIGNEE'S SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER)
========================================================
========================================================
..............................................................................
..............................................................................
..............................................................................
..............................................................................
(Print or type assignee's name, address and zip code)
and irrevocably appoint ......................................................
..........................................................................agent
to transfer this Security on the books of the Company. The agent may
substitute another to act for him.
================================================================================
Date:.........................................................................
Your signature:...............................................................
(Sign exactly as your name appears on the other side of this Security)
Signature Guarantee:..........................................................
Reverse of Note
Page 6 of 7
<PAGE>
CONVERSION NOTICE
To convert this Security into shares of common stock of the Company, check the
box:
=======
=======
To convert only part of this Security, state the principal amount to be
converted (which must be a minimum of $1,000 or any multiple thereof):
====================================
$
====================================
If you want the Security certificate, if any, made out in another person's name,
fill in the form below:
(INSERT OTHER PERSON'S SOCIAL SECURITY OR
TAX IDENTIFICATION NUMBER)
====================================================
====================================================
..............................................................................
..............................................................................
..............................................................................
..............................................................................
(Print or type other person's name, address and zip code)
================================================================================
Date:.........................................................................
Your Signature:...............................................................
(Sign exactly as your name appears on the other side of this Security)
Signature Guaranteed By:......................................................
Reverse of Note
Page 7 of 7
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this Fifth
Supplemental Indenture to be duly executed, all as of the date first written
above,
LTC PROPERTIES, INC.
By: /s/ William McBride III
-------------------------------------
Name: William McBride III
Title: President and Chief Operating
Officer
HARRIS TRUST AND SAVINGS BANK, as Trustee
By: /s/ J. Bartolini
-------------------------------------
Authorized Signatory
<PAGE>
LTC PROPERTIES, INC.
EXHIBIT 4.6
SIXTH SUPPLEMENTAL INDENTURE
This SIXTH SUPPLEMENTAL INDENTURE, dated as of December 30, 1998, is by
and between LTC Properties, Inc., a Maryland corporation (the "Company"), and
Harris Trust and Savings Bank, an Illinois banking corporation (the "Trustee"),
to that certain Indenture, dated as of September 23, 1994, between the Company
and the Trustee (as amended to date, the "Indenture"). Capitalized terms not
otherwise defined herein shall have the meanings ascribed to such terms in the
Indenture.
WHEREAS, the parties hereto have entered into the Indenture which provides
for the issuance by the Company of individual series of securities thereunder,
upon the Company and the Trustee entering into a supplemental indenture to the
Indenture authorizing such series;
WHEREAS, the Third Supplemental Indenture to the Indenture authorized the
issuance of the Company's 8.25% Convertible Subordinated Debentures due January
1, 1999 (the "8.25% Debentures");
WHEREAS, the Company wishes to extend the maturity of the 8.25% Debentures
from January 1, 1999 to January 15, 1999;
WHEREAS, the Company wishes to extend the date on or before which Holders
may convert the 8.25% Debentures into common stock of the Company from the close
of business on January 1, 1999 to the close of business on January 15, 1999;
WHEREAS, the Company has received consent from Holders of $10,000,000
principal amount of the 8.25% Debentures (representing 100% of the outstanding
principal amount of the 8.25% Debentures) to enter into this Sixth Supplemental
Indenture to (i) provide for the extension of the maturity of the 8.25%
Debentures from January 1, 1999 to January 15, 1999 and (ii) extend the date on
or before which Holders may convert the 8.25% Debentures into common stock of
the Company from the close of business on January 1, 1999 to the close of
business on January 15, 1999;
WHEREAS, all acts necessary to constitute this Sixth Supplemental
Indenture as a valid, binding and legal obligation of the Company have been done
and performed.
NOW, THEREFORE, in consideration of the premises and of the covenants
contained herein, it is hereby agreed as follows:
1. The following terms of the 8.25% Debentures shall be amended as set
forth below:
<PAGE>
1.1 Extension of Maturity Date. The maturity date of the 8.25%
Debentures shall be extended from January 1, 1999 to January 15, 1999.
1.2. Extension of Final Conversion Date. The date on or before which
Holders may convert the 8.25% Debentures into common stock of the Company shall
be extended from the close of business on January 1, 1999 to the close of
business on January 15, 1999.
2. Except as expressly modified and superseded by this Sixth
Supplemental Indenture, the terms and provisions of the Indenture and the 8.25%
Debentures issued thereunder are ratified and confirmed and shall continue in
full force and effect.
3. The laws of the State of New York shall govern this Sixth
Supplemental Indenture without regard to the principles of conflicts of law.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Sixth Supplemental
Indenture to be duly executed, all as of the date first above written.
LTC PROPERTIES, INC.
By /s/ ANDRE C. DIMITRIADIS
------------------------------
Name: Andre C. Dimitriadis
Title: Chairman and Chief
Executive Officer
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By /s/ D.G. DONOVAN
------------------------------
Name: D.G. Donovan
Title: Assitant Vice President
3
<PAGE>
LTC PROPERTIES, INC.
EXHIBIT 4.7
SEVENTH SUPPLEMENTAL INDENTURE
This SEVENTH SUPPLEMENTAL INDENTURE, dated as of January 14, 1999, is by
and between LTC Properties, Inc., a Maryland corporation (the "Company"), and
Harris Trust and Savings Bank, an Illinois banking corporation (the "Trustee"),
to that certain Indenture, dated as of September 23, 1994, between the Company
and the Trustee (as amended to date, the "Indenture"). Capitalized terms not
otherwise defined herein shall have the meanings ascribed to such terms in the
Indenture.
WHEREAS, the parties hereto have entered into the Indenture which provides
for the issuance by the Company of individual series of securities thereunder,
upon the Company and the Trustee entering into a supplemental indenture to the
Indenture authorizing such series;
WHEREAS, the Third Supplemental Indenture to the Indenture authorized the
issuance of the Company's 8.25% Convertible Subordinated Debentures due January
1, 1999 (the "8.25% Debentures");
WHEREAS, the Sixth Supplemental Indenture to the Indenture extended the
maturity date and the final conversion date of the 8.25% Debentures to January
15, 1999;
WHEREAS, the Company and the Holders wish to extend the maturity of the
8.25% Debentures from January 15, 1999 to September 30, 1999;
WHEREAS, the Company and the Holders wish to extend the date on or before
which Holders may convert the 8.25% Debentures into common stock of the Company
from the close of business on January 15, 1999 to the close of business on
September 30, 1999;
WHEREAS, the Company has received consent from Holders of $10,000,000
principal amount of the 8.25% Debentures (representing 100% of the outstanding
principal amount of the 8.25% Debentures) to enter into this Seventh
Supplemental Indenture to (i) provide for the extension of the maturity of the
8.25% Debentures from January 15, 1999 to September 30, 1999 and (ii) extend the
date on or before which Holders may convert the 8.25% Debentures into common
stock of the Company from the close of business on January 15, 1999 to the close
of business on September 30, 1999;
WHEREAS, all acts necessary to constitute this Seventh Supplemental
Indenture as a valid, binding and legal obligation of the Company have been done
and performed.
NOW, THEREFORE, in consideration of the premises and of the covenants
contained herein, it is hereby agreed as follows:
<PAGE>
1. The following terms of the 8.25% Debentures shall be amended as set
forth below:
1.1 Extension of Maturity Date. The maturity date of the 8.25%
Debentures shall be extended from January 15, 1999 to September 30, 1999.
1.2. Extension of Final Conversion Date. The date on or before which
Holders may convert the 8.25% Debentures into common stock of the Company shall
be extended from the close of business on January 15, 1999 to the close of
business on September 30, 1999.
2. Except as expressly modified and superseded by this Seventh
Supplemental Indenture, the terms and provisions of the Indenture and the 8.25%
Debentures issued thereunder are ratified and confirmed and shall continue in
full force and effect.
3. The laws of the State of New York shall govern this Seventh
Supplemental Indenture without regard to the principles of conflicts of law.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Seventh
Supplemental Indenture to be duly executed, all as of the date first above
written.
LTC PROPERTIES, INC.
By /s/ ANDRE C. DIMITRIADIS
------------------------------------
Andre C. Dimitriadis
Chairman and Chief Executive Officer
HARRIS TRUST AND SAVINGS BANK,
as Trustee
By /s/ D.G. DONOVAN
------------------------------------
D. G. Donovan
Assistant Vice President
3
<PAGE>
LTC PROPERTIES, INC.
EXHIBIT 10.28
- --------------------------------------------------------------------------------
THE 1998 EQUITY PARTICIPATION PLAN
OF
LTC PROPERTIES, INC.
LTC Properties, Inc., a Maryland corporation, has adopted The 1998 Equity
Participation Plan of LTC Properties, Inc. (the "Plan"), effective May 19, 1998,
for the benefit of its eligible employees, consultants and directors.
The purposes of the Plan are as follows:
(1) To provide an additional incentive for directors, key Employees (as
such term is defined below) and consultants to further the growth, development
and financial success of the Company by personally benefiting through the
ownership of Company stock and/or rights which recognize such growth,
development and financial success.
(2) To enable the Company to obtain and retain the services of directors,
key Employees and consultants considered essential to the long range success of
the Company by offering them an opportunity to own stock in the Company and/or
rights which will reflect the growth, development and financial success of the
Company.
ARTICLE I.
DEFINITIONS
Wherever the following terms are used in the Plan they shall have the
meanings specified below, unless the context clearly indicates otherwise.
"Administrator" shall mean the entity that conducts the general
administration of the Plan as provided in Article X. With reference to the
administration of the Plan with respect to Options granted to Independent
Directors, the term "Administrator" shall refer to the Board. With reference to
the administration of the Plan with respect to any other Award, the term
"Administrator" shall refer to the Committee unless the Board has assumed the
authority for administration of the Plan generally as provided in Section 10.2.
"Award" shall mean an Option, a Restricted Stock award, a Performance
Award, a Dividend Equivalents award, a Deferred Stock award, a Stock Payment
award or a Stock Appreciation Right which may be awarded or granted under the
Plan (collectively, "Awards").
"Award Agreement" shall mean a written agreement executed by an authorized
officer of the Company and the Holder which shall contain such terms and
conditions with respect to an Award as the Administrator shall determine,
consistent with the Plan.
"Award Limit" shall mean one hundred thousand (100,000) shares of Common
Stock, as adjusted pursuant to Section 11.3 of the Plan.
A-1
<PAGE>
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean a change in ownership or control of the
Company effected through any of the following transactions:
(a) any person or related group of persons (other than the Company
or a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange
Act) of securities of the Company representing forty percent (40%) or more
of the total combined voting power of the Company's then outstanding
securities; or
(b) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation (or other entity),
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 66-2/3% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation; provided, however, that a merger or consolidation effected
to implement a recapitalization of the Company (or similar transaction) in
which no person acquires more than 40% of the combined voting power of the
Company's then outstanding securities shall not constitute a Change in
Control; or
(c) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale of disposition by
the Company of all or substantially all of the Company's assets, or
(d) a majority of the members of the Board cease to be, as of any
date of determination, members of the Board who were members of the Board
as of the date the Plan was approved by the stockholders of the Company or
was nominated for election or elected to the Board with the approval of a
majority of the members of the Board at the time of such nomination or
election.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Compensation Committee of the Board, or another
committee or subcommittee of the Board, appointed as provided in Section 11.1.
"Common Stock" shall mean the common stock of the Company, par value $.01
per share, and any equity security of the Company issued or authorized to be
issued in the future, but excluding any preferred stock and any warrants,
options or other rights to purchase Common Stock. Debt securities of the Company
convertible into Common Stock shall be deemed equity securities of the Company.
"Company" shall mean LTC Properties, Inc., a Maryland corporation.
"Corporate Transaction" shall mean any of the following
stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated, form a
holding company or effect a similar reorganization as to form whereupon
the Plan and all Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to clause (a), above; or
A-2
<PAGE>
(c) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than forty percent (40%) of the
total combined voting power of the Company's outstanding securities are
transferred or issued to a person or persons different from those who held
such securities immediately prior to such merger.
"CSAR" shall mean a Coupled Stock Appreciation Right.
"Deferred Stock" shall mean Common Stock awarded under Article VIII of the
Plan.
"Director" shall mean a member of the Board.
"Dividend Equivalent" shall mean a right to receive the equivalent value
(in cash or Common Stock) of dividends paid on Common Stock, awarded under
Article VIII of the Plan.
"Employee" shall mean any officer or other employee (as defined in
accordance with Section 3401(c) of the Code) of the Company, or of any
corporation which is a Subsidiary.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.
"Fair Market Value" of a share of Common Stock as of a given date shall be
(i) the closing price of a share of Common Stock on the principal exchange on
which shares of Common Stock are then trading, if any (or as reported on any
composite index which includes such principal exchange), on the trading day
previous to such date, or if shares were not traded on the trading day previous
to such date, then on the next preceding date on which a trade occurred, or (ii)
if Common Stock is not traded on an exchange but is quoted on NASDAQ or a
successor quotation system, the mean between the closing representative bid and
asked prices for the Common Stock on the trading day previous to such date as
reported by NASDAQ or such successor quotation system; or (iii) if Common Stock
is not publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the Fair Market Value of a share of Common Stock as
established by the Administrator acting in good faith.
"Grantee" shall mean an Employee, Independent Director or consultant
granted a Performance Award, Dividend Equivalent, Stock Payment or Stock
Appreciation Right, or an award of Deferred Stock, under the Plan.
"Holder" shall mean a person who has been granted or awarded an Award.
"Incentive Stock Option" shall mean an option which conforms to the
applicable provisions of Section 422 of the Code and which is designated as an
Incentive Stock Option by the Committee.
"Independent Director" shall mean a member of the Board who is not an
Employee of the Company.
"Non-Qualified Stock Option" shall mean an Option which is not designated
as an Incentive Stock Option by the Committee.
"Option" shall mean a stock option granted under Article IV of the Plan.
An Option granted under the Plan shall, as determined by the Committee, be
either a Non-Qualified Stock Option or an Incentive Stock Option; provided,
however, that Options granted to Independent Directors and consultants shall be
Non-Qualified Stock Options.
"Optionee" shall mean an Employee, consultant or Independent Director
granted an Option under the Plan.
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"Performance Award" shall mean a cash bonus, stock bonus or other
performance or incentive award that is paid in cash, Common Stock or a
combination of both, awarded under Article VIII of the Plan.
"Performance Criteria" shall mean the following business criteria with
respect to the Company or any Subsidiary: (i) net income, (ii) investments,
(iii) cash flow, (iv) earnings per share, (v) return on equity, (vi) return on
invested capital or assets, (vii) cost reductions or savings, (viii) funds from
operations, (ix) appreciation in the fair market value of Common Stock and (x)
earnings before any one or more of the following items: interest, depreciation
or amortization.
"Plan" shall mean The 1998 Equity Participation Plan of LTC Properties,
Inc.
"QDRO" shall mean a qualified domestic relations order as defined by the
Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended, or the rules thereunder.
"Restricted Stock" shall mean Common Stock awarded under Article VII of
the Plan.
"Restricted Stockholder" shall mean an Employee, Independent Director or
consultant granted an award of Restricted Stock under Article VII of the Plan.
"Rule 16b-3" shall mean that certain Rule 16b-3 under the Exchange Act, as
such Rule may be amended from time to time.
"Section 162(m) Participant" shall mean any key Employee designated by the
Committee as a key Employee whose compensation for the fiscal year in which the
key Employee is so designated or a future fiscal year may be subject to the
limit on deductible compensation imposed by Section 162(m) of the Code.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stock Appreciation Right" shall mean a stock appreciation right granted
under Article IX of the Plan.
"Stock Payment" shall mean (i) a payment in the form of shares of Common
Stock, or (ii) an option or other right to purchase shares of Common Stock, as
part of a deferred compensation arrangement, made in lieu of all or any portion
of the compensation, including without limitation, salary, bonuses and
commissions, that would otherwise become payable to a key Employee or consultant
in cash or director fees that would otherwise be paid to an Independent Director
in cash, awarded under Article VIII of the Plan.
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain.
"Termination of Consultancy" shall mean the time when the engagement of a
Holder as a consultant to the Company or a Subsidiary is terminated for any
reason, with or without cause and with or without notice, including, but not by
way of limitation, by resignation, discharge, death or retirement; but excluding
terminations where there is a simultaneous commencement of employment with the
Company or any Subsidiary. The Committee, in its absolute discretion, shall
determine the effect of all matters and questions relating to Termination of
Consultancy, including, but not by way of limitation, the question of whether a
Termination of Consultancy resulted from a discharge for good cause, and all
questions of whether a particular leave of absence constitutes a Termination of
Consultancy. Notwithstanding any other provision of the Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate a consultant's
service at any time for any reason whatsoever, with or without cause and with or
without notice, except to the extent expressly provided otherwise in writing.
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"Termination of Directorship" shall mean the time when a Holder who is an
Independent Director ceases to be a Director for any reason, including, but not
by way of limitation, a termination by resignation, failure to be elected, death
or retirement. The Board, in its sole and absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Directorship
with respect to Independent Directors.
"Termination of Employment" shall mean the time when the employee-employer
relationship between a Holder and the Company or any Subsidiary is terminated
for any reason, with or without cause and with or without notice, including, but
not by way of limitation, a termination by resignation, discharge, death,
disability or retirement; but excluding (i) terminations where there is a
simultaneous reemployment or continuing employment of a Holder by the Company or
any Subsidiary, (ii) at the discretion of the Committee, terminations which
result in a temporary severance of the employee-employer relationship, and (iii)
at the discretion of the Committee, terminations which are followed by the
simultaneous establishment of a consulting relationship by the Company or a
Subsidiary with the former employee. The Committee, in its absolute discretion,
shall determine the effect of all matters and questions relating to Termination
of Employment, including, but not by way of limitation, the question of whether
a Termination of Employment resulted from a discharge for good cause, and all
questions of whether a particular leave of absence constitutes a Termination of
Employment; provided, however, that, with respect to Incentive Stock Options,
unless otherwise determined by the Committee in its discretion, a leave of
absence, change in status from an employee to an independent contractor or other
change in the employee-employer relationship shall constitute a Termination of
Employment if, and to the extent that, such leave of absence, change in status
or other change interrupts employment for the purposes of Section 422(a)(2) of
the Code and the then applicable regulations and revenue rulings under said
Section. Notwithstanding any other provision of the Plan, the Company or any
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause and with
or without notice, except to the extent expressly provided otherwise in writing.
ARTICLE II.
SHARES SUBJECT TO PLAN
2.1. Shares Subject to Plan.
(a) The shares of stock subject to Awards shall be Common Stock,
initially shares of the Company's Common Stock, par value $.01 per share.
The aggregate number of such shares which may be issued upon exercise of
such Options or rights or upon any such awards under the Plan shall not
exceed Five Hundred Thousand (500,000). The shares of Common Stock
issuable upon exercise of such Options or rights or upon any such awards
may be either previously authorized but unissued shares or treasury
shares.
(b) The maximum number of shares which may be subject to Awards,
granted under the Plan to any individual in any calendar year shall not
exceed the Award Limit. To the extent required by Section 162(m) of the
Code, shares subject to Options which are canceled continue to be counted
against the Award Limit and if, after grant of an Option, the price of
shares subject to such Option is reduced, the transaction is treated as a
cancellation of the Option and a grant of a new Option and both the Option
deemed to be canceled and the Option deemed to be granted are counted
against the Award Limit. Furthermore, to the extent required by Section
162(m) of the Code, if, after grant of a Stock Appreciation Right, the
base amount on which stock appreciation is calculated is reduced to
reflect a reduction in the Fair Market Value of the Common Stock, the
transaction is treated as a cancellation of the Stock Appreciation Right
and a grant of a new Stock Appreciation Right and both the Stock
Appreciation Right deemed to be canceled and the Stock Appreciation Right
deemed to be granted are counted against the Award Limit.
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2.2. Add-back of Options and Other Rights. If any Option, or other right
to acquire shares of Common Stock under any other Award under the Plan, expires
or is canceled without having been fully exercised, or is exercised in whole or
in part for cash as permitted by the Plan, the number of shares subject to such
Option or other right but as to which such Option or other right was not
exercised prior to its expiration, cancellation or exercise may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Furthermore, any shares subject to Awards which are adjusted pursuant to
Section 11.3 and become exercisable with respect to shares of stock of another
corporation shall be considered cancelled and may again be optioned, granted or
awarded hereunder, subject to the limitations of Section 2.1. Shares of Common
Stock which are delivered by the Holder or withheld by the Company upon the
exercise of any Award under the Plan, in payment of the exercise price thereof
or tax withholding thereon, may again be optioned, granted or awarded hereunder,
subject to the limitations of Section 2.1. If any share of Restricted Stock is
forfeited by the Holder or repurchased by the Company pursuant to Section 7.5
hereof, such share may again be optioned, granted or awarded hereunder, subject
to the limitations of Section 2.1. Notwithstanding the provisions of this
Section 2.2, no shares of Common Stock may again be optioned, granted or awarded
if such action would cause an Incentive Stock Option to fail to qualify as an
incentive stock option under Section 422 of the Code.
ARTICLE III.
GRANTING OF AWARDS
3.1 Award Agreement. Each Award shall be evidenced by an Award Agreement.
Award Agreements evidencing Awards intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code. Award Agreements evidencing Incentive Stock Options
shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
3.2 Provisions Applicable to Section 162(m) Participants.
(a) The Committee, in its discretion, may determine whether an Award
is to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code.
(b) Notwithstanding anything in the Plan to the contrary, the
Committee may grant any Award to a Section 162(m) Participant, including
Restricted Stock the restrictions with respect to which lapse upon the
attainment of performance goals which are related to one or more of the
Performance Criteria and any performance or incentive award described in
Article VIII that vests or becomes exercisable or payable upon the
attainment of performance goals which are related to one or more of the
Performance Criteria.
(c) To the extent necessary to comply with the performance-based
compensation requirements of Section 162(m)(4)(C) of the Code, with
respect to any Award granted under Articles VII and VIII which may be
granted to one or more Section 162(m) Participants, no later than ninety
(90) days following the commencement of any fiscal year in question or any
other designated fiscal period or period of service (or such other time as
may be required or permitted by Section 162(m) of the Code), the Committee
shall, in writing, (i) designate one or more Section 162(m) Participants,
(ii) select the Performance Criteria applicable to the fiscal year or
other designated fiscal period or period of service, (iii) establish the
various performance targets, in terms of an objective formula or standard,
and amounts of Restricted Stock or bonus amounts, as applicable, which may
be earned for such fiscal year or other designated fiscal period or period
of service and (iv) specify the relationship between Performance Criteria
and the performance targets and the amounts of Restricted Stock or bonus
amounts, as applicable, to be earned by each Section 162(m) Participant
for such fiscal year or other designated fiscal period or period of
service. Following the completion of each fiscal year or other
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designated fiscal period or period of service, the Committee shall certify
in writing whether the applicable performance targets have been achieved
for such fiscal year or other designated fiscal period or period of
service. In determining the amount earned by a Section 162(m) Participant,
the Committee shall have the right to reduce (but not to increase) the
amount payable at a given level of performance to take into account
additional factors that the Committee may deem relevant to the assessment
of individual or corporate performance for the fiscal year or other
designated fiscal period or period of service.
3.3 Consideration. In consideration of the granting of an Award under the
Plan, the Holder shall agree, in the Award Agreement, to remain in the employ of
(or to consult for or to serve as an Independent Director of, as applicable) the
Company or any Subsidiary for a period of at least one year (or such shorter
period as may be fixed in the Award Agreement or by action of the Administrator
following grant of the Award) after the Award is granted (or, in the case of an
Independent Director, until the next annual meeting of stockholders of the
Company).
3.4 At-Will Employment. Nothing in the Plan or in any Award Agreement
hereunder shall confer upon any Holder any right to continue in the employ of,
or as a consultant for, the Company or any Subsidiary, or as a director of the
Company, or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Holder at any time for any reason whatsoever, with or without cause and with
or without notice, except to the extent expressly provided otherwise in a
written employment agreement between the Holder and the Company and any
Subsidiary.
ARTICLE IV.
GRANTING OF OPTIONS TO EMPLOYEES,
CONSULTANTS AND INDEPENDENT DIRECTORS
4.1. Eligibility. Any Employee or consultant selected by the Committee
pursuant to Section 4.4(a)(i) shall be eligible to be granted an Option. Each
Independent Director of the Company shall be eligible to be granted Options at
the times and in the manner set forth in Sections 4.5 and 4.6.
4.2. Disqualification for Stock Ownership. No person may be granted an
Incentive Stock Option under the Plan if such person, at the time the Incentive
Stock Option is granted, owns stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or any
then existing Subsidiary or parent corporation (within the meaning of Section
422 of the Code) unless such Incentive Stock Option conforms to the applicable
provisions of Section 422 of the Code.
4.3. Qualification of Incentive Stock Options. No Incentive Stock Option
shall be granted to any person who is not an Employee.
4.4. Granting of Options to Employees and Consultants.
(a) The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of the Plan:
(i) Determine which Employees are key Employees and select
from among the key Employees or consultants (including Employees or
consultants who have previously received Awards under the Plan) such
of them as in its opinion should be granted Options;
(ii) Subject to the Award Limit, determine the number of
shares to be subject to such Options granted to the selected key
Employees or consultants;
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(iii) Subject to Section 4.3, determine whether such Options
are to be Incentive Stock Options or Non-Qualified Stock Options and
whether such Options are to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with the Plan; provided, however, that the terms and
conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall
include, but not be limited to, such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the
Code.
(b) Upon the selection of a key Employee or consultant to be granted
an Option, the Committee shall instruct the Secretary of the Company to
issue the Option and may impose such conditions on the grant of the Option
as it deems appropriate. Without limiting the generality of the preceding
sentence, the Committee may, in its discretion and on such terms as it
deems appropriate, require as a condition on the grant of an Option to an
Employee or consultant that the Employee or consultant surrender for
cancellation some or all of the unexercised Options, any other Award or
other rights which have been previously granted to him/her under the Plan
or otherwise. An Option, the grant of which is conditioned upon such
surrender, may have an Option price lower (or higher) than the exercise
price of such surrendered Option or other award, may cover the same (or a
lesser or greater) number of shares as such surrendered Option or other
award, may contain such other terms as the Committee deems appropriate,
and shall be exercisable in accordance with its terms, without regard to
the number of shares, price, exercise period or any other term or
condition of such surrendered Option or other award.
(c) Any Incentive Stock Option granted under the Plan may be
modified by the Committee, with the consent of the Optionee, to disqualify
such Option from treatment as an "incentive stock option" under Section
422 of the Code.
4.5 Granting of Options to Independent Directors
(a) During the term of the Plan, a person who is initially elected
to the Board and who is an Independent Director at the time of such
initial election automatically shall be granted an Option to purchase
Fifteen Thousand (15,000) shares of Common Stock (subject to adjustment as
provided in Section 11.3) on the date of such initial election. Members of
the Board who are employees of the Company who subsequently retire from
the Company and remain on the Board will not receive an initial Option
grant pursuant to the preceding sentence.
(b) The Board shall from time to time, in its absolute discretion,
and subject to applicable limitations of the Plan determine (i) which
Independent Directors, if any, should, in its opinion, be granted
Non-Qualified Stock Options, (ii) subject to the Award Limit, determine
the number of number of shares to be subject to such Options, and (iii)
the terms and conditions of such Options, consistent with the Plan.
4.6. Options in Lieu of Cash Compensation. Options may be granted under
the Plan to Employees and consultants in lieu of cash bonuses which would
otherwise be payable to such Employees and consultants and to Independent
Directors in lieu of directors' fees which would otherwise be payable to such
Independent Directors, pursuant to such policies which may be adopted by the
Administrator from time to time.
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ARTICLE V.
TERMS OF OPTIONS
5.1 Option Price. The price per share of the shares subject to each Option
granted to Employees and consultants shall be set by the Committee; provided,
however, that such price shall be no less than the par value of a share of
Common Stock, unless otherwise permitted by applicable state law, and (i) in the
case of Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, such price shall not be less than
100% of the Fair Market Value of a share of Common Stock on the date the Option
is granted; (ii) in the case of Incentive Stock Options such price shall not be
less than 100% of the Fair Market Value of a share of Common Stock on the date
the Option is granted (or the date the Option is modified, extended or renewed
for purposes of Section 424(h) of the Code); and (iii) in the case of Incentive
Stock Options granted to an individual then owning (within the meaning of
Section 424(d) of the Code) more than 10% of the total combined voting power of
all classes of stock of the Company or any Subsidiary or parent corporation
thereof (within the meaning of Section 422 of the Code), such price shall not be
less than 110% of the Fair Market Value of a share of Common Stock on the date
the Option is granted (or the date the Option is modified, extended or renewed
for purposes of Section 424(h) of the Code).
5.2 Option Term. The term of an Option granted to an Employee or
consultant shall be set by the Committee in its discretion; provided, however,
that, in the case of Incentive Stock Options, the term shall not be more than
ten (10) years from the date the Incentive Stock Option is granted, or five (5)
years from such date if the Incentive Stock Option is granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code). Except as limited by requirements of Section 422 of the Code and
regulations and rulings thereunder applicable to Incentive Stock Options, the
Committee may extend the term of any outstanding Option in connection with any
Termination of Employment or Termination of Consultancy of the Optionee, or
amend any other term or condition of such Option relating to such a termination.
5.3 Option Vesting
(a) The period during which the right to exercise, in whole or in
part, an Option granted to an Employee or a consultant vests in the
Optionee shall be set by the Committee in its sole and absolute discretion
and the Committee may determine that an Option may not be exercised in
whole or in part for a specified period after it is granted; provided,
however, that, unless the Committee otherwise provides in the terms of the
Award Agreement or otherwise, no Option shall be exercisable by any
Optionee who is then subject to Section 16 of the Exchange Act within the
period ending six months and one day after the date the Option is granted.
At any time after grant of an Option, the Committee may, in its sole and
absolute discretion and subject to whatever terms and conditions it
selects, accelerate the period during which an Option granted to an
Employee or consultant vests.
(b) No portion of an Option granted to an Employee or consultant
which is unexercisable at Termination of Employment or Termination of
Consultancy, as applicable, shall thereafter become exercisable, except as
may be otherwise provided by the Committee either in the Award Agreement
or by action of the Committee following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section
422 of the Code, but without regard to Section 422(d) of the Code) are
exercisable for the first time by an Optionee during any calendar year
(under the Plan and all other incentive stock option plans of the Company
and any parent or subsidiary corporation (within the meaning of Section
422 of the Code) of the Company) exceeds $100,000, such Options shall be
treated as Non-Qualified Options to the extent required by Section 422 of
the Code. The rule set forth in the preceding sentence shall be applied by
taking Options into
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account in the order in which they were granted. For purposes of this
Section 5.3(c), the Fair Market Value of stock shall be determined as of
the time the Option with respect to such stock is granted.
5.4 Terms of Options Granted to Independent Directors. The price per share
of the shares subject to each Option granted to an Independent Director shall
equal 100% of the Fair Market Value of a share of Common Stock on the date the
Option is granted. Subject to Section 6.6, each Option granted to an Independent
Director pursuant to Section 4.5 shall become exercisable in cumulative annual
installments of 33-1/3% on each of the first, second and third anniversaries of
the date of grant and shall expire on the earlier of the seventh anniversary of
the date of vesting or one year following an Independent Director's Termination
of Directorship for any reason; provided that no Option shall vest more than one
year following an Independent Director's Termination of Directorship.
ARTICLE VI.
EXERCISE OF OPTIONS
6.1. Partial Exercise. An exercisable Option may be exercised in whole or
in part. However, an Option shall not be exercisable with respect to fractional
shares and the Administrator may require that, by the terms of the Option, a
partial exercise be with respect to a minimum number of shares.
6.2. Manner of Exercise. All or a portion of an exercisable Option shall
be deemed exercised upon delivery of all of the following to the Secretary of
the Company or his/her office:
(a) A written notice complying with the applicable rules established
by the Administrator stating that the Option, or a portion thereof, is
exercised. The notice shall be signed by the Optionee or other person then
entitled to exercise the Option or such portion of the Option;
(b) Such representations and documents as the Administrator, in its
absolute discretion, deems necessary or advisable to effect compliance
with all applicable provisions of the Securities Act and any other federal
or state securities laws or regulations. The Administrator may, in its
absolute discretion, also take whatever additional actions it deems
appropriate to effect such compliance including, without limitation,
placing legends on share certificates and issuing stop-transfer notices to
agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 11.1 by any person or persons other than the Optionee, appropriate
proof of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised.
However, the Administrator, may in its discretion (i) allow a delay in
payment up to thirty (30) days from the date the Option, or portion
thereof, is exercised; (ii) allow payment, in whole or in part, through
the delivery of shares of Common Stock owned by the Optionee, duly
endorsed for transfer to the Company with a Fair Market Value on the date
of delivery equal to the aggregate exercise price of the Option or
exercised portion thereof; (iii) allow payment, in whole or in part,
through the surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option
exercise equal to the aggregate exercise price of the Option or exercised
portion thereof; (iv) allow payment, in whole or in part, through the
delivery of property of any kind which constitutes good and valuable
consideration; (v) allow payment, in whole or in part, through the
delivery of a full recourse promissory note bearing interest (at no less
than such rate as shall then preclude the imputation of interest under the
Code) and payable upon such terms as may be prescribed by the Committee or
the Board; (vi) allow payment, in whole or in part, through the delivery
of a notice that the Optionee has placed a market sell order with a broker
with respect to shares of Common Stock then issuable upon
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exercise of the Option, and that the broker has been directed to pay a
sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price; or (vii) allow payment through
any combination of the consideration provided in the foregoing
subparagraphs (ii), (iii), (iv), (v) and (vi). In the case of a promissory
note, the Administrator may also prescribe the form of such note and the
security to be given for such note. The Option may not be exercised,
however, by delivery of a promissory note or by a loan from the Company
when or where such loan or other extension of credit is prohibited by law.
6.3. Conditions to Issuance of Stock Certificates. The Company shall not
be required to issue or deliver any certificate or certificates for shares of
stock purchased upon the exercise of any Option or portion thereof prior to
fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges
on which such class of stock is then listed;
(b) The completion of any registration or other qualification of
such shares under any state or federal law, or under the rulings or
regulations of the Securities and Exchange Commission or any other
governmental regulatory body which the Administrator shall, in its
absolute discretion, deem necessary or advisable;
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Administrator shall, in its
absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of Options
granted to Independent Directors) may establish from time to time for
reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax, which in the
discretion of the Committee or the Board may be in the form of
consideration used by the Optionee to pay for such shares under Section
6.2(d).
6.4. Rights as Stockholders/ Dividend Equivalents. Optionees shall not be,
nor have any of the rights or privileges of, stockholders of the Company in
respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates representing such shares have been issued by the
Company to such Optionees. Notwithstanding the foregoing, any Optionee may be
granted Dividend Equivalents based on the dividends declared on Common Stock, to
be credited as of dividend payment dates, during the period between the date an
Option is granted, and the date such Option is exercised, vests or expires, as
determined by the Committee (or the Board, with respect to Independent
Directors). Such Dividend Equivalents shall be converted to cash or additional
shares of Common Stock by such formula and at such time and subject to such
limitations as may be determined by the Committee (or the Board, with respect to
Independent Directors). With respect to Dividend Equivalents granted with
respect to Options intended to be qualified performance-based compensation for
purposes of Section 162(m) of the Code, such Dividend Equivalents shall be
payable as of dividend payment dates regardless of whether such Option is
exercised.
6.5. Ownership and Transfer Restrictions. The Administrator, in its
absolute discretion, may impose such restrictions on the ownership and
transferability of the shares purchasable upon the exercise of an Option as it
deems appropriate. Any such restriction shall be set forth in the respective
Award Agreement and may be referred to on the certificates evidencing such
shares. The Committee may require the Employee to give the Company prompt notice
of any disposition of shares of Common Stock acquired by exercise of an
Incentive Stock Option within (i) two years from the date of granting (including
the date the Option is modified, extended or renewed for purposes of Section
424(h) of the Code) such Option to such Employee or (ii) one year after the
transfer of such shares to such Employee. The Committee may direct that the
certificates
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evidencing shares acquired by exercise of any such Option refer to such
requirement to give prompt notice of disposition.
6.6. Additional Limitations on Exercise of Options. Optionees may be
required to comply with any timing or other restrictions with respect to the
settlement or exercise of an Option, including a window-period limitation, as
may be imposed in the discretion of the Administrator.
ARTICLE VII.
AWARD OF RESTRICTED STOCK
7.1. Eligibility. Subject to the Award Limit, Restricted Stock may be
awarded to any Employee who the Committee determines is a key Employee, any
consultant who the Committee determines should receive such an Award or any
Independent Director who the Board determines should receive such an Award.
7.2. Award of Restricted Stock.
(a) The Committee (or the Board, with respect to Independent
Directors) may from time to time, in its absolute discretion:
(i) Determine which Employees are key Employees and select
from among the key Employees, Independent Directors or consultants
(including Employees, Independent Directors or consultants who have
previously received other awards under the Plan) such of them as in
its opinion should be awarded Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with the
Plan.
(b) The Committee (or the Board, with respect to Independent
Directors) shall establish the purchase price, if any, and form of payment
for Restricted Stock.
(c) Upon the selection of a key Employee, Independent Director or
consultant to be awarded Restricted Stock, the Committee (or the Board,
with respect to Independent Directors) shall instruct the Secretary of the
Company to issue such Restricted Stock and may impose such conditions on
the issuance of such Restricted Stock as it deems appropriate.
7.3. Rights as Stockholders. Subject to Section 7.4, upon delivery of the
shares of Restricted Stock to the escrow holder pursuant to Section 7.6, the
Restricted Stockholder shall have, unless otherwise provided by the Committee
(or the Board, with respect to Independent Directors), all the rights of a
stockholder with respect to said shares, subject to the restrictions in his/her
Award Agreement, including the right to receive all dividends and other
distributions paid or made with respect to the shares; provided, however, that
in the discretion of the Committee (or the Board, with respect to Independent
Directors), any extraordinary distributions with respect to the Common Stock
shall be subject to the restrictions set forth in Section 7.4.
7.4. Restriction. All shares of Restricted Stock issued under the Plan
(including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Award Agreement, be
subject to such restrictions as the Committee (or the Board, with respect to
Independent Directors) shall provide, which restrictions may include, without
limitation, restrictions concerning voting rights and transferability and
restrictions based on duration of employment with the Company, Company
performance and individual performance; provided, however, that, except with
respect to shares of Restricted Stock granted to Section
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162(m) Participants, by action taken after the Restricted Stock is issued, the
Committee may, on such terms and conditions as it may determine to be
appropriate, remove any or all of the restrictions imposed by the terms of the
Award Agreement. Restricted Stock may not be sold or encumbered until all
restrictions are terminated or expire. If no consideration was paid by the
Restricted Stockholder upon issuance, a Restricted Stockholder's rights in
unvested Restricted Stock shall lapse upon Termination of Employment or, if
applicable, upon Termination of Consultancy or Termination of Directorship with
the Company; provided, however, that the Committee in its sole and absolute
discretion may provide that such rights shall not lapse in the event of a
Termination of Employment following a "change of ownership control" (within the
meaning of Treasury Regulation Section 1.62-27(e)(2)(v) or any successor
regulation thereto) of the Company or because of the Restricted Stockholder's
death or disability; provided, further, except with respect to shares of
Restricted Stock granted to Section 162(m) Participants, the Committee in its
sole and absolute discretion may provide that no such right of repurchase shall
exist in the event of a Termination of Employment, or a Termination of
Consultancy, without cause or following any Change in Control of the Company or
because of the Restricted Stockholder's retirement, or otherwise.
7.5. Repurchase of Restricted Stock. The Committee (or the Board, with
respect to Independent Directors) shall provide in the terms of each individual
Award Agreement that the Company shall have the right to repurchase from the
Restricted Stockholder the Restricted Stock then subject to restrictions under
the Award Agreement immediately upon a Termination of Employment or, if
applicable, upon a Termination of Consultancy between the Restricted Stockholder
and the Company, at a cash price per share equal to the price paid by the
Restricted Stockholder for such Restricted Stock; provided, however, that the
Committee in its sole and absolute discretion may provide that no such right of
repurchase shall exist in the event of a Termination of Employment following a
"change of ownership or control" (within the meaning of Treasury Regulation
Section 1.162-27(e)(2)(v) or any successor regulation thereto) of the Company or
because of the Restricted Stockholder's death or disability; provided, further,
that, except with respect to shares of Restricted Stock granted to Section
162(m) Participants, the Committee in its sole and absolute discretion may
provide that no such right of repurchase shall exist in the event of a
Termination of Employment or a Termination of Consultancy without cause or
following any Change in Control of the Company or because of the Restricted
Stockholder's retirement, or otherwise.
7.6. Escrow. The Secretary of the Company or such other escrow holder as
the Committee may appoint shall retain physical custody of each certificate
representing Restricted Stock until all of the restrictions imposed under the
Award Agreement with respect to the shares evidenced by such certificate expire
or shall have been removed.
7.7. Legend. In order to enforce the restrictions imposed upon shares of
Restricted Stock hereunder, the Committee (or the Board, with respect to
Independent Directors) shall cause a legend or legends to be placed on
certificates representing all shares of Restricted Stock that are still subject
to restrictions under Award Agreements, which legend or legends shall make
appropriate reference to the conditions imposed thereby.
7.8. Section 83(b) Election. If a Restricted Stockholder makes an election
under Section 83(b) of the Code, or any successor section thereto, to be taxed
with respect to the Restricted Stock as of the date of transfer of the
Restricted Stock rather than as of the date or dates upon which the Restricted
Stockholder would otherwise be taxable under Section 83(a) of the Code, the
Restricted Stockholder shall deliver a copy of such election to the Company
immediately after filing such election with the Internal Revenue Service.
7.9. Restricted Stock in Lieu of Cash Compensation. Restricted Stock may
be awarded under the Plan to Employees and consultants in lieu of cash bonuses
which would otherwise be payable to such Employees and consultants and to
Independent Directors in lieu of directors' fees which would otherwise be
payable to such Independent Directors, pursuant to such policies which may be
adopted by the Administrator from time to time.
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ARTICLE VIII.
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS, DEFERRED STOCK,
STOCK PAYMENTS
8.1. Eligibility. Subject to the Award Limit, one or more Performance
Awards, Dividend Equivalents, awards of Deferred Stock, and/or Stock Payments
may be granted to any Employee who the Committee determines is a key Employee,
any consultant who the Committee determines should receive such an Award or any
Independent Director who the Board determines should receive such an Award.
8.2. Performance Awards. Any key Employee or consultant selected by the
Committee or any Independent Director selected by the Board may be granted one
or more Performance Awards. The value of such Performance Awards may be linked
to any one or more of the Performance Criteria or other specific performance
criteria determined appropriate by the Committee (or the Board, with respect to
Independent Directors), in each case on a specified date or dates or over any
period or periods determined by the Committee (or the Board, with respect to
Independent Directors). In making such determinations, the Committee (or the
Board, with respect to Independent Directors) shall consider (among such other
factors as it deems relevant in light of the specific type of award) the
contributions, responsibilities and other compensation of the particular key
Employee, Independent Director or consultant.
8.3. Dividend Equivalents. Any key Employee or consultant selected by the
Committee or any Independent Director selected by the Board may be granted
Dividend Equivalents based on the dividends declared on Common Stock, to be
credited as of dividend payment dates, during the period between the date a
Stock Appreciation Right, Deferred Stock or Performance Award is granted, and
the date such Stock Appreciation Right, Deferred Stock or Performance Award is
exercised, vests or expires, as determined by the Committee (or the Board, with
respect to Independent Directors). Such Dividend Equivalents shall be converted
to cash or additional shares of Common Stock by such formula and at such time
and subject to such limitations as may be determined by the Committee (or the
Board, with respect to Independent Directors).
8.4. Stock Payments. Any key Employee or consultant selected by the
Committee or any Independent Director selected by the Board may receive Stock
Payments in the manner determined from time to time by the Committee (or the
Board, with respect to Independent Directors). The number of shares shall be
determined by the Committee (or the Board, with respect to Independent
Directors) and may be based upon the Performance Criteria or other specific
performance criteria determined appropriate by the Committee (or the Board, with
respect to Independent Directors), determined on the date such Stock Payment is
made or on any date thereafter.
8.5. Deferred Stock. Any key Employee or consultant selected by the
Committee or any Independent Director selected by the Board may be granted an
award of Deferred Stock in the manner determined from time to time by the
Committee (or the Board, with respect to Independent Directors). The number of
shares of Deferred Stock shall be determined by the Committee (or the Board,
with respect to Independent Directors) and may be linked to the Performance
Criteria or other specific performance criteria determined to be appropriate by
the Committee (or the Board, with respect to Independent Directors), in each
case on a specified date or dates or over any period or periods determined by
the Committee (or the Board, with respect to Independent Directors). Common
Stock underlying a Deferred Stock award will not be issued until the Deferred
Stock award has vested, pursuant to a vesting schedule or performance criteria
set by the Committee (or the Board, with respect to Independent Directors).
Unless otherwise provided by the Committee (or the Board, with respect to
Independent Directors), a Holder of Deferred Stock shall have no rights as a
Company stockholder with respect to such Deferred Stock until such time as the
Award has vested and the Common Stock underlying the Award has been issued.
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8.6. Term. The term of a Performance Award, Dividend Equivalent, award of
Deferred Stock and/or Stock Payment shall be set by the Committee (or the Board,
with respect to Independent Directors) in its discretion.
8.7. Exercise or Purchase Price. The Committee (or the Board, with respect
to Independent Directors) may establish the exercise or purchase price of a
Performance Award, shares of Deferred Stock, or shares received as a Stock
Payment.
8.8. Exercise Upon Termination of Employment, Termination of Directorship
or Termination of Consultancy. A Performance Award, Dividend Equivalent, award
of Deferred Stock and/or Stock Payment is exercisable or payable only while the
Holder is an Employee, Independent Director or consultant; provided, however,
that the Committee in its sole and absolute discretion may provide that the
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment may be exercised or paid subsequent to a Termination of Employment
following a "change of control or ownership" (within the meaning of Section
1.162-27(e)(2)(v) or any successor regulation thereto) of the Company; provided,
further, that except with respect to Performance Awards granted to Section
162(m) Participants, the Committee in its sole and absolute discretion may
provide that the Performance Awards may be exercised or paid following a
Termination of Employment or a Termination of Consultancy without cause, or
following a Change in Control of the Company, or because of the Grantee's
retirement, death or disability, or otherwise.
8.9. Payment on Exercise. Payment of the amount determined under Section
8.1 or 8.2 above shall be in cash, in Common Stock or a combination of both, as
determined by the Committee (or the Board, with respect to Independent
Directors). To the extent any payment under this Article VIII is effected in
Common Stock, it shall be made subject to satisfaction of all provisions of
Section 6.3.
8.10. Performance Award, Dividend Equivalent, Deferred Stock and/or Stock
Payment in Lieu of Cash Compensation. Performance Awards, Dividend Equivalents,
Deferred Stock and/or Stock Payments may be awarded under the Plan to Employees
and consultants in lieu of cash bonuses which would otherwise be payable to such
Employees and consultants and to Independent Directors in lieu of directors'
fees which would otherwise be payable to such Independent Directors, pursuant to
such policies which may be adopted by the Administrator from time to time.
ARTICLE IX.
STOCK APPRECIATION RIGHTS
9.1. Grant of Stock Appreciation Rights. A Stock Appreciation Right may be
granted to any key Employee or consultant selected by the Committee or any
Independent Director selected by the Board. A Stock Appreciation Right may be
granted (i) in connection and simultaneously with the grant of an Option, (ii)
with respect to a previously granted Option, or (iii) independent of an Option.
A Stock Appreciation Right shall be subject to such terms and conditions not
inconsistent with the Plan as the Committee (or the Board, with respect to
Independent Directors) shall impose and shall be evidenced by an Award
Agreement. Without limiting the generality of the foregoing, the Committee (or
the Board, with respect to Independent Directors) may, in its discretion and on
such terms as it deems appropriate, require as a condition of the grant of a
Stock Appreciation Right to an Employee, Independent Director or consultant that
the Employee, Independent Director or consultant surrender for cancellation some
or all of the unexercised Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, or other rights which have been previously granted to him/her under
the Plan or otherwise. A Stock Appreciation Right, the grant of which is
conditioned upon such surrender, may have an exercise price lower (or higher)
than the exercise price of the surrendered Option or other award, may cover the
same (or a lesser or greater) number of shares as such surrendered Option or
other award, may contain such other terms as the Committee (or the Board, with
respect to Independent Directors) deems appropriate, and shall be exercisable
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in accordance with its terms, without regard to the number of shares, price,
exercise period or any other term or condition of such surrendered Option or
other award.
9.2. Coupled Stock Appreciation Rights.
(a) A CSAR shall be related to a particular Option and shall be
exercisable only when and to the extent the related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number
of shares subject to the simultaneously or previously granted Option to
which it is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to the Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the
extent then exercisable pursuant to its terms) and to receive from the
Company in exchange therefor an amount determined by multiplying the
difference obtained by subtracting the Option exercise price from the Fair
Market Value of a share of Common Stock on the date of exercise of the
CSAR by the number of shares of Common Stock with respect to which the
CSAR shall have been exercised, subject to any limitations the Committee
(or the Board, with respect to Independent Directors) may impose.
9.3. Independent Stock Appreciation Rights.
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee
(or the Board, with respect to Independent Directors). An ISAR shall
be exercisable in such installments as the Committee (or the Board,
with respect to Independent Directors) may determine. An ISAR shall
cover such number of shares of Common Stock as the Committee (or the
Board, with respect to Independent Directors) may determine. The
exercise price per share of Common Stock subject to each ISAR shall
be set by the Committee (or the Board, with respect to Independent
Directors). An ISAR is exercisable only while the Grantee is an
Employee, Independent Director or consultant; provided that the
Committee (or the Board, with respect to Independent Directors) may
determine that the ISAR may be exercised subsequent to Termination
of Employment, Termination of Directorship or Termination of
Consultancy without cause, or following a Change in Control of the
Company, or because of the Grantee's retirement, death or
disability, or otherwise.
(b) An ISAR shall entitle the Grantee (or other person
entitled to exercise the ISAR pursuant to the Plan) to exercise all
or a specified portion of the ISAR (to the extent then exercisable
pursuant to its terms) and to receive from the Company an amount
determined by multiplying the difference obtained by subtracting the
exercise price per share of the ISAR from the Fair Market Value of a
share of Common Stock on the date of exercise of the ISAR by the
number of shares of Common Stock with respect to which the ISAR
shall have been exercised, subject to any limitations the Committee
(or the Board, with respect to Independent Directors) may impose.
9.4. Payment and Limitations on Exercise.
(a) Payment of the amount determined under Section 9.2(c) and 9.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as
of the date the Stock Appreciation Right is exercised) or a combination of
both, as determined by the Committee (or the Board, with respect to
Independent Directors). To the extent such payment is effected in Common
Stock it shall be made subject to satisfaction of all provisions of
Section 6.3 above pertaining to Options.
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(b) Grantees of Stock Appreciation Rights may be required to comply
with any timing or other restrictions with respect to the settlement or
exercise of a Stock Appreciation Right, including a window-period
limitation, as may be imposed in the discretion of the Committee (or the
Board, with respect to Independent Directors).
ARTICLE X.
ADMINISTRATION
10.1. Compensation Committee. The Compensation Committee (or another
committee or a subcommittee of the Board assuming the functions of the Committee
under the Plan) shall consist solely of two or more Independent Directors
appointed by and holding office at the pleasure of the Board, each of whom is
both a "non-employee director" as defined by Rule 16b-3 and an "outside
director" for purposes of Section 162(m) of the Code. Appointment of Committee
members shall be effective upon acceptance of appointment. Committee members may
resign at any time by delivering written notice to the Board. Vacancies in the
Committee may be filled by the Board.
10.2. Duties and Powers of Committee. It shall be the duty of the
Committee to conduct the general administration of the Plan in accordance with
its provisions. The Committee shall have the power to interpret the Plan and the
agreements pursuant to which Awards are granted or awarded, and to adopt such
rules for the administration, interpretation, and application of the Plan as are
consistent therewith and to interpret, amend or revoke any such rules.
Notwithstanding the foregoing, the full Board, acting by a majority of its
members in office, shall conduct the general administration of the Plan with
respect to Options granted to Independent Directors. Any such grant or award
under the Plan need not be the same with respect to each Holder. Any such
interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under the Plan except with respect to matters
which under Rule 16b-3 or Section 162(m) of the Code, or any regulations or
rules issued thereunder, are required to be determined in the sole discretion of
the Committee.
10.3. Majority Rule; Unanimous Written Consent. The Committee shall act by
a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
10.4. Compensation; Professional Assistance; Good Faith Actions. Members
of the Committee shall receive such compensation for their services as may be
determined by the Board. All expenses and liabilities which members of the
Committee incur in connection with the administration of the Plan shall be borne
by the Company. The Committee may, with the approval of the Board, employ
attorneys, consultants, accountants, appraisers, brokers, or other persons. The
Committee, the Company and the Company's officers and Directors shall be
entitled to rely upon the advice, opinions or valuations of any such persons.
All actions taken and all interpretations and determinations made by the
Committee or the Board in good faith shall be final and binding upon all
Holders, the Company and all other interested persons. No members of the
Committee or Board shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or Awards, and all
members of the Committee and the Board shall be fully protected by the Company
in respect of any such action, determination or interpretation.
ARTICLE XI.
MISCELLANEOUS PROVISIONS
11.1. Not Transferable. No Award under the Plan may be sold, pledged,
assigned or transferred in any manner other than by will or the laws of descent
and distribution or, subject to the consent of the Administrator, pursuant to a
QDRO, unless and until such Award has been exercised, or the shares underlying
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such Award have been issued, and all restrictions applicable to such shares have
lapsed. No Option, Restricted Stock award, Deferred Stock award, Performance
Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment or
interest or right therein shall be liable for the debts, contracts or
engagements of the Holder or his/her successors in interest or shall be subject
to disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
During the lifetime of the Holder, only he may exercise an Option or other
Award (or any portion thereof) granted to him/her under the Plan, unless it has
been disposed of pursuant to a QDRO. After the death of the Holder, any
exercisable portion of an Option or other Award may, prior to the time when such
portion becomes unexercisable under the Plan or the applicable Award Agreement,
be exercised by his/her personal representative or by any person empowered to do
so under the deceased Holder's will or under the then applicable laws of descent
and distribution.
11.2. Amendment, Suspension or Termination of the Plan. Except as
otherwise provided in this Section 11.2, the Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 11.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under the Plan. No amendment,
suspension or termination of the Plan shall, without the consent of the Holder
alter or impair any rights or obligations under any Award theretofore granted or
awarded, unless the Award itself otherwise expressly so provides. No Awards may
be granted or awarded during any period of suspension or after termination of
the Plan, and in no event may any Incentive Stock Option be granted under the
Plan after the first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved
by the Company's stockholders under Section 11.4.
In addition, if the Board determines that Awards other than Options or
Stock Appreciation Rights which may be granted to Section 162(m) Participants
should continue to be eligible to qualify as performance-based compensation
under Section 162(m)(4)(C) of the Code, the Performance Criteria must be
disclosed to and approved by the Company's stockholders no later than the first
stockholder meeting that occurs in the fifth year following the year in which
the Company's stockholders previously approved the Performance Criteria.
11.3. Changes in Common Stock or Assets of the Company, Acquisition or
Liquidation of the Company, Change in Control and Other Corporate Events.
(a) Subject to Section 11.3(d), in the event that the Administrator
determines that any dividend or other distribution (whether in the form of
cash, Common Stock, other securities, or other property),
recapitalization, reclassification, stock split, reverse stock split,
reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, liquidation, dissolution, or sale, transfer, exchange or other
disposition of all or substantially all of the assets of the Company
(including, but not limited to, a Corporate Transaction), or exchange of
Common Stock or other securities of the Company, issuance of warrants or
other rights to purchase Common Stock or other securities of the Company,
or other similar corporate transaction or event, in the Administrator's
opinion, affects the Common Stock such that an adjustment is determined by
the Administrator to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made
available
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under the Plan or with respect to an Award, then the Administrator shall,
in such manner as it may deem equitable, adjust any or all of:
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Awards may be granted
or awarded (including, but not limited to, adjustments of the
limitations in Section 2.1 on the maximum number and kind of shares
which may be issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents, or Stock
Payments, and in the number and kind of shares of outstanding
Restricted Stock or Deferred Stock, and
(iii) the grant or exercise price with respect to any Award.
(b) Subject to Sections 11.3(b)(vii) and 11.3(d), in the event of
any Corporate Transaction or other transaction or event described in
Section 11.3(a) or any unusual or nonrecurring transactions or events
affecting the Company, any affiliate of the Company, or the financial
statements of the Company or any affiliate, or of changes in applicable
laws, regulations, or accounting principles, the Administrator, in its
sole and absolute discretion, and on such terms and conditions as it deems
appropriate, either by the terms of the Award or by action taken prior to
the occurrence of such transaction or event and either automatically or
upon the Holder's request, is hereby authorized to take any one or more of
the following actions whenever the Administrator determines that such
action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the
Plan or with respect to any Award under the Plan, to facilitate such
transactions or events or to give effect to such changes in laws,
regulations or principles:
(i) To provide for either the purchase of any such Award for
an amount of cash equal to the amount that could have been attained
upon the exercise of such Award or realization of the Holder's
rights had such Award been currently exercisable or payable or fully
vested or the replacement of such Award with other rights or
property selected by the Administrator in its sole discretion;
(ii) To provide that the Award cannot vest, be exercised or
become payable after such event;
(iii) To provide that such Award shall be exercisable as to
all shares covered thereby, notwithstanding anything to the contrary
in (i) Section 5.3 or 5.4 or (ii) the provisions of such Award;
(iv) To provide that such Award be assumed by the successor or
survivor corporation, or a parent or subsidiary thereof, or shall be
substituted for by similar options, rights or awards covering the
stock of the successor or survivor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number
and kind of shares and prices;
(v) To make adjustments in the number and type of shares of
Common Stock (or other securities or property) subject to
outstanding Awards, and in the number and kind of outstanding
Restricted Stock or Deferred Stock and/or in the terms and
conditions of (including the grant or exercise price), and the
criteria
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included in, outstanding options, rights and awards and options,
rights and awards which may be granted in the future.;
(vi) To provide that, for a specified period of time prior to
such event, the restrictions imposed under an Award Agreement upon
some or all shares of Restricted Stock or Deferred Stock may be
terminated, and, in the case of Restricted Stock, some or all shares
of such Restricted Stock may cease to be subject to repurchase under
Section 7.5 or forfeiture under Section 7.4 after such event; and
(vii) None of the foregoing discretionary actions taken under
this Section 11.3(b) shall be permitted with respect to Options
granted under Section 4.5 to Independent Directors to the extent
that such discretion would be inconsistent with the applicable
exemptive conditions of Rule 16b-3. In the event of a Change in
Control or a Corporate Transaction, to the extent that the Board
does not have the ability under Rule 16b-3 to take or to refrain
from taking the discretionary actions set forth in Section
11.3(b)(iii) above, each Option granted to an Independent Director
shall be exercisable as to all shares covered thereby upon such
Change in Control or during the five days immediately preceding the
consummation of such Corporate Transaction and subject to such
consummation, notwithstanding anything to the contrary in Section
5.4 or the vesting schedule of such Options. In the event of a
Corporate Transaction, to the extent that the Board does not have
the ability under Rule 16b-3 to take or to refrain from taking the
discretionary actions set forth in Section 11.3(b)(ii) above, no
Option granted to an Independent Director may be exercised following
such Corporate Transaction unless such Option is, in connection with
such Corporate Transaction, either assumed by the successor or
survivor corporation (or parent or subsidiary thereof) or replaced
with a comparable right with respect to shares of the capital stock
of the successor or survivor corporation (or parent or subsidiary
thereof).
(c) Subject to Section 11.3(d) and 11.8, the Administrator
may, in its discretion, include such further provisions and limitations in
any Award, agreement or certificate, as it may deem equitable and in the
best interests of the Company.
(d) With respect to Awards described in Article VII or VIII which
are granted to Section 162(m) Participants and are intended to qualify as
performance-based compensation under Section 162(m)(4)(C), no adjustment
or action described in this Section 11.3 or in any other provision of the
Plan shall be authorized to the extent that such adjustment or action
would cause such Award to fail to so qualify under Section 162(m)(4)(C),
or any successor provisions thereto. No adjustment or action described in
this Section 11.3 or in any other provision of the Plan shall be
authorized to the extent that such adjustment or action would cause the
Plan to violate Section 422(b)(1) of the Code. Furthermore, no such
adjustment or action shall be authorized to the extent such adjustment or
action would result in short-swing profits liability under Section 16 or
violate the exemptive conditions of Rule 16b-3 unless the Administrator
determines that the Award is not to comply with such exemptive conditions.
The number of shares of Common Stock subject to any Award shall always be
rounded to the next whole number.
11.4. Approval of Plan by Stockholders. The Plan will be submitted for the
approval of the Company's stockholders within twelve months after the date of
the Board's initial adoption of the Plan. Awards may be granted or awarded prior
to such stockholder approval; provided that such Awards shall not be exercisable
nor shall such Awards vest prior to the time when the Plan is approved by the
stockholders; and provided further, that if such approval has not been obtained
at the end of said twelve-month period, all Awards previously granted or awarded
under the Plan shall thereupon be canceled and become null and void.
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11.5. Tax Withholding. The Company shall be entitled to require payment in
cash or deduction from other compensation payable to each Holder of any sums
required by federal, state or local tax law to be withheld with respect to the
issuance, vesting, exercise or payment of any Award. The Administrator may in
its discretion and in satisfaction of the foregoing requirement allow such
Holder to elect to have the Company withhold shares of Common Stock otherwise
issuable under such Award (or allow the return of shares of Common Stock) having
a Fair Market Value equal to the sums required to be withheld.
11.6. Loans. The Committee may, in its discretion, extend one or more
loans to key Employees, Independent Directors or Consultants in connection with
the exercise or receipt of an Award granted or awarded under the Plan, or the
issuance of Restricted Stock or Deferred Stock awarded under the Plan. The terms
and conditions of any such loan shall be set by the Committee.
11.7. Forfeiture Provisions. Pursuant to its general authority to
determine the terms and conditions applicable to Awards under the Plan, the
Administrator shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3) to provide, in the terms of Awards made
under the Plan, or to require a Holder to agree by separate written instrument,
that (i) any proceeds, gains or other economic benefit actually or
constructively received by the Holder upon any receipt or exercise of the Award,
or upon the receipt or resale of any Common Stock underlying the Award, must be
paid to the Company, and (ii) the Award shall terminate and any unexercised
portion of the Award (whether or not vested) shall be forfeited, if (a) a
Termination of Employment, Termination of Consultancy or Termination of
Directorship occurs prior to a specified date, or within a specified time period
following receipt or exercise of the Award, or (b) the Holder at any time, or
during a specified time period, engages in any activity in competition with the
Company, or which is inimical, contrary or harmful to the interests of the
Company, as further defined by the Committee (or the Board, as applicable) or
the Holder incurs a Termination of Employment, Termination of Consultancy or
Termination of Directorship for cause.
11.8. Limitations Applicable to Section 16 Persons and Performance-Based
Compensation. Notwithstanding any other provision of the Plan, the Plan, and any
Award granted or awarded to any individual who is then subject to Section 16 of
the Exchange Act, shall be subject to any additional limitations set forth in
any applicable exemptive rule under Section 16 of the Exchange Act (including
any amendment to Rule 16b-3 of the Exchange Act) that are requirements for the
application of such exemptive rule. To the extent permitted by applicable law,
the Plan and Awards granted or awarded hereunder shall be deemed amended to the
extent necessary to conform to such applicable exemptive rule. Furthermore,
notwithstanding any other provision of the Plan or any Award described in
Article VII or VIII which is granted to a Section 162(m) Participant and is
intended to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code shall be subject to any additional limitations set
forth in Section 162(m) of the Code (including any amendment to Section 162(m)
of the Code) or any regulations or rulings issued thereunder that are
requirements for qualification as performance-based compensation as described in
Section 162(m)(4)(C) of the Code, and the Plan shall be deemed amended to the
extent necessary to conform to such requirements.
11.9. Effect of Plan Upon Options and Compensation Plans. The adoption of
the Plan shall not affect any other compensation or incentive plans in effect
for the Company or any Subsidiary. Nothing in the Plan shall be construed to
limit the right of the Company (i) to establish any other forms of incentives or
compensation for Employees, Independent Directors or consultants of the Company
or any Subsidiary or (ii) to grant or assume options or other rights or awards
otherwise than under the Plan in connection with any proper corporate purpose
including but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, partnership,
limited liability company, firm or association.
11.10. Compliance with Laws. The Plan, the granting and vesting of Awards
under the Plan and the issuance and delivery of shares of Common Stock and the
payment of money under the Plan or under Awards
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granted or awarded hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under the Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all applicable
legal requirements. To the extent permitted by applicable law, the Plan and
Awards granted or awarded hereunder shall be deemed amended to the extent
necessary to conform to such laws, rules and regulations.
11.11. Titles. Titles are provided herein for convenience only and are not
to serve as a basis for interpretation or construction of the Plan.
11.12. Governing Law. The Plan and any agreements hereunder shall be
administered, interpreted and enforced under the internal laws of the State of
Maryland without regard to conflicts of laws thereof.
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LTC PROPERTIES, INC.
EXHIBIT 10.29
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TERM LOAN AGREEMENT
among
LTC PROPERTIES, INC.
and
THE LENDERS REFERRED TO HEREIN
and
BANK OF MONTREAL,
as Administrative Agent
and
SANWA BANK CALIFORNIA,
as Documentation Agent
March 8, 1999
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<PAGE>
TERM LOAN AGREEMENT
This Agreement, dated as of March 8, 1999, is among LTC PROPERTIES, INC.,
a Maryland corporation (the "Borrower"), the financial institutions party hereto
(together with their respective successors and permitted assigns, the
"Lenders"), BANK OF MONTREAL ("Bank of Montreal"), as Administrative Agent (the
"Agent"), and SANWA BANK CALIFORNIA ("Sanwa"), as Documentation Agent.
Recitals
WHEREAS, the Borrower wishes to obtain commitments from the Lenders for
pro rata credit extensions under a term credit facility in the aggregate amount
of $25,000,000.
WHEREAS, the Lenders have agreed, on the terms and conditions herein set
forth, to extend credit to the Borrower (1) for the purpose of funding
investments in healthcare and education facilities and related mortgage loans
and (2) for general corporate purposes.
WHEREAS, it is the intention of the Borrower and the Lenders that the
indebtedness of the Borrower to the Lenders under this Agreement be pari passu
with the indebtedness of the Borrower to the lenders under the Revolving Credit
Agreement (as hereinafter defined).
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereto hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Definitions. As used in this Agreement:
"Acquisition" means each transaction, or any series of related
transactions, consummated on or after the date of this Agreement, by which the
Borrower or any of its Subsidiaries (i) acquires any ongoing business or all or
substantially all of the assets of any Person or division thereof, whether
through the purchase of assets, by merger or otherwise, or (ii) directly or
indirectly acquires (in one transaction or as the most recent transaction in a
series of transactions) at least a majority (in number of votes) of the
securities of a corporation which have ordinary voting power for the election of
directors (other than securities having such power only by reason of the
happening of a contingency) or a majority (by percentage of voting power) of the
outstanding equity interests of a partnership or other Person.
"Advance" means a borrowing hereunder consisting of the aggregate amount
of the several Loans made by the Lenders to the Borrower of the same Type and,
in the case of a LIBOR Loan, for the same Interest Period.
"Affiliate" of any Person means any other Person directly or indirectly
controlling, controlled by or under common control with such Person. A Person
shall be deemed to control another Person if the controlling Person possesses,
directly or indirectly, the power to direct or cause the direction of the
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<PAGE>
management or policies of the controlled Person, whether through ownership of
stock, by contract or otherwise; provided that control shall be conclusively
presumed when any Person or affiliated group directly or indirectly owns 20% or
more of the securities having ordinary voting power for the election of
directors of a corporation. Notwithstanding the foregoing, a partnership shall
not be deemed an Affiliate of the Borrower if a general partner (which is an
Affiliate of the Borrower) controls such partnership.
"Agent" means Bank of Montreal in its capacity as administrative agent for
the Lenders pursuant to Article 12, and not in its individual capacity as a
Lender, and any successor Agent appointed pursuant to Article 12.
"Aggregate Commitment" means the aggregate of the Commitments of all the
Lenders.
"Agreement" means this Term Loan Agreement, as it may be amended or
modified and in effect from time to time.
"Agreement Accounting Principles" means generally accepted accounting
principles as in effect from time to time, applied in a manner consistent with
that used in preparing the financial statements referred to in Section 5.5
(except for changes concurred in by the Borrower's independent public
accountants).
"Applicable Lending Office" means for any Lender, its office for LIBOR
Loans and Reference Rate Loans, specified in Schedule 1 or in the Assignment
Agreement pursuant to which it became a party hereto, as the case may be, any of
which offices may, upon 10 days' prior written notice to the Agent and the
Borrower, be changed by such Lender.
"Applicable Value" means (i) with respect to any Owned Property, the Book
Value of such Owned Property determined in accordance with Agreement Accounting
Principles net of depreciation applied on a pro rata basis and (ii) with respect
to any Mortgaged Property, the unpaid principal balance of the related Mortgage
Note.
"Appraisal" means a Master Appraisal Institute appraisal (or an appraisal
prepared by Valuation Counselor's Group or other appraisal satisfactory to the
Agent and the Required Lenders).
"Article" means an article of this Agreement unless another document is
specifically referenced.
"Assignment Agreement" means an Assignment Agreement in the form of
Exhibit C hereto.
"Authorized Officer" means any of the Chairman, Chief Executive Officer,
President, Chief Financial Officer or Treasurer (specifically authorized by the
Borrower) of the Borrower, acting singly.
"Bank of Montreal" is defined in the first paragraph hereof.
"Book Value" means, with regard to any Owned Property, the sum of (i) the
lesser of (a) the purchase price or (b) the final construction cost (provided
that such construction was completed within the last 90 days), plus (ii)
capitalized improvements and all other related closing costs (calculated on a
cost basis,) as determined in accordance with Agreement Accounting Principles.
"Borrower" is defined in the first paragraph hereof.
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<PAGE>
"Borrowing Base" means, as at any date, the sum of (i) 75% of the
aggregate Applicable Value of the Eligible Mortgage Loans and (ii) 60% of the
aggregate Applicable Value of the Eligible Owned Properties (other than Eligible
Owned Properties of "Guarantors" under the Revolving Credit Agreement), minus
(a) the aggregate principal amount of all "Loans," and the aggregate "Letter of
Credit Amount" of all "Letters of Credit" (as such terms are defined in the
Revolving Credit Agreement), outstanding under the Revolving Credit Agreement
and (b) the aggregate principal amount of any outstanding Senior Debt (other
than amounts outstanding hereunder or under the Revolving Credit Agreement,
Capitalized Leases, and the Oregon Bonds and Washington Bonds referenced on
Schedule 3).
"Borrowing Base Certificate" means a certificate of an Authorized Officer
of the Borrower, in substantially the form of Exhibit E and appropriately
completed.
"Borrowing Date" means a date on which an Advance is made hereunder.
"Business Day" means any day (i) other than a Saturday, Sunday or other
day on which commercial banks are authorized or required by law to close in Los
Angeles, California, New York, New York or Chicago, Illinois and (ii) if the
applicable Business Day relates to a LIBOR Loan, on which dealings in Dollar
deposits are carried on in the London Interbank Market.
"Capitalized Lease" of a Person means any lease of Property by such Person
as lessee which would be capitalized on a balance sheet of such Person prepared
in accordance with Agreement Accounting Principles.
"Cash Flow" means, for any period, for the Borrower and its Subsidiaries
(determined on a Consolidated Basis in a presentation of Consolidated Statements
of Cash Flow without duplication in accordance with Agreement Accounting
Principles), Net Income plus minority interest expenses plus depreciation,
amortization and other non-cash charges minus non-cash income plus Interest
Expense for such period.
"Cash Flow Coverage Ratio" means for the Borrower and its Subsidiaries on
a Consolidated Basis, determined as of the end of each fiscal quarter for the
period of four fiscal quarters then ended, the ratio of (i) Cash Flow to (ii)
the sum of principal payments (excluding principal payments on existing
convertible Subordinated Indebtedness and under this Agreement), Distributions
and Interest Expense.
"Change of Control" means (i) the acquisition by any Person (including any
syndicate or group deemed to be a "Person" under Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or any
successor provision to either of the foregoing) of beneficial ownership,
directly or indirectly, of shares of capital stock of the Borrower entitling
such Person to exercise more than 50% of the total voting power of all voting
shares of the Borrower; or (ii) any consolidation of the Borrower with, or
merger of the Borrower into, any other Person, any merger of another Person into
the Borrower or any sale or transfer of all or substantially all of the assets
of the Borrower to another Person other than (a) where the surviving corporation
is the Borrower, (b) the Borrower continues to be a REIT and (c) the Borrower
shall be in pro forma compliance with all provisions of this Agreement
subsequent to such Change of Control.
"Closing Date" means the date on which all the conditions precedent set
forth in Section 4.1 shall have been satisfied or waived.
"Code" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time, including the regulations proposed or
promulgated thereunder.
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<PAGE>
"Commitment" means, for each Lender, the obligation of such Lender to make
Loans not exceeding the amount set forth opposite such Lender's name on Schedule
1 hereto or as set forth in any Assignment Agreement relating to any assignment
that has become effective pursuant to Section 14.3, as such amount may be
modified from time to time pursuant to the terms hereof.
"Commitment Percentage" means, as to any Lender at any time, the
percentage of the Aggregate Commitment then constituted by such Lender's
Commitment.
"Compliance Certificate" has the meaning set forth in Section 7.1(iii).
"Consolidated," "Consolidating" and "on a Consolidated Basis," when
describing financial statements, refer to those of the Borrower and its
Subsidiaries.
"Control" means the power to direct or cause the direction of the
management or policies of a Person, whether through rights of ownership under
voting securities, under contract or otherwise, and "Controlling" and
"Controlled" shall have meanings correlative thereto.
"Controlled Group" means all members of a controlled group of corporations
and all trades or businesses (whether or not incorporated) under common control
which, together with the Borrower or any of its Subsidiaries, are treated as a
single employer under Section 414 of the Code.
"Conversion/Continuation Notice" is the notice referred to in Section
2.10.
"Debt" of any Person means (i) all indebtedness of such Person for
borrowed money or for the deferred purchase price of property or services, (ii)
all obligations of such Person evidenced by notes, bonds, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional-sale or other title-retention agreement with respect to property
acquired by such Person, (iv) all obligations of such Person as lessee under
leases that have been or should be, in accordance with Agreement Accounting
Principles, recorded as Capitalized Leases, (v) all obligations of such Person
under direct or indirect guaranties in respect of, and obligations (contingent
or otherwise) to purchase or otherwise acquire, or otherwise to secure a credit
against loss in respect of, indebtedness or obligations of others of the kinds
referred to in clause (i), (ii), (iii) or (iv) above (including letters of
credit or similar instruments for such purpose) and (vi) liabilities in respect
of unfunded vested benefits under plans covered by Title IV of ERISA.
"Debt Service Coverage Ratio" means for the Borrower and its Subsidiaries
on a Consolidated Basis, determined as of the end of each fiscal quarter for the
period of four fiscal quarters then ended, the ratio of (i) Cash Flow to (ii)
the sum of principal payments on Debt (excluding principal payments on existing
convertible Subordinated Indebtedness and under this Agreement) and Interest
Expense.
"Default" means any Event of Default and any default, event or condition
that would, with the giving of any requisite notice and the passage of any
requisite period of time, constitute an Event of Default.
"Distributions" means the declaration of any dividend or the declaration
of a distribution on or in respect to any shares of any class of capital stock,
any partnership interest or any membership interest of any Person, other than
dividends or other distributions payable solely in shares of common stock,
partnership interests or membership units of such Person, as the case may be;
the purchase, redemption or other retirement of any shares of any class of
capital stocks, partnership interests or membership units of such Person,
directly or indirectly, through a Subsidiary or otherwise; the return of equity
capital by
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<PAGE>
any Person to its shareholders, partners or members as such; or any other
distribution on or in respect of any shares of any class of capital stock,
partnership interests or membership unit of such Person.
"Documentation Agent" means Sanwa in its capacity as documentation agent
for the Lenders, and not in its individual capacity as a Lender, and any
successor Documentation Agent appointed by the Lenders.
"Dollars" or "$" shall mean lawful money of the United States of America.
"Eligible Assignee" means (i) a commercial bank organized under the laws
of the United States, or any State thereof or the District of Columbia, and
having total assets in excess of $500,000,000; (ii) a commercial bank organized
under the laws of any other country which is a member of the Organization for
Economic Cooperation and Development, or a political subdivision of any such
country, and having total assets in excess of $500,000,000, provided that such
bank is acting through a branch or agency located in the United States; (iii) an
insurance company or other financial institution or an investment fund that is
engaged in making, purchasing or otherwise investing in commercial loans in the
ordinary course of its business and having total assets in excess of
$500,000,000; (iv) any Affiliate of an existing Lender; and (v) any other Person
approved by the Agent and, in the absence of any Event of Default, the Borrower;
provided, however, that (a) an Affiliate of the Borrower shall not qualify as an
Eligible Assignee, (b) no direct competitor of the Borrower shall qualify as an
Eligible Assignee and (c) no financial institution shall qualify as an Eligible
Assignee if its participation hereunder would result in increased liability of
the Borrower under Section 3.3.
"Eligible Mortgage Loans" means, as of any date, any Mortgage Loan, other
than the following:
(i) Any Mortgage Loan to an Affiliate or any Mortgage Loan which is not
owned by the Borrower as sole owner and holder of such Mortgage Loan;
(ii) Any Mortgage Loan not originated by the Borrower;
(iii) Any Mortgage Loan pursuant to which the Mortgage relates to a ground
lease;
(iv) Any Mortgage Loan which is more than 30 days past due for any payment
thereunder;
(v) Any Mortgage Loan for which the Borrower does not have the full right
and authority to sell, assign and transfer such Mortgage Loan, the related
Mortgage, the related Mortgage Note and other related documents;
(vi) Any Mortgage Loan for which there does not exist a Phase I
environmental report, any Mortgage Loan with respect to which any material
environmental claim has been made or any Mortgage Loan for which there exists an
environmental report which details the reasonable likelihood of material
environmental claims;
(vii) Any Mortgage Loan for which there has not been issued a title policy
showing the Borrower as first lienholder or a title policy has been issued
showing the Borrower as first lienholder, but with encumbrances or exceptions of
a material nature unless otherwise insured against;
(viii) Any Mortgage Loan, the principal balance of which is more than 80%
of the value as determined by an Appraisal of the property secured by such
Mortgage Loan;
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<PAGE>
(ix) Any Mortgage Loan where the mortgagor thereof is currently the
subject of a bankruptcy proceeding or is otherwise insolvent;
(x) Any Mortgage Loan with respect to a property which has been in
operation as a licensed skilled nursing home or long-term care facility for less
than one year, provided, however, that (a) if the Operator of any such property
which has been in operation less than one year is a publicly-traded company with
a ratio of (i) net income plus depreciation, amortization, other non-cash
charges and Interest Expense to (ii) Interest Expense of at least 1.00:1.00
(calculated as of the end of each fiscal quarter for the period of four quarters
then ended and calculated in accordance with generally accepted accounting
principles), such Mortgage Loan shall be considered eligible hereunder and (b)
up to $20,000,000 (calculated on an aggregate basis with amounts permitted under
Section (viii)(b) of the definition of "Eligible Owned Properties") of such
property subject to a Mortgage Loan in operation less than one year and which
does not meet the requirements of (a) and which has an Operator which is
publicly-traded shall be considered eligible hereunder;
(xi) Any property subject to a Mortgage Loan for which the Operator does
not have all material Governmental Approvals required for the operation thereof;
(xii) Any Mortgage Loan of which the Borrower is not the sole lender;
(xiii) Any Mortgage Loan for which an Appraisal has not been completed; or
(xiv) Any Mortgage Loan which is not free and clear of any and all Liens
which are likely to have a Material Adverse Effect, encumbering or affecting the
Mortgage Loan or Mortgage Note.
"Eligible Owned Properties" means, as of any date, Owned Properties, other
than the following:
(i) Any Owned Properties leased to an Affiliate or which are not owned by
the Borrower or its Subsidiaries in fee simple ownership;
(ii) Any Owned Property for which the lease payment is 30 or more days
past due;
(iii) Any Owned Property for which the term of the lease does not extend
past the Facility Termination Date or for which the Operator thereof has failed
to exercise a renewal option and no new lease has been executed by the Operator
thereof within 60 days prior to the expiration of such lease;
(iv) Any Owned Property for which no lease is in effect, or which has been
terminated for any reason;
(v) Any Owned Property where the Operator thereof is currently the subject
of a bankruptcy proceeding or is otherwise insolvent;
(vi) Any Owned Property subject to a Lien which is reasonably likely to
have a Material Adverse Effect;
(vii) Any Owned Property for which the Operator does not have all material
Governmental Approvals required for the operation thereof as an Owned Property;
(viii) Any Owned Property which has been in operation as a licensed
skilled nursing home or long-term care facility for less than one year,
provided, however, that (a) if the Operator of any such
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Owned Property which has been in operation less than one year is a
publicly-traded company with a ratio of (i) net income plus depreciation,
amortization, other non-cash charges and Interest Expense to (ii) Interest
Expense of at least 1.00:1.00 (calculated as of the end of each fiscal quarter
for the period of four quarters then ended and calculated in accordance with
generally accepted accounting principles), such Owned Property shall be
considered eligible hereunder and (b) up to $20,000,000 (calculated on an
aggregate basis with amounts permitted under Section (x)(b) of the definition of
"Eligible Mortgage Loans") of the Book Value of Owned Property in operation less
than one year and which does not meet the requirements of (a) and which has an
Operator which is publicly-traded shall be considered eligible hereunder;
(ix) Any Owned Property for which there does not exist a Phase I
environmental report, any Owned Property with respect to which any material
environmental claim has been made or any Owned Property for which there exists
an environmental report which details the reasonable likelihood of material
environmental claims;
(x) Any Owned Property for which there has not been issued a title policy
showing the Borrower or any of its Subsidiaries as owner or a title policy has
been issued showing the Borrower or any of its Subsidiaries as owner, but with
encumbrances or exceptions of a material nature;
(xi) Any Owned Property of which the Borrower or any of its Subsidiaries
is not the sole owner; or
(xii) Any Owned Property of which the Borrower or its Subsidiaries do not
have full right and authority to sell, transfer or assign.
Notwithstanding the foregoing, for any Owned Property, only the lesser of (a)
the Book Value or (b) the value as determined by an Appraisal (if an Appraisal
exists) shall be considered eligible for Borrowing Base purposes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and any rule or regulation issued thereunder.
"Event of Default" has the meaning set forth in Article 9.
"Facility Termination Date" means October 2, 2000, unless accelerated
pursuant to Section 10.1.
"Fed Funds Rate" means for any day, the rate per annum (rounded upwards,
if necessary, to the nearest 1/100 of 1%) equal to the weighted average of the
rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal Funds brokers on such day, as published by
the Federal Reserve Bank of New York on the Business Day next succeeding such
day, provided that (i) if the day for which such rate is to be determined is not
a Business Day, the Federal Funds Rate for such day shall be such rate on such
transactions on the next preceding Business Day as so published on the next
succeeding Business Day and (ii) if such rate is not so published for any
Business Day, the Federal Funds Rate for such Business Day shall be the average
rate charged to the Agent on such Business Day on such transactions as
determined by the Agent.
"Governmental Approvals" means any authorization, consent, approval,
license, lease, ruling, permit, waiver, exemption, filing, registration or
notice by or with a Governmental Person.
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"Governmental Person" means, whether domestic or foreign, any national,
federal, state or local government, any political subdivision thereof or any
governmental, quasi-governmental, judicial, public or regulatory
instrumentality, authority, body or entity, including the Federal Deposit
Insurance Corporation, the Comptroller of the Currency, the Board of Governors
of the Federal Reserve System, any central bank, the Department of Housing and
Urban Development, the Health Care Financing Administration, the Department of
Health and Human Services, and any comparable authority.
"Governmental Rule" means any treaty, law, rule, regulation, ordinance,
order, code, judgment, decree, directive, interpretation, request, guideline,
policy or similar form of decision of any Governmental Person.
"Interest Expense" means, for any Person on a Consolidated Basis, as of
any date, for the fiscal quarter most recently ended and the immediately
preceding three fiscal quarters, the sum of (i) the amount of all interest on
Debt and (ii) all amortized discount and expenses relating to Debt (as more
specifically reflected on the Borrower's income statements, prepared in
accordance with Agreement Accounting Principles, under "interest").
"Interest Period" means, with respect to a LIBOR Loan, a period of one
week or one, two, three or six months, commencing on a Business Day selected by
the Borrower pursuant to a Conversion/Continuation Notice or otherwise pursuant
to this Agreement. Such Interest Period shall end on (but exclude) the day which
corresponds numerically to such date one week or one, two, three or six months
thereafter, provided, however, that if there is no such numerically
corresponding day in such next week or next, second or third or sixth succeeding
month, such Interest Period shall end on the last Business Day as such next week
or next, second or third or sixth succeeding month. If an Interest Period would
otherwise end on a day which is not a Business Day, such Interest Period shall
end on the next succeeding Business Day, provided, however, that if said next
succeeding Business Day falls in a new calendar month, such Interest Period
shall end on the immediately preceding Business Day. No Interest Period may end
after the Facility Termination Date. (If the Borrower shall have selected an
Interest Period which ends after the Facility Termination Date, such Interest
Period shall end on the Facility Termination Date, and the Borrower shall pay to
the Lenders all amounts due under Section 3.1 as a result of such termination.)
"Investment" means, for any Person, any investment made in cash or by
delivery of Property:
(i) In any Person, whether by acquisition of stock, indebtedness or other
obligation or investment security, or by loan, guarantee, advance, capital
contribution or otherwise; or
(ii) In any Property, the amount of any investment shall be at cost (the
amount of cash or the fair market value of other property given in exchange
therefor).
"Lenders" is defined in the first paragraph hereof.
"Leverage Ratio" means for the Borrower and its Subsidiaries on a
Consolidated Basis, determined as of the end of each fiscal quarter, the ratio
of (i) Total Liabilities outstanding at such time to (ii) Tangible Net Worth.
"LIBOR" means, for any Interest Period for any LIBOR Loan, the arithmetic
mean (rounded upwards, if necessary, to the nearest 1/16 of 100%), as determined
by the Agent of the respective rates per annum quoted by Telerate, Inc. at
approximately 11:00 a.m. London time (or as soon thereafter as practicable), on
the date 2 Business Days before the first day of such Interest Period for the
offering by lenders to leading banks in the London Interbank Market of Dollar
deposits having a term comparable
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to such Interest Period and in an amount comparable tothe principal amount of
the LIBOR Loans to be made by the Lenders for such Interest Period.
"LIBOR Loan" means a Loan when it bears interest at the LIBOR Rate.
"LIBOR Rate" means, with respect to a LIBOR Loan for the relevant Interest
Period, the sum of (i) LIBOR applicable to such Interest Period plus (ii) 1.25%
per annum. The LIBOR Rate shall be rounded to the next higher multiple of 1/100
of 1% if the rate is not such a multiple.
"Lien" means any voluntary or involuntary lien, security interest or other
charge or encumbrance of any kind, or any other type of preferential
arrangement, including the lien or retained title of a conditional vendor and
any easement, right of way or other encumbrance on title to real property.
"Loan" means, with respect to a Lender, a LIBOR Loan or a Reference Rate
Loan.
"Loan Documents" means this Agreement, the Notes and any other agreements
(including, but not limited to any fee letters) executed by the Borrower in
connection herewith, as such agreements and documents may be amended,
supplemented and otherwise modified from time to time in accordance with the
terms hereof.
"Material Adverse Effect" means a material adverse effect on (i) the
business, Property, condition (financial or otherwise) or results of operations
of the Borrower and its Subsidiaries taken as a whole, (ii) the ability of the
Borrower to perform its obligations under the Loan Documents to which it is a
party or (iii) the validity or enforceability of any of the Loan Documents or
the rights or remedies of the Agent or the Lenders thereunder.
"Moody's" means Moody's Investors Service, Inc.
"Mortgage" means, with respect to any Mortgage Loan, the mortgage, deed of
trust or other instrument creating a first mortgage lien on the related Mortgage
Property. In the case of a Mortgage Loan secured by more than one Mortgage, the
term "Mortgage" shall refer to each such Mortgage.
"Mortgaged Property" means, with respect to any Mortgage Loan, any fee
interest of the obligor on the related Mortgage Note in land and the
improvements thereof subject to the lien of the related Mortgage. In the case of
any Mortgage Loans secured by more than one Mortgaged Property, the term
"Mortgaged Property" shall refer to each such Mortgaged Properties.
"Mortgage Loan" means each loan made by any Person to finance Owned
Properties, evidenced by a Mortgage Note secured by a Mortgage, together with
all direct rights to payment in respect thereof under the Mortgage Note and any
and all related agreements, any security interest thereunder and any guarantee
relating to the Mortgaged Property and any such loan.
"Mortgage Note" means, with respect to any Mortgage Loan, the note (or
notes) or other instrument(s) evidencing the indebtedness under such Mortgage
Loan.
"Multiemployer Plan" means a Plan that is a "multiemployer plan" as
defined in Section 3(37) or 4001(i)(3) of the Borrower's ERISA Plan.
"Net Income" means, for the Borrower and its Subsidiaries on a
Consolidated Basis, net income as determined in accordance with Agreement
Accounting Principles.
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"Notes" mean promissory notes, in substantially the form of Exhibit A
hereto, duly executed by the Borrower and payable to the order of a Lender in
the amount of its Commitment, including any amendment, modification, renewal or
replacement of such promissory note.
"Notice of Assignment" is defined in Section 14.3(ii).
"Obligations" means all unpaid principal of and accrued and unpaid
interest on the Notes, all accrued and unpaid fees and all expenses,
reimbursements, indemnities and other obligations of the Borrower to the Lenders
or to any Lender, the Agent or any indemnified party hereunder arising under the
Loan Documents.
"Operator" means (i) the lessee of any Owned Property owned by the
Borrower and (ii) the mortgagor or lessee of a Mortgaged Property to the extent
such entity controls the operation of the Mortgaged Property.
"Owned Property" means a healthcare facility offering long-term
healthcare-related products and services, including any skilled nursing homes,
long-term care facilities, assisted living facilities and other similarly
related healthcare facilities.
"PBGC" means the Pension Benefit Guaranty Corporation, or any successor
thereto.
"Person" means any natural person, corporation, firm, limited liability
company, joint venture, partnership, association, enterprise, trust or other
entity or organization, or any government or political subdivision or any
agency, department or instrumentality thereof.
"Plan" means an employee pension benefit plan which is covered by Title IV
of ERISA or subject to the minimum funding standards under Section 412 of the
Code maintained by or contributed to by the Borrower or any member of the
Controlled Group.
"Property" of a Person means any and all property, whether real, personal,
tangible, intangible, or mixed, of such Person, or other assets owned, leased or
operated by such Person.
"Purchasers" is defined in Section 14.3(i).
"Rating" means a rating issued (not implied) from time to time by S&P or
Moody's for senior, unsecured, non-credit enhanced long-term Debt of the
Borrower.
"Reference Rate" means, for any day, the rate per annum (rounded upward,
if necessary, to the next higher 1/100th of 1%) equal to the higher of (i) the
annual rate of interest announced from time to time by the Agent at its office
in Chicago, Illinois as its corporate reference rate (it being understood that
such rate is a rate set by the Agent based upon various factors including
general economic and market conditions, that such rate is used as a reference
point for pricing certain loans and that the Agent may price its loans at, above
or below such rate) and (ii) the sum of the Fed Funds Rate plus 1/2% per annum.
"Reference Rate Loan" means a Loan when it bears interest at the Reference
Rate.
"Regulation D" means Regulation D of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor thereto or other
regulation or official interpretation of said Board of Governors relating to
reserve requirements applicable to member banks of the Federal Reserve System.
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"Regulation U" means Regulation U of the Board of Governors of the Federal
Reserve System as from time to time in effect and any successor or other
regulation or official interpretation of said Board of Governors relating to the
extension of credit by banks for the purpose of purchasing or carrying margin
stocks applicable to member banks of the Federal Reserve System.
"REIT" means a Real Estate Investment Trust (as defined in the Code)
formed and operated in compliance with the Code.
"REMIC" means a Real Estate Mortgage Investment Conduit (as defined in the
Code) formed and operated in compliance with the Code.
"REMIC Certificate" means any certificates issued by or on behalf of any
REMIC formed by the Borrower or any of its Subsidiaries representing an interest
in a mortgage portfolio held by or on behalf of such REMIC.
"Reportable Event" means a reportable event as defined in Section 4043 of
ERISA and the regulations issued under such section, with respect to a Single
Employer Plan, excluding, however, such events as to which the PBGC by
regulation waived the requirement of Section 4043(a) of ERISA that it be
notified within 30 days of the occurrence of such event, provided, however, that
a failure to meet the minimum funding standard of Section 412 of the Code and of
Section 302 of ERISA shall be a Reportable Event regardless of the issuance of
any such waiver of the notice requirement in accordance with either Section
4043(a) of ERISA or Section 412(d) of the Code.
"Required Lenders" means Lenders in the aggregate having at least 66 2/3%
of the Aggregate Commitment or, if the Aggregate Commitment has been terminated,
Lenders in the aggregate holding at least 66 2/3% of the aggregate unpaid
principal amount of the outstanding Loans. Any Lender which has refused (except
if such refusal is mandated by law) to make available its Commitment Percentage
of any Advance shall not be included in this calculation.
"Requirement of Law" means as to any Person, the articles or certificate
of incorporation of such Person, and any material law, treaty, rule or
regulation, determination or policy statement or interpretation of an arbitrator
or a court or other Governmental Person, in each case applicable to or binding
upon such Person or any of its Property or to which such Person or any of its
Property is subject.
"Revolving Credit Agreement" means the Credit Agreement dated as of
October 3, 1997 among the Borrower, the lenders referred to therein, Sanwa, as
Administrative Agent, and the other agents referred to therein.
"S&P" means Standard and Poor's Ratings Group.
"Sanwa" is defined in the first paragraph hereof.
"SEC" means the United States Securities and Exchange Commission or any
successor thereto.
"SEC Report" means a Current Report on Form 8-K pursuant to the Securities
Exchange Act of 1934.
"Section" means a numbered section of this Agreement, unless another
document is specifically referenced.
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"Senior Debt" means the sum of the outstanding principal balance of all
Debt, other than Subordinated Debt, of the Borrower and its Subsidiaries on a
Consolidated Basis (excluding non-recourse Mortgage Loans).
"Senior Leverage Ratio" means for the Borrower and its Subsidiaries on a
Consolidated Basis, determined as of the end of each fiscal quarter, the ratio
of (i) Senior Debt outstanding at such time to (ii) Tangible Net Worth.
"Significant Subsidiary" means any Subsidiary of the Borrower, the stock
of which is directly owned by the Borrower and which has Tangible Net Worth of
at least $2,500,000.
"Single Employer Plan" means a Plan other than a Multiemployer Plan.
"Subordinated Indebtedness" means, collectively, Debt (i) for which the
Borrower is directly and primarily liable and in respect of which none of its
Subsidiaries is contingently or otherwise obligated, (ii) that does not have any
principal or sinking fund payment due prior to the Facility Termination Date and
(iii) that is subordinated (on terms set forth in Schedule 6 or such other terms
as are acceptable to the Required Lenders) to the Obligations of the Borrower
hereunder and under other Loan Documents, and pursuant to documentation
containing other terms (including covenants and events of default) that are not
more favorable than those applicable to the Loans. Notwithstanding the
foregoing, the Borrower's 8.25% Convertible Subordinated Debentures due
September 1999 in the original issued amount of $10,000,000 shall be deemed
Subordinated Indebtedness.
"Subsidiary" of a Person means (i) any corporation more than 50% of the
outstanding securities having ordinary voting power of which shall at the time
be owned or controlled, directly or indirectly, by such Person or by one or more
of its Subsidiaries or by such Person and one or more of its Subsidiaries, or
(ii) any general partner of any partnership (but not the partnership itself),
any association, any joint venture or any similar business organization more
than 50% of the ownership interests having ordinary voting power of which shall
at the time be so owned or controlled. Unless otherwise expressly provided, all
references herein to a "Subsidiary" shall mean a Subsidiary of the Borrower.
"Tangible Net Worth" means, as at any date for any Person, the sum for
such Person and its Subsidiaries (determined on a Consolidated Basis without
duplication in accordance with Agreement Accounting Principles) of the
following:
(i) The total amount of shareholders' equity, minus
(ii) The sum of the following: the cost of treasury shares and the book
value of all assets which should be classified as intangibles (without
duplication of deductions in respect of items already deducted in arriving at
surplus and retained earnings) but in any event including Debt issuance costs,
unamortized costs of securitization, unrealized gain or loss on mortgage-backed
securities, goodwill, research and development costs, trademarks, tradenames,
copyrights, patents and franchises, unamortized debt discount and expense, and
any write-up of the book value of assets resulting from a revaluation of such
assets subsequent to the Closing Date, minus
(iii) All amounts (without duplication) due to such Person from current
and former officers, directors, consultants, employees.
"Taxes" is defined in Section 3.2.
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"Total Investments" mean any Investment made, directly or indirectly, (i)
in the unpaid principal balance of any Mortgage Loan, (ii) in the Book Value
plus depreciation relating to any Owned Property and (iii) in the unpaid
principal balance of the Mortgage Loans underlying any REMIC Certificate (minus
any Mortgage Loans payable by the Borrower or its Subsidiaries to such REMIC).
"Total Liabilities" means, as of any date, the sum, for the Borrower and
its Subsidiaries on a Consolidated Basis in accordance with Agreement Accounting
Principles of the following:
(i) all Debt and
(ii) all other liabilities which should be classified as liabilities on
the balance sheet, including all reserves (other than general contingency
reserves) and all deferred taxes and other deferred items.
"Transferee" is defined in Section 14.4.
"Type" means, with respect to a Loan, its nature as a Reference Rate Loan
or a LIBOR Loan.
"Unfunded Liabilities" means the amount (if any) by which the present
value of all nonforfeitable benefits under all Single Employer Plans exceeds the
fair market value of all such Plan assets allocable to such benefits, all
determined in accordance with the respective most recent valuations for such
Plans.
1.2 Rules and Interpretation.
(i) A reference to any document or agreement shall mean such document or
agreement as amended, modified or supplemented from time to time in accordance
with its terms and the terms of this Agreement.
(ii) The singular includes the plural and the plural includes the
singular.
(iii) A reference to any law includes any amendment or modification of
such law.
(iv) A reference to any Person includes its permitted successors and
permitted assigns.
(v) Accounting terms capitalized but not otherwise defined herein shall
have their meanings applied to them by Agreement Accounting Principles applied
on a consistent basis by the accounting entity to which they refer.
(vi) The words "include," "includes" and "including" are not limiting.
(vii) All terms not specifically defined herein or by Agreement Accounting
Principles, which terms are defined in the Uniform Commercial Code as in effect
in the State of California, have the meanings assigned to them therein.
(viii) Reference to a particular "section" refers to that section of this
Agreement unless otherwise indicated.
(ix) The words "herein," "hereof," "hereunder" and words of like import
shall mean to this Agreement as a whole and not to any particular section or
subdivision of this Agreement.
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ARTICLE 2
THE TERM CREDIT FACILITY
2.1 Commitments. Each Lender agrees severally, on the terms and conditions
set forth in this Agreement, to make a single Loan to the Borrower in Dollars on
or after the Closing Date, such Loan to be in an amount not to exceed the amount
of such Lender's Commitment; provided, however, that the aggregate principal
amount of such Loans made by all of the Lenders shall not exceed the lesser of
(i) the Aggregate Commitment or (ii) the Borrowing Base. Loans that are prepaid
under this Agreement may not be reborrowed. Not more than two Interest Periods
in respect of LIBOR Loans may be outstanding at any time.
2.2 Borrowing Base. The Borrowing Base availability shall be determined on
the basis of the Borrowing Base Certificate which is delivered on the Closing
Date and in accordance with Section 7.1(iv).
2.3 Commitment Percentage. The principal amount of the Loan made by a
Lender on the occasion of each Advance hereunder shall be the amount equal to
the product of (i) such Lender's Commitment Percentage (expressed as a fraction)
and (ii) the total amount of the Advance requested; provided that in no event
shall any Lender be obligated to make a particular Loan if after giving effect
to such Loan such Lender's Loans would exceed its Commitment.
2.4 Types of Loans. Except as limited herein, the Loans may from time to
time be (i) LIBOR Loans, (ii) Reference Rate Loans or (iii) a combination
thereof, as determined by the Borrower and notified to the Agent in accordance
with Section 2.11. Each Lender may make or maintain its Loans to the Borrower by
or through any Applicable Lending Office.
2.5 Evidence of Obligations. The Loans made by each Lender to the Borrower
shall be evidenced by a Note, with appropriate insertions therein as to payee,
date and principal amount, payable to the order of such Lender and representing
the obligation of the Borrower to pay the aggregate unpaid principal amount of
all Loans made by such Lender to the Borrower, with interest thereon as
prescribed in Sections 2.13 and 2.14. Each Lender is hereby authorized (but not
required) to record the date and amount of each payment or prepayment of
principal of its Loans made to the Borrower, each continuation thereof, each
conversion of all or a portion thereof to another Type and, in the case of LIBOR
Loans, the length of each Interest Period with respect thereto, in the books and
records of such Lender, and any such recordation shall constitute prima facie
evidence of the accuracy of the information so recorded. The failure of any
Lender to make any such recordation or notation in its books and records (or any
error in such recordation or notation) shall not affect the obligations of the
Borrower hereunder or under the Notes. Each Note shall (i) be dated the Closing
Date, (ii) provide for the payment of interest in accordance with Sections 2.13
and 2.14 and (iii) be stated to be payable on the Facility Termination Date.
2.6 Commitment Reduction. At the Borrower's option and upon at least five
Business Days' prior irrevocable written notice to the Agent, with such notice
specifying the amount and the date of such reduction, the Borrower may
permanently reduce the Aggregate Commitment in whole at any time or in part from
time to time; provided, however, that (i) each partial reduction of the
Aggregate Commitment shall be in an aggregate amount equal to at least
$5,000,000 or an integral multiple of $1,000,000 in excess thereof and (ii) the
Borrower may not reduce the Aggregate Commitment below an amount equal to the
sum of all Loans outstanding. The Agent shall promptly notify each Lender (by
telecopy or by telephone) of each requested Commitment reduction.
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In addition, the Commitments shall automatically terminate upon the
occurrence of a Change of Control.
Reductions of the Aggregate Commitment pursuant to this Section 2.6 shall
automatically effect a reduction of the Commitment of each Lender to an amount
equal to the product of (i) the Aggregate Commitment of all Lenders, as reduced
pursuant to this Section 2.6, and (ii) the Commitment Percentage of such Lender.
2.7 Required Payments. The outstanding Loans and all other unpaid
Obligations shall be paid in full by the Borrower on the Facility Termination
Date.
2.8 Interest Limitation. Notwithstanding any other term of this Agreement
or any Note or any other Loan Document or any other document referred to herein
or therein, the maximum amount of interest which may be charged to or collected
from any Person liable hereunder or under any Note by the Lenders shall be
absolutely limited to, and shall in no event exceed, the maximum amount of
interest which could lawfully be charged or collected under applicable law, and
any term of this Agreement, any Note, any other Loan Document or any other
document referred to herein or therein which could be construed as providing for
interest in excess of such lawful maximum shall be and hereby is made expressly
subject to and modified by the provisions of this Section.
2.9 Fees.
(i) The Borrower agrees to pay to Bank of Montreal, for its own account,
an administrative fee for its services as the Agent and an upfront fee, in such
amounts and payable at such times as specified in a letter agreement dated the
Closing Date entered into by the Borrower and Bank of Montreal.
(ii) The Borrower agrees to pay to Sanwa, for its own account, an upfront
fee in such amount and payable at such time as specified in a letter agreement
dated the Closing Date entered into by the Borrower and Sanwa.
2.10 Voluntary Conversion of Advances. The Borrower may on any Business
Day, upon written notice (a "Conversion/Continuation Notice") given to the Agent
not later than 11:00 a.m., Chicago time, on the third Business Day before the
date of the proposed conversion, convert any Advance into an Advance of another
Type; provided, however, that, with respect to a conversion from LIBOR Loans
into Reference Rate Loans, any such conversion shall be made on, and only on,
the last day of the Interest Period for such Loans. Each such notice of a
conversion shall, within the restrictions specified above, specify (i) the Loans
to be converted, (ii) the Type of Loans into which such Loans are to be
converted and (iii) the requested date for such conversion. Upon receipt of any
such notice, the Agent shall promptly notify each Lender thereof. Any part of
outstanding LIBOR Loans and Reference Rate Loans may be converted as provided
herein, provided (a) no Loan may be converted into a LIBOR Loan after the date
that is one month prior to the Facility Termination Date and (b) the Borrower
shall not have the right to continue or convert to a LIBOR Loan if a Default
shall have occurred and be continuing. However, if the Borrower shall fail to
give any required notices described above in this Section or if continuation of
LIBOR Loans is not permitted pursuant to the preceding sentence, all outstanding
LIBOR Loans shall be automatically converted to Reference Rate Loans on the last
day of the then-expiring Interest Period therefor.
2.11 Notice of Borrowing. The Borrower shall give the Agent telephonic
notice, which must be promptly confirmed by written notice substantially in the
form of Exhibit D attached hereto (which telephonic notice must be received by
the Agent prior to 11:00 a.m., Chicago time, on the
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proposed Borrowing Date or, if all or any part of the Loans requested are to be
made as LIBOR Loans, three Business Days prior to the proposed Borrowing Date),
requesting that the Lenders make Loans on the proposed Borrowing Date and
specifying (i) the aggregate amount of Loans requested to be made (which must be
in an aggregate amount equal to at least $5,000,000 and in an integral multiple
of $1,000,000), (ii) subject to Section 2.1, whether the Loans are LIBOR Loans
or Reference Rate Loans or a combination thereof and (iii) if the Loans are to
be entirely or partly LIBOR Loans, the respective amounts of each such Type of
Loan and the respective lengths of the Interest Periods therefor. On receipt of
such notice, the Agent shall promptly notify each Lender thereof no later than
10:00 a.m., Los Angeles time, on the date of receipt of such telephonic notice.
On the proposed Borrowing Date, not later than 12:00 noon, Los Angeles time,
each Lender shall make available to the Agent at its office specified in Section
15.1 such Lender's Commitment Percentage of the aggregate borrowing amount (as
determined in accordance with Section 2.3) in immediately available funds and in
Dollars. Not later than 12:00 noon, Los Angeles time, on the date of such Loans
and upon fulfillment of the applicable conditions set forth in Article 4, the
Agent shall make such Loans available to the Borrower in immediately available
funds. Each notice pursuant to this Section 2.11 shall be irrevocable and
binding on the Borrower and, to the extent that any discrepancy exists between
the telephonic notice and the later written notice, the telephonic notice shall
take precedence. The Agent may, in the absence of notification from any Lender
that such Lender has not made its Commitment Percentage of the requested Loans
available to the Agent on such date, credit the account of the Borrower on the
books of such office of the Agent with the aggregate amount of Loans to be made
by such Lender on such date.
2.12 Commitment Obligations. Neither the Agent nor any Lender shall be
responsible for the obligation or Commitment of any other Lender hereunder, nor
will the failure of any Lender to comply with the terms of this Agreement
relieve any other Lender or the Borrower of their obligations under this
Agreement and the Notes. Nothing herein shall be deemed to relieve any Lender
from its obligation to fulfill its Commitments hereunder or to prejudice any
rights which the Borrower may have against any Lender as a result of any default
by such Lender hereunder.
2.13 Interest. A Reference Rate Loan shall bear interest on the
outstanding principal amount thereof, for each day from and including the date
such Loan is made or is converted from a LIBOR Loan into a Reference Rate Loan
pursuant to Section 2.10 to (but not including) the date it becomes due or is
converted into a LIBOR Loan pursuant to Section 2.10 hereof, at a rate per annum
equal to the Reference Rate for such day. Changes in the rate of interest on any
Loan maintained as a Reference Rate Loan will take effect simultaneously with
each change in the Reference Rate. Each LIBOR Loan shall bear interest from and
including the first day of the Interest Period applicable thereto to (but not
including) the last day of such Interest Period at the LIBOR Rate determined as
applicable to such LIBOR Loan.
2.14 Rates Applicable After Default. Notwithstanding anything to the
contrary contained herein, during the continuance of an Event of Default no Loan
may be made as, converted into or continued as a LIBOR Loan. During the
continuance of an Event of Default each Loan shall bear interest at a rate per
annum equal to the Reference Rate plus 2% per annum. All such interest shall be
payable on demand of the Agent.
2.15 Method of Payment. All payments of the Obligations hereunder shall be
made, without setoff, deduction, or counterclaim, in immediately available funds
in Dollars to the Agent at the address specified pursuant to Article 15, or at
any other Applicable Lending Office of the Agent specified in writing by the
Agent to the Borrower, by 12:00 noon, Chicago time, on the date when due and
shall be applied ratably by the Agent among the Lenders (except for amounts
required under Sections 3.1, 3.2 and 3.3, in which case such amounts shall be
paid to the affected Lender or Lenders). Each payment delivered to the Agent for
the account of any Lender shall be delivered promptly by the
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Agent to such Lender in the same type of funds that the Agent received, at such
Lender's address specified pursuant to Article 15 or at any Applicable Lending
Office specified in a notice received by the Agent from such Lender.
2.16 Telephonic Notices. The Borrower hereby authorizes the Lenders and
the Agent to convert or continue Loans and effect selections of Types of Loans
based on telephonic notices made by any Person or Persons the Agent or any
Lender in good faith believes to be acting on behalf of the Borrower. The
Borrower agrees to deliver promptly to the Agent a written confirmation, if such
confirmation is requested by the Agent or any Lender, of each telephonic notice
signed by an Authorized Officer. If the written confirmation differs in any
material respect from the action taken by the Agent and the Lenders, the records
of the Agent and the Lenders shall govern absent manifest error.
2.17 Interest Payment Dates; Interest and Fee Basis. Interest accrued on
each Reference Rate Loan shall be payable in arrears on the first Business Day
of each calendar month, commencing with the first such date to occur after the
Closing Date, on any date on which Reference Rate Loan is prepaid, whether due
to acceleration or otherwise, and at maturity. Interest accrued on that portion
of the outstanding principal amount of any Reference Rate Loan converted into a
LIBOR Loan on a day other than an interest payment date shall be payable on the
date of conversion. Interest accrued on each LIBOR Loan shall be payable on the
last day of its applicable Interest Period (and, in the case of any LIBOR Loan
with an Interest Period of six months, on the day that is three months after the
first day of such Interest Period), on any date on which the LIBOR Loan is
prepaid, whether by acceleration or otherwise, and at maturity.
Interest on LIBOR Loans and fees shall be calculated for actual days
elapsed on the basis of a 360-day year, and interest on Reference Rate Loans
shall be calculated for actual days elapsed on the basis of a year of 365 or 366
days, as applicable. Interest shall be payable for the day a Loan is made but
not for the day of any payment on the amount paid if payment is received prior
to 12:00 noon, Los Angeles time, at the place of payment. Whenever any payment
to be made hereunder shall be stated to be due on a day that is not a Business
Day, such payment shall be made on the next succeeding Business Day, and such
extension of time shall in such case be included in the computation of payment
of interest; provided, however, that, if such extension would cause any payment
of interest on or principal of any LIBOR Loan to be made in the next following
calendar month, then such payment shall instead be made on the next preceding
Business Day, and such shortened time shall in such case be used in the
computation of payment of interest.
2.18 Notification of Loan, Interest Rates, Prepayments and Commitment
Reductions. Promptly after receipt thereof, the Agent will notify each Lender of
the contents of each borrowing notice, Conversion/Continuation Notice and
repayment notice received by it hereunder. The Agent will notify each Lender of
the interest rate applicable to each Loan promptly upon determination of such
interest rate and will give each Lender prompt notice of each change in the
Reference Rate.
Each determination of an interest rate by the Agent pursuant to any
provision of this Agreement shall be conclusive and binding on the Borrower and
the Lenders in the absence of manifest error.
2.19 Applicable Lending Offices. Each Lender may book its Loans at any
Applicable Lending Office selected by such Lender and may change its Applicable
Lending Office from time to time. All terms of this Agreement shall apply to any
such Applicable Lending Office, and the Notes shall be deemed held by each
Lender for the benefit of such Applicable Lending Office. Each Lender may, by
written or telex notice to the Agent and the Borrower, designate an Applicable
Lending Office through which the Loans will be made by it and for whose account
Loan payments are to be made. For purposes of Article 3 and determining the
LIBOR Rate, all LIBOR Loans shall be deemed to have been
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funded with offshore deposits, provided that the Lenders shall have the right to
fund LIBOR Loans in any manner in their sole discretion.
2.20 Non-Receipt of Funds by the Agent. Unless the Borrower or a Lender,
as the case may be, notifies the Agent prior to the date on which it is
scheduled to make payment to the Agent (or the same date, in the case of
Reference Rate Loans) of (i) in the case of a Lender, the proceeds of a Loan or
(ii) in the case of the Borrower, a payment of principal, interest or fees to
the Agent for the account of the Lenders, that it does not intend to make such
payment, the Agent may assume that such payment has been made. The Agent may,
but shall not be obligated to, make the amount of such payment available to the
intended recipient in reliance upon such assumption. If such Lender or the
Borrower, as the case may be, has not in fact made such payment to the Agent,
the recipient of such payment shall, on demand by the Agent, repay to the Agent
the amount so made available together with interest thereon in respect of each
day during the period commencing on the date such amount was so made available
by the Agent until the date the Agent recovers such amount, at a rate per annum
equal to (a) in the case of payment by a Lender, the Fed Funds Rate for such day
or (b) in the case of payment by the Borrower, the interest rate applicable to
the relevant Loan.
2.21 Withholding Tax Exemption. At least five Business Days prior to the
first date on which interest or fees are payable hereunder for the account of
any Lender, each Lender that is not incorporated under the laws of the United
States of America, or a state thereof, will deliver to the Borrower and the
Agent two duly completed copies of United States Internal Revenue Service Form
1001 or 4224, certifying in either case that such Lender is entitled to receive
payments under this Agreement and the Notes without deduction or withholding of
any United States federal income taxes. Each Lender which so delivers a Form
1001 or 4224 further undertakes to deliver to the Borrower and the Agent two
additional copies of such form (or a successor form) on or before the date that
such form expires (currently, three successive calendar years for Form 1001 and
one calendar year for Form 4224) or becomes obsolete or after the occurrence of
any event requiring a change in the most recent forms so delivered by it, and
such amendments thereto or extensions or renewals thereof as may be reasonably
requested by the Borrower or the Agent, in each case certifying that such Lender
is entitled to receive payments under this Agreement and the Notes without
deduction or withholding of any United States federal income taxes, unless an
event (including without limitation any change in treaty, law or regulation) has
occurred prior to the date on which any such delivery would otherwise be
required which renders all such forms inapplicable or which would prevent such
Lender from duly completing and delivering any such form with respect to it and
such Lender advises the Borrower and the Agent that it is not capable of
receiving payments without any deduction or withholding of United States federal
income tax.
2.22 Optional Prepayment. The Borrower may, at any time and from time to
time, prepay the Loans, in whole or in part, without premium or penalty (except
amounts required by Section 3.1), upon at least three Business Days' irrevocable
written notice, in the case of LIBOR Loans, and upon at least one Business Day's
irrevocable written notice, in the case of Reference Rate Loans, from the
Borrower to the Agent, specifying the date and amount of prepayment, whether the
prepayment is of LIBOR Loans, Reference Rate Loans or a combination thereof, and
the amount allocable to each. Any prepayment of a LIBOR Loan on a day other than
the last day of an Interest Period applicable thereto shall also be subject to
the payment of amounts due under Section 3.1 hereof. Upon receipt of any such
notice from the Borrower, the Agent shall promptly notify each Lender thereof.
If any such notice is given, the amount specified in such notice shall be due
and payable by the Borrower on the date specified therein, together with accrued
interest to such date on the amount prepaid. Partial prepayments of Loans shall
be in an aggregate principal amount of $5,000,000 or in increments of $1,000,000
above such amount. Optional prepayments shall be applied as directed by the
Borrower and, in the absence of such direction, as the Agent shall determine.
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2.23 Mandatory Prepayments.
(i) If at any time the aggregate principal amount of all Loans outstanding
shall exceed the lesser of (a) the Aggregate Commitment or (b) the Borrowing
Base, the Borrower shall, immediately upon demand made by the Agent, prepay such
of the Loans as the Borrower may elect in the aggregate principal amount equal
to such excess.
(ii) Upon a Change of Control, the Borrower shall immediately prepay all
of the Loans.
2.24 Application of Repayments. All repayments of principal made pursuant
to Section 2.23 shall be applied, in the absence of instruction by the Borrower,
first to the principal of Reference Rate Loans and then to the principal of
LIBOR Loans. Each partial repayment shall be allocated among the Lenders in
proportion, as nearly as practicable, to their respective Commitment
Percentages, with adjustments to the extent practicable, to equalize any prior
repayments not exactly in proportion.
Notwithstanding the rights given to the Borrower pursuant to California
Civil Code Sections 1479 and 2822, or equivalent provisions in the laws in the
State of California, to designate how payments will be applied, the Borrower
hereby waives such rights and the Agent shall have the right in its sole
discretion, other than as specifically set forth herein, to determine the order
and method of application of payments to outstanding Obligations and to revise
such application prospectively or retroactively at its discretion.
ARTICLE 3
CHANGE IN CIRCUMSTANCES
3.1 Yield Protection.
(i) If any repayment of principal of, or conversion of, any LIBOR Loan is
made other than on the last day of an Interest Period therefor, as a result of a
prepayment, payment or conversion, or an acceleration of the maturity of the
Loans pursuant to Article 10, or for any other reason, or if the Borrower shall
fail to borrow a LIBOR Loan after requesting one, then the Borrower shall, upon
demand by the Agent upon request of any affected Lender, pay to the Agent for
the account of such affected Lender any amounts required to compensate it for
any additional losses, costs or expenses that it may reasonably incur as a
result of such repayment, conversion or failure to borrow, including any loss
(including loss of anticipated profits), cost or expense incurred by reason of
the liquidation or reemployment of deposits or other funds acquired by such
Lender to fund or maintain such LIBOR Loan. The calculation of such losses,
costs or expenses shall be on the basis of the difference between (a) the LIBOR
Rate applicable to such LIBOR Loan in effect prior to the event resulting in
such losses, costs or expenses and (b) the LIBOR Rate at the time the affected
Lender suffers any such additional losses, costs or expenses as a result of
actions by the Borrower. A certificate as to such amounts, submitted to the
Borrower by the Lenders through the Agent, shall be conclusive and binding for
all purposes, absent manifest error.
(ii) If, due to either (a) the introduction of or any change in or in the
interpretation of any Governmental Rule or (b) the compliance by the Lenders
with any Governmental Rule (whether or not having the force of law), there is
any increase in the cost to any Lender of agreeing to make, making, funding or
maintaining any LIBOR Loan, then the Borrower shall from time to time, upon
written demand by the Agent upon request of any affected Lender, pay to the
Agent for the account of such
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affected Lender additional amounts sufficient to compensate such affected Lender
upon request of any Lender for such increased cost. A certificate as to the
amount of such increased cost, submitted to the Borrower by the Lenders through
the Agent, shall be conclusive and binding for all purposes, absent manifest
error.
(iii) Notwithstanding any other provision of this Agreement, if the
introduction of or any change in or in the interpretation of any Governmental
Rule makes it unlawful, or any Governmental Person asserts that it is unlawful,
for any Lender to perform its obligations hereunder to make LIBOR Loans or to
continue to fund or maintain LIBOR Loans hereunder, then, on notice thereof and
demand therefor by the Lenders through the Agent to the Borrower, (a) the
obligation of such Lender to make LIBOR Loans and to convert Reference Rate
Loans into LIBOR Loans shall terminate and (b) the Borrower shall forthwith
prepay in full all LIBOR Loans then outstanding, together with interest accrued
thereon, unless the Borrower, within five Business Days of such notice and
demand, converts all LIBOR Loans then outstanding into Reference Rate Loans in
accordance with Section 2.10.
(iv) If, with respect to any LIBOR Loan, the Agent notifies the Borrower
that LIBOR for such Loan will not adequately reflect the cost to one or more
Lenders (as determined by such Lender(s) in good faith on the basis of market
conditions then in effect) of making, funding or maintaining such Loan, then (a)
such Loan will automatically, on the last day of the then existing Interest
Period therefor, convert into a Reference Rate Loan on which interest and
principal shall be payable contemporaneously with the related LIBOR Loans and
(b) the obligation of the affected Lender to make, or to convert Reference Rate
Loans into, LIBOR Loans shall be suspended until the Agent notifies the Borrower
that the circumstances causing such suspension no longer exist.
3.2 Taxes. Subject to the Lenders' compliance with Section 2.21, all
payments by or on behalf of the Borrower hereunder shall be made without setoff
or counterclaim and in such amounts as may be necessary in order that all such
payments (after deduction or withholding for or on account of any present or
future taxes, levies, imposts, duties or other charges of whatsoever nature
imposed by any Governmental Person, other than any tax on or measured by the
overall net income of the Agent or a Lender pursuant to the income tax laws of
the United States, the jurisdiction where the Agent's or such Lender's principal
office is located or any political subdivision thereof (collectively, the
"Taxes")) shall not be less than the amounts otherwise specified to be paid
hereunder. A certificate as to any additional amounts payable to the Agent or a
Lender hereunder submitted to the Borrower by the Agent shall show in reasonable
detail the amount payable to the Agent or a Lender and the calculations used to
determine in good faith such amount and shall be conclusive absent manifest
error. Any amounts payable by the Borrower hereunder with respect to past
payments shall be due within ten days following receipt by the Borrower of such
certificate from the Agent; and such amounts payable with respect to future
payments shall be due concurrently with such future payments. With respect to
each deduction or withholding for or on account of any Taxes, the Borrower shall
promptly furnish to the Agent such certificates, receipts and other documents as
may be required (in the reasonable judgment of the Agent) to establish any tax
credit to which a Lender may be entitled. The agreements and obligations of the
Borrower under this paragraph shall survive the payment in full of the Loans.
3.3 Changes in Capital Adequacy Regulations. If a Lender determines that
the amount of capital required to be maintained by such Lender, any Applicable
Lending Office of such Lender or any corporation controlling such Lender is
increased as a result of a Change, then, within 15 days of demand by such
Lender, the Borrower shall pay such Lender the amount necessary to compensate
for any shortfall in the rate of return on the portion of such increased capital
which such Lender determines is attributable to this Agreement, its Loans or its
obligation to make Loans hereunder (after taking into account such Lender's
policies as to capital adequacy). "Change" means (i) any change after the
Closing Date in the Risk-Based Capital Guidelines or (ii) any adoption of or
change in any other law,
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governmental or quasi-governmental rule, regulation, policy, guideline,
interpretation, or directive (whether or not having the force of law) after the
Closing Date which affects the amount of capital required or expected to be
maintained by any Lender or any Applicable Lending Office or any corporation
controlling any Lender. "Risk-Based Capital Guidelines" means (a) the risk-based
capital guidelines in effect in the United States on the Closing Date, and (b)
the corresponding capital regulations promulgated by regulatory authorities
outside the United States implementing the July 1988 report of the Basle
Committee on Banking Regulation and Supervisory Practices entitled
"International Convergence of Capital Measurements and Capital Standards" and
any amendments to such regulations adopted prior to the Closing Date.
3.4 Replacement of Lenders. If the Borrower is obligated to pay to any
Lender (other than the Agent) any amount under Section 3.1, 3.2 or 3.3 or if any
Lender requests that its LIBOR Loans be converted into Reference Rate Loans
pursuant to Section 3.1(iv), the Borrower may, so long as no Default then
exists, replace such Lender with another Lender which meets all of the
qualifications of being an Eligible Assignee and which complies with the
provisions of Section 14.3.
ARTICLE 4
CONDITIONS PRECEDENT
4.1 Conditions to Loans. The Lenders shall not be required to make their
Loans unless the Borrower has furnished the following documents to the Agent and
unless the following circumstantial conditions shall be in effect:
(i) this Agreement and the Notes duly executed by the Borrower;
(ii) the charter documents of the Borrower certified by the Secretary of
State of Maryland, together with good-standing certificates from the States of
Maryland and California;
(iii) the resolutions of the Board of Directors of the Borrower approving
the execution, delivery and performance by the Borrower of the Loan Documents,
together with a copy of the Borrower's bylaws, certified by the Secretary of the
Borrower to be true and correct and in full force and effect;
(iv) an incumbency certificate of the Borrower;
(v) one or more favorable legal opinions (in form and substance
satisfactory to the Agent and the Lenders) of counsel to the Borrower;
(vi) a Borrowing Base Certificate as of February 26, 1999;
(vii) all fees and expenses to be paid on the Closing Date;
(viii) no statute, rule, regulation, order, decree or preliminary or
permanent injunction of any court or administrative agency or, to the best
knowledge of the Borrower, any such action threatened by any Person, shall be in
effect that prohibits the Agent or the Lenders from consummating the
transactions contemplated by this Agreement and the other Loan Documents;
(ix) copies of the Borrower's Consolidated and Consolidating financial
statements for the period ended December 31, 1998;
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(x) a Compliance Certificate dated the Closing Date and containing
information as of December 31, 1998; and
(xi) such other documents, instruments and opinions as the Agent, any
Lender or its respective counsel may have reasonably requested.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lenders that:
5.1 Authorization. The execution, delivery and performance by the Borrower
of the Loan Documents to which it is a party are within the Borrower's corporate
powers, have been duly authorized by all necessary corporate action and do not
contravene any applicable law, rule, regulation or order or any contractual
restriction binding on or affecting the Borrower or its Subsidiaries.
5.2 Enforceability. Each Loan Document is the legal, valid and binding
obligation of the Borrower, enforceable against the Borrower in accordance with
its terms, except as the enforceability thereof may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium or other similar
laws affecting creditors' rights generally.
5.3 Use of Proceeds. The Borrower will use the proceeds of the Loans
solely as set forth in Section 7.2. No action has been taken or is currently
planned by the Borrower, or any agent acting on its behalf, which would cause
this Agreement or the Notes to violate Regulation U or any other regulation of
the Board of Governors of the Federal Reserve System or to violate the
Securities and Exchange Act of 1934, in each case as in effect now or as the
same may hereafter be in effect. The Borrower is not engaged in the business of
extending credit for the purpose of purchasing or carrying margin stock as one
of its important activities, and none of the proceeds of the Loans will be used
directly or indirectly for such purpose.
5.4 Litigation. Except as disclosed in writing to the Agent and the
Lenders before the date of this Agreement, there is no litigation, tax claim,
proceeding, arbitration or dispute pending or, to the best knowledge of the
Borrower, threatened against or affecting the Borrower or any Significant
Subsidiary or their respective Property, an adverse determination in which could
reasonably be expected to have a Material Adverse Effect.
5.5 Financial Statements. The Consolidated financial statements of the
Borrower dated December 31, 1997 and September 30, 1998, copies of which have
been delivered to the Lenders, fairly and accurately reflect the financial
condition of the Borrower and its Subsidiaries as of such dates, and since
September 30, 1998 there has been no Material Adverse Effect.
5.6 Taxes. To the best of its knowledge, the Borrower and each Subsidiary
have filed all tax returns and reports required to be filed and have paid all
applicable federal, state and local franchise and income taxes which are due and
payable.
5.7 Subsidiaries. Schedule 2 hereto contains an accurate list of all of
the presently existing Subsidiaries of the Borrower, setting forth their
respective jurisdictions of incorporation or organization and the percentage of
their respective capital stock or ownership interests owned by the Borrower or
other Subsidiaries. All of the issued and outstanding shares of capital stock of
such Subsidiaries have been duly authorized and issued and are fully paid and
non-assessable.
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5.8 ERISA. There are no Unfunded Liabilities of the Borrower or any
Subsidiary. Each Single Employer Plan complies in all material respects with all
applicable requirements of law and regulations, except to the extent that the
failure to comply therewith does not have a Material Adverse Effect. No
Reportable Event has occurred with respect to any Single Employer Plan, except
to the extent that such Reportable Event has no Material Adverse Effect. Neither
the Borrower nor any Subsidiary (a) is a party to any Multiemployer Plan or (b)
has withdrawn from any Multiemployer Plan, except to the extent such actions do
not have a Material Adverse Effect.
5.9 Accuracy of Information. No information, exhibit or report furnished
by the Borrower or any of its Subsidiaries to the Agent or to any Lender in
connection with the negotiation of, or compliance with, the Loan Documents
contains any material misstatement of fact or omits to state a material fact or
any fact necessary to make the statements contained therein not misleading in
any material respect.
5.10 Organization and Existence. The Borrower is duly organized, validly
existing and in good standing under the laws of the State of Maryland and has
the corporate power and authority, and the legal right, to own and operate its
Property and to conduct the business in which it is currently engaged and in
which it proposes to be engaged after the Closing Date and is duly qualified as
a foreign entity and in good standing under the laws of each jurisdiction where
its ownership, lease or operation of Property or the conduct of its business
requires such qualification, except to the extent that the failure to comply
thereunder could not, in the aggregate, reasonably be expected to have a
Material Adverse Effect, and the Borrower is in compliance with all Requirements
of Law except to the extent that the failure to comply therewith could not, in
the aggregate, reasonably be expected to have a Material Adverse Effect.
5.11 Consents. No consent or authorization of, or filing with or other act
by or in respect of, any Governmental Authority, or any other Person is required
in connection with the Loans hereunder or with the execution, delivery,
performance, validity or enforceability of this Agreement, the Notes or the
other Loan Documents. The execution, delivery and performance of this Agreement,
the Notes and the other Loan Documents and the use of the proceeds thereof will
not violate any Requirement of Law or contractual obligation of the Borrower or
any of its Subsidiaries which could be reasonably expected to have a Material
Adverse Effect and will not result in, or require, the creation or imposition of
any Lien on any of its respective Properties or revenues pursuant to any such
Requirement of Law or contractual obligation, except pursuant to the Loan
Documents or otherwise as permitted hereunder, which Lien could reasonably be
expected to have a Material Adverse Effect.
5.12 Intellectual Property. The Borrower and each of its Subsidiaries
owns, or is licensed to use, all trademarks, tradenames, patents, copyrights,
material permits, licenses or other intangibles necessary for the conduct of its
business as currently conducted without conflict with the rights of others,
except to the extent that the failure to own or license such property could not
reasonably be expected to have a Material Adverse Effect.
5.13 Default. There exists no Default.
5.14 Nature of Business. Neither the Borrower nor any of its Subsidiaries
is engaged in any material business other than as provided in this Agreement or
as set forth in the Report on Form 10-K pursuant to the Securities Exchange Act
of 1934 for the Borrower for fiscal year 1997.
5.15 Ranking of Loans. This Agreement and the other Loan Documents to
which the Borrower is party, when executed, and the Loans, when borrowed, are
and will be the direct and general
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obligations of the Borrower. The Borrower's Obligations hereunder and thereunder
will rank at least pari passu in priority of payment with all other Senior Debt,
except to the extent otherwise permitted hereunder.
5.16 Investment Company Acts; Other Regulations. Neither the Borrower nor
any of its Subsidiaries is an "investment company," or a company "controlled" by
an "investment company," within the meaning of the Investment Company Act of
1940, as amended.
5.17 Environmental Matters. Except as disclosed to the Agent, the Borrower
and its Subsidiaries are in compliance in all material respects with all
applicable environmental laws, and there is no contamination at, under or about
any of their respective Properties, or violation of any environmental law with
respect to any of their respective Properties or the business conducted at any
of their respective Properties which involves a matter or matters which has
caused or reasonably likely to cause a Material Adverse Effect.
5.18 Title. Except for assets which may have been disposed of in the
ordinary course of business, the Borrower and its Subsidiaries have good and
marketable title to all of the Property reflected in financial statements
delivered to the Lenders and to all Property acquired by the Borrower and its
Subsidiaries since the date of said financial statements, free and clear of all
Liens, encumbrances, security interests and adverse claims except (i) those
specifically referred to in said financial statements, (ii) those permitted by
Section 8.8 hereof and (iii) those that could not, in the aggregate, reasonably
be expected to have a Material Adverse Effect.
5.19 REIT and REMIC Status. The Borrower is a REIT, and each of the
purported REMICs formed by the Borrower or any of its Subsidiaries is a REMIC.
ARTICLE 6
FINANCIAL COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
6.1 Senior Leverage Ratio. The Borrower and its Subsidiaries on a
Consolidated Basis shall not permit, at any time, the Senior Leverage Ratio to
be greater than 0.65:1.00.
6.2 Leverage Ratio. The Borrower and its Subsidiaries on a Consolidated
Basis shall not permit, at any time, the Leverage Ratio to be greater than
1.25:1.00.
6.3 Minimum Tangible Net Worth. The Borrower and its Subsidiaries on a
Consolidated Basis shall at all times maintain Tangible Net Worth of not less
than $250,000,000 plus 75% of net cash proceeds of any new equity issuances or
any conversion of convertible Subordinated Indebtedness subsequent to June 30,
1997.
6.4 Debt Service Coverage Ratio. The Borrower and its Subsidiaries on a
Consolidated Basis shall maintain at all times a Debt Service Coverage Ratio of
not less than 2.25:1.00.
6.5 Minimum Cash Flow Coverage Ratio. The Borrower and its Subsidiaries on
a Consolidated Basis shall not permit at any time the Cash Flow Coverage Ratio
to be less than 1.00:1.00.
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ARTICLE 7
AFFIRMATIVE COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
7.1 Financial Reporting. The Borrower will maintain, for itself and each
Subsidiary, a system of accounting established and administered in accordance
with Agreement Accounting Principles, and furnish to each of the Lenders:
(i) As soon as available and in any event within 50 days after the end of
each quarterly fiscal period of each fiscal year of the Borrower (except the
last fiscal quarter), Consolidated statements of income, retained earnings and
cash flow of the Borrower and its Subsidiaries and Consolidating statements of
income and balance sheet of the Borrower, its Significant Subsidiaries and its
Subsidiaries having assets in excess of 5% of the Borrower's Consolidated total
assets, each for such period and for the period from the beginning of the
respective fiscal year to the end of such period, and the related Consolidated
balance sheet of the Borrower and its Subsidiaries as at the end of such period,
setting forth in each case in comparative form the corresponding Consolidated
figures for the corresponding period in the preceding fiscal year, accompanied
by a certificate of an Authorized Officer of the Borrower, which certificate
shall state that those Consolidated financial statements fairly present,
respectively, the Consolidated financial condition and results of operations of
the Borrower and its Subsidiaries and the Consolidating financial condition and
results of operations of the Borrower, its Significant Subsidiaries and
Subsidiaries having assets in excess of 5% of the Borrower's Consolidated total
assets, in each case in accordance with Agreement Accounting Principles,
consistently applied, as at the end of, and for, such period (subject to
normally recurring audit adjustments).
(ii) As soon as available and in any event within 95 days after the end of
each fiscal year of the Borrower, Consolidated statements of income, retained
earnings and cash flow of the Borrower and its Subsidiaries and Consolidating
statements of income and balance sheet of the Borrower, its Significant
Subsidiaries and Subsidiaries having assets in excess of 5% of the Borrower's
Consolidated total assets, each for such fiscal year and the related
Consolidated balance sheet of the Borrower and its Subsidiaries as at the end of
such fiscal year, setting forth in each case in comparative form the
corresponding Consolidated figures for the preceding fiscal year, and
accompanied, in the case of the Consolidated balance sheet of the Borrower, by
an unqualified opinion of independent certified public accountants of recognized
national standing, which opinion shall state that those Consolidated financial
statements fairly present, respectively, the Consolidated financial condition
and results of operations of the Borrower and its Subsidiaries, as at the end
of, and for, such fiscal year in accordance with Agreement Accounting
Principles, consistently applied.
(iii) Together with the financial statements required in Sections 7.1(i)
and (ii), a compliance certificate in substantially the form of Exhibit B hereto
(a "Compliance Certificate") signed by an Authorized Officer showing the
calculations necessary to determine compliance with this Agreement and stating
that no Default exists, or if any Default exists, stating the nature and status
thereof.
(iv) As soon as possible and in any event within 50 days after the end of
each calendar quarter, a report setting forth the aging of the Mortgage Loans
and any Mortgage securing a REMIC Certificate and each Operator which operates,
leases or has Mortgage Loans in excess of 15% of the Borrower's Total
Investments, together with a Borrowing Base Certificate signed by an Authorized
Officer showing the calculations necessary to determine compliance with this
Agreement and stating that no Default exists, or if any Default exists, stating
the nature and status thereof.
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(v) As soon as possible and in any event within 10 days after the Borrower
knows that any Reportable Event has occurred with respect to any Single Employer
Plan, a statement, signed by an Authorized Officer, describing said Reportable
Event and the action which the Borrower proposes to take with respect thereto.
(vi) As soon as possible and in any event within 10 days after receipt by
the Borrower, a copy of (a) any notice or claim to the effect that the Borrower
or any of its Subsidiaries is or may be liable to any Person as a result of the
release by the Borrower, any of its Subsidiaries, or any other Person of any
toxic or hazardous waste or substance into the environment and (b) any notice
alleging any violation of any federal, state or local environmental, health or
safety law or regulation by the Borrower or any of its Subsidiaries, which, in
either case, could have a Material Adverse Effect.
(vii) Promptly upon the furnishing thereof to the shareholders of the
Borrower, copies of all financial statements, reports and proxy statements so
furnished.
(viii) Promptly upon the filing thereof, copies of all registration
statements and all other filings and annual, quarterly, monthly or other regular
reports or statutory statements which the Borrower or any of its Subsidiaries
files with the SEC or any insurance or regulatory agency.
(ix) As soon as possible and in any event as soon as the Borrower knows of
any litigation or administrative or regulatory proceeding affecting the Borrower
where the amount claimed against the Borrower or where the granting of relief
requested could have a Material Adverse Effect, a statement, signed by an
Authorized Officer, describing said litigation or proceeding and the action
which the Borrower proposes to take with respect thereto.
(x) As soon as possible and in any event within 10 days of any change in
the location of any of the Borrower's places of business or the establishment of
any, or the discontinuance of any existing, places of businesses, notice of the
same.
(xi) As soon as available and in any event within 95 days after the end of
each fiscal year of any Operator which is not a publicly traded company and
which operates 10% or more of the Borrower's Total Investments, statements of
income, retained earnings and cash flow of such Operator for such fiscal year
and the related balance sheet of such Operator as of the end of such fiscal
year, accompanied by an unqualified opinion of independent certified public
accountants of recognized national standing, which opinion shall state that such
financial statements fairly present the financial condition and results of
operations of such Operator as at the end of, and for, such fiscal year in
accordance with Agreement Accounting Principles, consistently applied.
(xii) As soon as available and in any event within 95 days after the end
of each fiscal year of the Borrower, the Borrower's Consolidated financial
projections for the next two fiscal years of the Borrower and its Subsidiaries.
(xiii) As soon as available, but prior to the effective date of any
Acquisition of $25,000,000 or more (which is not in the ordinary course of the
Borrower's business, but which is permitted pursuant to Section 8.5), historical
financial statements of the Person to be acquired and information regarding
terms of the Acquisition as the Agent may from time to time reasonably request.
(xiv) Promptly upon request therefor, such other statements, lists of
property and accounts, budgets, forecasts, reports or other information
(including non-financial information) as the Agent may from time to time
reasonably request, in form satisfactory to the Agent.
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7.2 Use of Proceeds. The Borrower will use the proceeds of the Loans (i)
to fund investments in Owned Properties and related Mortgage Loans and (ii) for
general corporate purposes. The Borrower will not, nor will it permit any
Subsidiary to, use any of the proceeds of the Loans to purchase or carry any
"margin stock" (as defined in Regulation U).
7.3 Notice of Default. The Borrower will, and will cause each Subsidiary
to, give prompt (but in any case, within 5 Business Days) notice in writing to
the Lenders of the occurrence of any Default and of any other development,
financial or otherwise, which could have a Material Adverse Effect.
7.4 Conduct of Business. The Borrower will, and will cause each Subsidiary
to, maintain its corporate existence, carry on and conduct its business in the
fields in which it currently conducts business and related fields, do all things
necessary to remain in good standing in its respective jurisdiction of
organization and maintain all requisite authority to conduct its business in
each jurisdiction in which its respective businesses are conducted. The Borrower
shall not, and shall not permit any of its Subsidiaries to, make any material
change in the nature of its business as presently conducted.
7.5 Records. The Borrower will, and will cause each Subsidiary to, keep
adequate records and books of account, in which full and correct entries shall
be made in accordance with Agreement Accounting Principles of all financial
transactions of the Borrower, its Subsidiaries, its assets and its business.
7.6 Insurance. The Borrower will, and will cause each Subsidiary to,
maintain insurance on all its Property in such amounts and covering such risks
as is consistent with sound business practice, and the Borrower will furnish to
the Agent upon request full information as to the insurance carried.
7.7 Compliance with Laws. The Borrower will, and will cause each
Subsidiary to, comply in all material respects with all applicable laws, rules,
regulations and orders (including, without limitation, all applicable
environmental laws and the rules and regulations thereunder), such compliance to
include, without limitation, paying before the same become delinquent all taxes,
assessments and governmental charges imposed upon it or upon its Property,
except such taxes, assessments and governmental charges as are being contested
in good faith by appropriate proceedings and as to which appropriate reserves
are maintained.
7.8 Maintenance of Properties. The Borrower will, and will cause each
Subsidiary to, do all things necessary to maintain, preserve, protect and keep
its respective Property in good repair, working order and condition, and make
all necessary and proper repairs, renewals and replacements so that its
respective business carried on in connection therewith may be properly conducted
at all times.
7.9 Inspection/Audits. At any reasonable time and from time to time upon
reasonable notice, the Borrower will, and will cause each Subsidiary to, permit
the Agent and any Lender, by its respective representatives and agents, to
inspect and audit any of the Property, corporate books and financial records of
the Borrower and each Subsidiary, to examine and make copies of the books of
accounts and other financial records of the Borrower and each Subsidiary, and to
discuss the affairs, finances and accounts of the Borrower and each Subsidiary
with, and to be advised as to the same by, its respective officers at such
reasonable times and intervals as any Lender may designate. The Borrower will
also, and will cause its Subsidiaries to, cooperate in all audits of the books
and records of the Borrower and its Subsidiaries, all at the Borrower's expense,
and will deliver to the Agent and the
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Lenders, at least on an annual basis, an audit (in form and substance
satisfactory to the Agent) of the books and records of the Borrower and its
Subsidiaries.
7.10 Payment of Obligations. The Borrower and each of its Subsidiaries
will pay and discharge promptly all taxes, assessments and other governmental
charges and claims levied or imposed upon it or its respective Property, or any
part thereof, provided, however, that the Borrower and its Subsidiaries shall
have the right in good faith to contest any such taxes, assessments, charges or
claims and, pending the outcome of such contest, to delay or refuse payment
thereof provided that adequately funded reserves are established by it to pay
and discharge any such taxes assessments, charges and claims.
7.11 REIT Status. The Borrower shall at all times maintain its status as a
REIT.
7.12 Management. The Borrower shall cause a person (reasonably acceptable
to the Required Lenders) to be appointed Chairman and Chief Executive Officer
within 6 months after the departure of Andre C. Dimitriadis from the Borrower.
7.13 Year 2000 Compliance. The Borrower shall, and shall cause each
Subsidiary to, perform all acts reasonably necessary to ensure that the Borrower
and its Subsidiaries become Year 2000 Compliant in a timely manner. Such acts
shall include performing a review and assessment of all of the Borrower's and
its Subsidiaries material systems and adopting a plan with a budget for the
remediation and testing of such systems. For the purposes hereof, "Year 2000
Compliant" shall mean that all software, hardware, firmware, equipment, goods or
systems utilized by and material to the business operations or financial
condition of the Borrower or any Subsidiary will properly perform date-sensitive
functions before, during and after the year 2000. The Borrower shall, and shall
cause each Subsidiary to, use efforts to remain informed as to whether its major
customers, suppliers and vendors are Year 2000 Compliant. The Borrower shall,
upon the Agent's reasonable request, provide the Agent with such certifications
or other evidence of the Borrower's and its Subsidiaries' compliance with the
terms hereof as the Agent may from time to time require.
ARTICLE 8
NEGATIVE COVENANTS
During the term of this Agreement, unless the Required Lenders shall
otherwise consent in writing:
8.1 Debt. The Borrower will not, nor will it permit any Subsidiary to,
create, incur or suffer to exist any Debt, except:
(i) Debt of the Borrower under the Loan Documents;
(ii) Debt in existence on the date hereof, as set forth on Schedule 3;
(iii) trade Debt incurred to acquire goods, supplies, and services and
incurred in the ordinary course of business;
(iv) Subordinated Indebtedness incurred either (a) to refinance all or a
portion of the Loans as long as all proceeds are used to repay the Loans or (b)
to refinance Subordinated Indebtedness outstanding, provided such refinancing
occurs substantially simultaneously with the repayment of such outstanding
Subordinated Indebtedness, and provided further that all such Subordinated
Indebtedness
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permitted under this subsection (iv) does not mature prior to the maturity of
Loans remaining outstanding;
(v) Debt, including contingent liabilities and medium-term notes, that is
pari passu with the Loans outstanding hereunder, but only if and so long as (a)
either S&P or Moody's has issued a Rating of BBB- or Baa3, as applicable, and
(b) the repayment terms, covenants and events of default applicable to such pari
passu Debt are not more favorable to the lenders thereof than the repayment
terms, covenants and events of default applicable to the Loans;
(vi) Debt under operating leases for real or personal property used in the
Borrower's business as presently conducted;
(vii) Capitalized Leases incurred subsequent to October 3, 1997 not to
exceed in aggregate principal amount $5,000,000;
(viii) The endorsement of negotiable instruments for deposit or collection
in the ordinary course of the Borrower's business as presently conducted;
(ix) non-recourse Debt;
(x) interest-rate protection agreements not to exceed in aggregate amount
the sum of (a) an amount equal to 100% of the unpaid principal balance of all
Mortgage Loans and (b) outstanding Loans hereunder; and
(xi) Debt incurred by a Subsidiary as a result of its position as a
general partner in a limited partnership which has borrowed amounts from the
Borrower pursuant to Section 8.9(ii).
8.2 Merger. The Borrower will not, nor will it permit any Subsidiary to,
enter into any merger, consolidation or amalgamation, or liquidate, wind up or
dissolve itself (or suffer any liquidation or dissolution), or convey, sell,
lease, assign, transfer or otherwise dispose of all or substantially all of its
Property, business or assets; provided that the Borrower may merge or
consolidate with another Person, including, without limitation, a Subsidiary, if
(i) the Borrower is the surviving corporation, (ii) the Borrower will be in pro
forma compliance with all provisions of this Agreement subsequent to such merger
or consolidation, (iii) the Borrower shall have filed an SEC Report (if required
to do so by law) and (iv) the Borrower will not engage in any material line of
business substantially different from those engaged in as of the Closing Date.
8.3 Sale of Assets. The Borrower will not, nor will it permit any
Subsidiary to, lease, sell or otherwise dispose of its respective Property to
any other Person, except for (i) sales of Property in the ordinary course of
business for fair consideration and (ii) leases, sales or other dispositions of
its respective Property that, together with all other Property of the Borrower
and its Subsidiaries previously leased, sold or disposed of (other than
inventory in the ordinary course of business) as permitted by this Section
during the term of this Agreement, do not require the Borrower to file an SEC
Report; provided that the foregoing shall not be construed as prohibiting (a) a
transfer of assets from a Subsidiary to the Borrower or (b) the merger of a
Subsidiary into the Borrower.
8.4 Prepayments of Convertible Subordinated Debt. The Borrower will not,
and will not permit any of its Subsidiaries to, prepay any convertible
Subordinated Indebtedness in an aggregate amount in excess of $10,000,000,
unless such prepayment is as the result of a refinancing due to the issuance of
Subordinated Indebtedness and/or the issuance of equity.
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8.5 Acquisitions. Except for Owned Properties and Mortgage Loans (subject
to the limitations set forth in Section 8.12) and Investments permitted under
Section 8.10, the Borrower will not, nor will it permit any Subsidiary to, enter
into any agreement, contract, binding commitment or other arrangement providing
for any Acquisition, or take any action to solicit the tender of securities or
proxies in respect thereof in order to effect any Acquisition, unless:
(i) the Person to be (or whose assets are to be) acquired does not oppose
such Acquisition and the line or lines of business of the Person to be acquired
(or the assets to be acquired) are in healthcare- or education-related
businesses;
(ii) no Default shall have occurred and be continuing either immediately
prior to or immediately after giving effect to such Acquisition on a pro forma
basis;
(iii) during the period from and including October 3, 1997 until the
Facility Termination Date, the aggregate consideration for all Acquisitions
which are not Mortgage Loans or Owned Properties (but which must still be in
healthcare- or education-related areas) shall not exceed an amount equal to 10%
of the Borrower's Consolidated total assets (as determined in accordance with
Agreement Accounting Principles), of which no more than $20,000,000 in aggregate
amount shall be paid in cash; and
(iv) the Borrower's REIT status is not adversely affected.
8.6 Affiliates. The Borrower will not, and will not permit any Subsidiary
to, enter into any transaction (including, without limitation, the purchase or
sale of any Property or service) with, or make any payment or transfer to, any
Affiliate except in the ordinary course of business and pursuant to the
reasonable requirements of the Borrower's or such Subsidiary's business and upon
fair and reasonable terms no less favorable to the Borrower or such Subsidiary
than the Borrower or such Subsidiary would obtain in a comparable arms-length
transaction; provided that the foregoing shall not be construed as prohibiting a
transfer of assets from a Subsidiary to the Borrower or the merger of a
Subsidiary into the Borrower. Notwithstanding the foregoing, the Borrower may
make capital contributions to Significant Subsidiaries for the purpose of
establishing such Significant Subsidiaries and providing assets for such
Significant Subsidiaries to meet their respective obligations.
8.7 ERISA. The Borrower will not, and will not permit any Subsidiary, to
have Unfunded Liabilities for any and all Plans maintained for or covering
employees of the Borrower or any Subsidiary to exceed $2,000,000 in the
aggregate at any time.
8.8 Encumbrances and Liens. The Borrower will not, and will not permit any
Subsidiary to, create, assume or suffer to exist any Lien (other than for taxes
not delinquent and for taxes and other items being contested in good faith, with
appropriate reserves maintained) on Property of any kind, whether real, personal
or mixed, now owned or hereafter acquired by the Borrower or any of its
Subsidiaries, or upon the income or profits thereof, except for (i) minor
encumbrances and easements on real property which do not materially affect its
market value; (ii) existing Liens on the Borrower's Property as set forth on
Schedule 4; (iii) future purchase-money security interests encumbering only the
Property purchased or security interests relating to any refinancing of any such
purchase-money security interests, as long as the Lien encumbers only the
original Property and such additional related personal Property acquired in the
ordinary course of the Borrower's or such Subsidiary's business; (iv) statutory
liens of bankers, carriers, warehousemen, mechanics, materialmen, and other
similar Liens imposed by law, which are incurred in the ordinary course of
business for sums not more than 30 days delinquent or which are being contested
in good faith by appropriate proceedings; (v) deposits made in the ordinary
course of business to secure liability to insurance carriers; (vi) attachment
and judgment Liens securing
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claims less than $5,000,000 in the aggregate (excluding for purposes of said
calculation any such Liens for which execution has been stayed, payment is
covered in full by insurance, or the Borrower is prosecuting an appeal in good
faith by appropriate proceedings); (vii) monetary obligations of the Borrower
under any leasing or similar arrangement which, in accordance with Agreement
Accounting Principles, is classified as a Capitalized Lease; (viii) Liens
securing non-recourse Debt; and (ix) Liens existing on Property when it is
acquired by the Borrower or any of its Subsidiaries.
8.9 Loans, Advances and Guaranties. The Borrower will not, and will not
permit any Subsidiary to, except in the ordinary course of business, make any
loans or advances, become a guarantor or surety, pledge its credit or Properties
in any manner or extend credit, except that (i) the Borrower may make loans or
advances to its current and former officers, directors, consultants and
employees in an aggregate amount not to exceed at any time $15,000,000 for the
purpose of exercising stock options or warrants (of which up to $2,000,000 may
be used as employment incentives), (ii) the Borrower may make loans permitted
under Section 8.10(vii)(c), (iii) the Borrower may guarantee payment of bonds
payable to the Oregon Department of Housing in an aggregate principal amount not
to exceed $4,210,000, (iv) the Borrower may make loans to LTC Healthcare, Inc.
in an aggregate principal amount not to exceed $20,000,000 and (v) the
"Guarantors" may issue the "Guaranties" (as such terms are defined in the
Revolving Credit Agreement).
8.10 Investments. The Borrower will not, and will not permit any
Subsidiary to, have or purchase the Debt of another Person or entity or have or
make any Investment except for:
(i) certificates of deposit, time deposits, Eurodollar time deposits,
repurchase agreements, reverse repurchase agreements, or bankers' acceptances,
having in each case a maturity date of not more than twelve months from the date
of acquisition by the Borrower, issued by a Lender or any U.S. commercial bank
or any branch or agency of a non-U.S. bank licensed to conduct business in the
U.S. having combined capital and surplus or not less than $50,000,000 whose
short-term securities are rated at least "A-1" by S&P (or the equivalent rating
provided by any of Moody's, Duff & Phelps Credit Rating Co. or Fitch Investors
Services, Inc.);
(ii) interest-bearing or discounted obligations of the United States
Government, any agency thereof (including without limitation the Federal Home
Loan Mortgage Corporation, the Government National Mortgage Association, the
Federal National Mortgage Association and the Federal Farm Credit System) or any
entities or pools of mortgages or other instruments formed by the United States
Government or any such agencies, and in any case only if such obligation has a
maturity date not more than twelve months from the date of acquisition by the
Borrower;
(iii) obligations issued by state and local governments or their agencies,
instrumentalities, authorities or subdivisions, if such issuer has received a
rating of at least "A-1" by S&P (or the equivalent rating provided by any of
Moody's, Duff & Phelps Credit Rating Co. or Fitch Investors Services, Inc.), and
in any case only if such obligation has a maturity date of not more than twelve
months from the date of acquisition by Borrower;
(iv) commercial paper of an issuer rated at least "A-1" by S&P (or the
equivalent rating provided by any of Moody's, Duff & Phelps Credit Rating Co. or
Fitch Investors Services, Inc.), and in any case only if such obligation has a
maturity date not more than twelve months from the date of acquisition by the
Borrower;
(v) Investments in money market funds, including short-term adjustable
rate money market funds;
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(vi) Investments by the Borrower in REMICs formed by the Borrower and
REMIC Certificates issued by REMICs formed by the Borrower, not to exceed at any
time an aggregate amount equal to $125,000,000 plus 25% of any increase in the
Borrower's Tangible Net Worth subsequent to June 30, 1997;
(vii) subsequent to October 3, 1997, the sum of (a) loans, advances to and
investments in any Person or asset other than those loans, advances and
investments already permitted in Section 8.10 and those Acquisitions already
permitted in Section 8.5, plus (b) investments in stock, now owned or hereafter
acquired, of publicly-traded companies (but not more than 10% of the stock of
any single company), plus (c) loans or advances to limited partners (of
partnerships of which the general partner is a Subsidiary of the Borrower) and
limited partnerships (of which the general partner is a Subsidiary of the
Borrower) for the purposes of funding the limited partners' tax obligations
resulting from the sale of limited partnership facilities and paying previously
agreed-upon Distributions to such limited partners, shall not exceed in
aggregate principal amount at any time outstanding $20,000,000; and none of such
investments, loans or advances shall be in any Person engaged in any
education-related line of business;
(viii) loans and advances otherwise permitted under Section 8.9 (to the
extent such loans or advances may be deemed Investments);
(ix) Investments in current and all future Subsidiaries, directly or
indirectly wholly-owned by the Borrower;
(x) Acquisitions otherwise permitted under Section 8.5;
(xi) Investments of the Borrower and its Subsidiaries in existence on the
date hereof, as set forth on Schedule 5;
(xii) Investments as a result of the purchase (by the payment of cash or
the issuance of Borrower stock), of limited partner interests of partnerships of
which the general partner is a Subsidiary of the Borrower; and
(xiii) any purchase of a fee interest in real property used primarily for
education-related purposes, any loan secured by a mortgage, deed of trust or
other instrument creating a first mortgage lien on a fee interest in real
property used primarily for education-related purposes and any Investment in a
Person engaged primarily in education-related business, provided that (a) such
purchases and loans shall not exceed an aggregate of $20,000,000 in respect of a
single property and (b) the aggregate amount of all such purchases, loans and
Investments shall not exceed $75,000,000.
8.11 Dividends and Distributions. The Borrower will not, and will not
permit any of its Subsidiaries to, declare or pay any Distribution (other than
Distributions payable solely in common stock), provided that (i) each Subsidiary
that is a wholly-owned Subsidiary of the Borrower may declare and pay
Distributions to its shareholder and (ii) the Borrower may declare and pay
Distributions in any fiscal year in an aggregate amount not to exceed 95% of its
Cash Flow (minus Interest Expense) for such fiscal year. In addition, the
Borrower shall not, and shall not permit any of its Subsidiaries to, redeem,
convert, retire or otherwise acquire shares of any class of its capital stock,
except that the Borrower may repurchase up to $5,000,000 of its capital stock in
any fiscal year. The Borrower shall not effect or permit any change in or
amendment to any document or instrument pertaining to the terms of the capital
stock of the Borrower, except to increase the authorized capital of the
Borrower.
8.12 Concentrations.
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(i) The Borrower shall not, and shall not permit any Subsidiary to, invest
in or acquire any Owned Property or Mortgage Loan where a single Operator
(excluding Affiliates) operates or leases more than 15% of the Total Investments
of the Borrower and its Subsidiaries, except that the Borrower and its
Subsidiaries may invest up to 45% of the Borrower's and its Subsidiaries' Total
Investments in Sun Healthcare, Inc. and Assisted Living Concepts, Inc., provided
that the maximum concentration to either of such Operators shall not exceed 25%
of the Borrower's and its Subsidiaries' Total Investments;
(ii) The Borrower shall not invest in or acquire any single Owned Property
or Mortgage Loan secured by a single Property in an aggregate amount in excess
of $20,000,000.
ARTICLE 9
DEFAULTS
The occurrence of any one or more of the following events shall constitute
an "Event of Default":
9.1 Payment Defaults. The Borrower shall fail to pay when due any payment
of principal of any Loan or shall fail to pay within 3 days of when due any
interest, any other charge or any fee payable under the terms of this Agreement
or any other Loan Document.
9.2 Representations and Warranties. Any representation or warranty made by
the Borrower under any Loan Document shall prove to have been incorrect or
misleading in any material respect when made.
9.3 Other Loan Document Defaults. The Borrower shall fail to perform (i)
any obligation set forth in Section 7.2, 7.13, 8.1, 8.2, 8.3, 8.4, 8.5, 8.9,
8.10, 8.11 or 8.12(ii) of this Agreement; or (ii) any obligation set forth in
Section 8.12(i), and such failure shall continue for 180 days after the earlier
of actual knowledge by the Borrower or written notice thereof from the Agent; or
(iii) any other obligation contained in this Agreement or the other Loan
Documents, and such failure shall continue for 30 days after the earlier of
actual knowledge by the Borrower or written notice thereof from the Agent.
9.4 Bankruptcy. (i) The Borrower or any Significant Subsidiary shall fail
to pay its Debts generally as they become due or shall file any petition or
action for relief under any bankruptcy, insolvency, reorganization, moratorium
or creditor composition law, or any other law for the relief of or relating to
debtors; (ii) an involuntary petition under any bankruptcy law shall be filed
against the Borrower or any Significant Subsidiary and shall not be dismissed or
discharged within 45 days of filing; or (iii) a custodian, receiver, trustee,
assignee for the benefit or creditors, or other similar official shall be
appointed to take possession, custody or control of the Properties of the
Borrower or any Significant Subsidiary and shall not be dismissed or discharged
within 60 days of appointment.
9.5 Other Agreements. The Borrower or any Significant Subsidiary shall
fail to pay when due principal or interest payments required under the terms of
any bonds, notes, debentures or other agreements evidencing, in the aggregate,
at least $2,000,000 of Debt (excluding, for purposes of this calculation,
payments required under this Agreement or any of the other Loan Documents), and
such non-payment shall continue beyond any period of grace provided with respect
thereto, or the Borrower or any Significant Subsidiary shall default in the
observance or performance of any other agreement contained in any such bonds,
notes, debentures or other agreements evidencing indebtedness, and the effect of
such failure or default is to permit the holders thereof the right to cause the
indebtedness evidenced thereby to become due prior to its stated date of
maturity.
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9.6 ERISA. Any Governmental Person shall take any action under ERISA, or
the Borrower or any Significant Subsidiary shall fail to meet minimum funding
requirements thereunder, or any other event shall occur with respect to any
Plan, that could have a Material Adverse Effect or that causes unfunded
liabilities to exceed $2,000,000.
9.7 Judgments. A final judgment or order for the payment of money in
excess of $10,000,000 (exclusive of amounts covered by insurance) shall be
rendered against the Borrower or any Significant Subsidiary and the same shall
remain undischarged for a period of 60 days during which execution shall not be
effectively stayed, or any judgment, writ, warrant of attachment, or execution
or similar process, shall be issued or levied against a substantial part of the
Borrower's or any Significant Subsidiary's property and such judgment, writ,
warrant of attachment, or execution or similar process, shall not be released,
stayed, vacated, bonded or otherwise dismissed within 20 days after its issue or
levy.
9.8 Loan Documents. Any Loan Document shall fail to remain in full force
or effect, or any action shall be taken by the Borrower to discontinue or to
assert the invalidity or unenforceability of any Loan Document.
9.9 Change of Control. A Change of Control shall have occurred.
9.10 REIT Status. The Borrower shall at any time fail to maintain its REIT
status.
ARTICLE 10
ACCELERATION, WAIVERS AND AMENDMENTS
10.1 Acceleration. If any Event of Default described in Section 9.4 occurs
with respect to the Borrower or any Significant Subsidiary, the obligations of
the Lenders to make Loans hereunder shall automatically terminate and the
Obligations shall immediately become due and payable without any election or
action on the part of the Agent or any Lender. If any other Event of Default
occurs, the Required Lenders may terminate or suspend the obligations of the
Lenders to make Loans hereunder, or declare the Obligations to be due and
payable, or both, whereupon the Obligations shall become immediately due and
payable, without presentment, demand, protest or notice of any kind, all of
which the Borrower hereby expressly waives. The Agent agrees to promptly notify
the Borrower of any Event of Default, but failure by the Agent to give such
notice shall not affect any of the Borrower's obligations or any of the Agent's
or the Lenders' rights and remedies hereunder.
10.2 Additional Remedies. The rights, powers and remedies given to the
Agent and the Lenders hereunder shall be cumulative and not alternative and
shall be in addition to all rights, powers and remedies given to the Agent and
the Lenders by law against the Borrower or any other Person, including but not
limited to any Lender's right of setoff or banker's lien.
10.3 Amendments and Waivers. Subject to the provisions of this Article 10,
the Required Lenders (or the Agent with the consent in writing of the Required
Lenders) and the Borrower may enter into agreements supplemental hereto for the
purpose of adding, waiving or modifying any provisions to the Loan Documents or
changing in any manner the rights of the Lenders or the Borrower hereunder or
waiving any Default hereunder; provided, however, that no such supplemental
agreement or waiver shall, without the consent of each Lender affected thereby:
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(i) Extend the maturity of any Loan or Note or forgive all or any portion
of the principal amount thereof, or reduce the rate or extend the time of
payment of interest or fees thereon.
(ii) Reduce the percentage specified in the definition of Required
Lenders.
(iii) Increase the amount of, or extend, the Commitment of any Lender
hereunder or permit the Borrower to assign its rights under this Agreement.
(iv) Amend in any respect the Borrowing Base (or any components thereof or
definitions related thereto) or any change to the advance rate thereunder.
(v) Amend this Section 10.3.
No amendment of any provision of this Agreement relating to the Agent's specific
rights and responsibilities hereunder shall be effective without the written
consent of the Agent. No amendment of any provision of this Agreement relating
to the Documentation Agent's specific rights and responsibilities hereunder
shall be effective without the written consent of the Documentation Agent. The
Agent may waive payment of the fees required under Section 14.3(ii) without
obtaining the consent of any other party to this Agreement.
10.4 Preservation of Rights. No delay or omission of the Lenders or the
Agent to exercise any right under the Loan Documents shall impair such right or
be construed to be a waiver of any Default or an acquiescence therein, and the
making of a Loan notwithstanding the existence of a Default or the inability of
the Borrower to satisfy the conditions precedent to such Loan or shall not
constitute any waiver or acquiescence. Any single or partial exercise of any
such right shall not preclude other or further exercise thereof or the exercise
of any other right, and no waiver, amendment or other variation of the terms,
conditions or provisions of the Loan Documents whatsoever shall be valid unless
in writing signed by the Lenders required pursuant to Section 10.3, and then
only to the extent in such writing specifically set forth. All remedies
contained in the Loan Documents or by law afforded shall be cumulative and all
shall be available to the Agent and the Lenders until the Obligations have been
paid in full.
ARTICLE 11
GENERAL PROVISIONS
11.1 Survival of Representations. All representations and warranties of
the Borrower contained in this Agreement shall survive delivery of the Notes and
the making of the Loans herein contemplated.
11.2 Governmental Regulation. Anything contained in this Agreement to the
contrary notwithstanding, no Lender shall be obligated to extend credit to the
Borrower in violation of any limitation or prohibition provided by any
applicable statute or regulation.
11.3 Headings. Section headings in the Loan Documents are for convenience
of reference only and shall not govern the interpretation of any of the
provisions of the Loan Documents.
11.4 Entire Agreement. The Loan Documents embody the entire agreement and
understanding among the Borrower, the Agent and the Lenders and supersede all
prior agreements and understandings among the Borrower, the Agent and the
Lenders relating to the subject matter thereof.
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11.5 Several Obligations; Benefits of this Agreement. The respective
obligations of the Lenders hereunder are several and not joint, and no Lender
shall be the partner or agent of any other (except to the extent to which the
Agent is authorized to act as such). The failure of any Lender to perform any of
its obligations hereunder shall not relieve any other Lender from any of its
obligations hereunder. This Agreement shall not be construed so as to confer any
right or benefit upon any Person other than the parties to this Agreement and
their respective successors and assigns.
11.6 Expenses; Indemnification. The Borrower shall reimburse the Agent for
any costs, internal charges and out-ofpocket expenses (including reasonable
attorneys' fees and time charges of attorneys for the Agent and the
Documentation Agent and audit and exam expenses), paid or incurred by the Agent
and the Documentation Agent in connection with the negotiation, documentation
and syndication of this Agreement. The Borrower shall also reimburse the Agent
and each Lender for any costs, internal charges and out-of-pocket expenses
(including reasonable attorneys' fees and time charges of attorneys for the
Agent and each Lender) paid or incurred by the Agent or any Lender in connection
with the collection and enforcement of the Loan Documents. The Borrower further
agrees to indemnify the Agent, the Documentation Agent and each Lender, and its
directors, officers and employees against all losses, claims, damages,
penalties, judgments, liabilities and expenses (including, without limitation,
all expenses of litigation or preparation therefor whether or not the Agent, the
Documentation Agent or any Lender is a party thereto) which any of them may pay
or incur arising out of or relating to this Agreement, the other Loan Documents,
the transactions contemplated hereby or the direct or indirect application or
proposed application of the proceeds of any Loan hereunder, provided that no
Person shall have the right to be indemnified hereunder for such Person's own
gross negligence or willful misconduct as determined by a court of competent
jurisdiction.
11.7 Numbers of Documents. All statements, notices, closing documents, and
requests hereunder shall be furnished to the Agent with sufficient counterparts
so that the Agent may furnish one to each of the Lenders.
11.8 Severability of Provisions. Any provision in any Loan Document that
is held to be inoperative, unenforceable, or invalid in any jurisdiction shall,
as to that jurisdiction, be inoperative, unenforceable, or invalid without
affecting the remaining provisions in that jurisdiction or the operation,
enforceability, or validity of that provision in any other jurisdiction, and to
this end the provisions of all Loan Documents are declared to be severable.
11.9 Nonliability of Lenders. The relationship between the Borrower and
the Lenders, the Documentation Agent and the Agent shall be solely that of
borrower and lender. Neither the Agent, the Documentation Agent nor any Lender
shall have any fiduciary responsibilities to the Borrower. Neither the Agent,
the Documentation Agent nor any Lender undertakes any responsibility to the
Borrower to review or inform the Borrower of any matter in connection with any
phase of the Borrower's business or operations.
11.10 Choice of Law. THE LOAN DOCUMENTS (OTHER THAN THOSE CONTAINING A
CONTRARY EXPRESS CHOICE OF LAW PROVISION) SHALL BE CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF CALIFORNIA, BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS.
11.11 Consent to Jurisdiction. SUBJECT TO SECTION 11.15 BELOW, THE
BORROWER HEREBY IRREVOCABLY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF ANY
UNITED STATES FEDERAL OR CALIFORNIA STATE COURT SITTING IN LOS ANGELES IN ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO ANY
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LOAN DOCUMENTS, AND THE BORROWER HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN
RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH
COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO
THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT
SUCH COURT IS AN INCONVENIENT FORUM. SUBJECT TO SECTION 11.15 BELOW, NOTHING
HEREIN SHALL LIMIT THE RIGHT OF THE AGENT, THE DOCUMENTATION AGENT OR ANY LENDER
TO BRING PROCEEDINGS AGAINST THE BORROWER IN THE COURTS OF ANY OTHER
JURISDICTION. SUBJECT TO SECTION 11.15 BELOW, ANY JUDICIAL PROCEEDING BY THE
BORROWER AGAINST THE AGENT, THE DOCUMENTATION AGENT OR ANY LENDER OR ANY
AFFILIATE OF THE AGENT, THE DOCUMENTATION AGENT OR ANY LENDER INVOLVING,
DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR
CONNECTED WITH ANY LOAN DOCUMENT SHALL BE BROUGHT ONLY IN A COURT IN LOS
ANGELES, CALIFORNIA.
11.12 Waiver of Jury Trial. SUBJECT TO SECTION 11.15 BELOW, THE BORROWER,
THE AGENT, THE DOCUMENTATION AGENT AND EACH LENDER HEREBY WAIVE TRIAL BY JURY IN
ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER
SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO,
OR CONNECTED WITH ANY LOAN DOCUMENT OR THE RELATIONSHIP ESTABLISHED THEREUNDER.
11.13 Integration Clause. Except for documents and instruments
specifically referenced herein, this Agreement constitutes the entire agreement
among the Agent, the Documentation Agent, the Lenders and the Borrower regarding
the Loans, and all prior communications, oral or written, between the Borrower
and the Agent, the Documentation Agent or any Lender shall be of no further
effect or evidentiary value.
11.14 Confidentiality. The Lenders shall take normal and reasonable
precautions to maintain the confidentiality of all non-public information
obtained pursuant to the requirements of this Agreement which has been
identified as such by the Borrower but may, in any event, make disclosures (i)
reasonably required by any bona fide transferee, assignee or participant in
connection with the contemplated transfer or assignment of any of the
Commitments or Loans or participations therein or (ii) as required or requested
by any governmental agency or representative thereof or as required pursuant to
any legal process or (iii) to its attorneys and accountants or (iv) as required
by law or (v) in connection with litigation involving any Lender.
11.15 Dispute Resolution. It is understood and agreed that upon the
request of any party hereto any dispute, claim, or controversy of any kind,
whether in contract or in tort, statutory or common law, legal or equitable, now
existing or hereinafter arising out of, pertaining to or in connection with this
Agreement or the other Loan Documents, or any related agreements, documents, or
instruments, shall be resolved through final and binding arbitration
administered by Judicial Arbitration & Mediation Services, Inc. ("J.A.M.S.").
The hearing shall be conducted at a location determined by the arbitrator in Los
Angeles, California and shall be administered by and in accordance with the then
existing Rules of Practice and Procedure of Judicial Arbitration & Mediation
Services, Inc., and judgment upon any award rendered by the arbitrator may be
entered by an State or Federal Court having jurisdiction thereof. The arbitrator
shall determine which is the prevailing party or parties and shall include in
the award that party's or parties' reasonable attorneys' fees and costs. As soon
as practicable after selection of the arbitrator, the arbitrator or his/her
designated representative shall determine a reasonable estimate of anticipated
fees and costs of the arbitrator, and render a statement to each party setting
forth that party's pro-rata share of said fees and costs. Thereafter each party
shall, within ten days of receipt of said
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statement, deposit said sum with the arbitrator. Failure of any party to make
such a deposit shall result in a forfeiture by the non-depositing party of the
right to prosecute or defend that claim which is the subject of the arbitration,
but shall not otherwise serve to abate, stay under this paragraph, nor any other
provision of this dispute resolution provision, or limit the right of any party
to obtain provisional or ancillary remedies such as injunctive relief from any
court having jurisdiction before, during or after the pendency of any
arbitration. The institution and maintenance of any action for the pursuit of
provisional or ancillary remedies shall not constitute a waiver of the right of
any party, including the plaintiff, to submit the controversy or claim to
arbitration.
ARTICLE 12
THE AGENT
12.1 Appointment. Bank of Montreal is hereby appointed Agent hereunder and
under each other Loan Document, and each of the Lenders irrevocably authorizes
the Agent to act as the agent of such Lender. The Agent agrees to act as such
upon the express conditions contained in this Article 12. The Agent shall not
have a fiduciary relationship in respect of the Borrower or any Lender by reason
of this Agreement.
12.2 Powers. The Agent shall have and may exercise such powers under the
Loan Documents as are specifically delegated to the Agent by the terms of each
thereof, together with such powers as are reasonably incidental thereto. The
Agent shall have no implied duties to the Lenders, or any obligation to the
Lenders to take any action thereunder except any action specifically provided by
the Loan Documents to be taken by the Agent.
12.3 General Immunity. Neither the Agent nor any of its directors,
officers, agents or employees shall be liable to the Borrower or any Lender for
any action taken or omitted to be taken by it or them hereunder or under any
other Loan Document or in connection herewith or therewith except for its or
their own gross negligence or willful misconduct.
12.4 No Responsibility for Loans, Recitals, etc. Neither the Agent nor any
of its directors, officers, agents or employees shall be responsible for or have
any duty to ascertain, inquire into, or verify (i) any statement, warranty or
representation made in connection with any Loan Document or any borrowing
hereunder; (ii) the performance or observance of any of the covenants or
agreements of any obligor under any Loan Document, including, without
limitation, any agreement by an obligor to furnish information directly to each
Lender; (iii) the satisfaction of any condition specified in Article 4 except
receipt of items required to be delivered to the Agent; or (iv) the validity,
effectiveness or genuineness of any Loan Document or any other instrument or
writing furnished in connection therewith. The Agent shall have no duty to
disclose to the Lenders information that is not required to be furnished by the
Borrower to the Agent at such time, but is voluntarily furnished by the Borrower
to the Agent (either in its capacity as Agent or in its individual capacity).
12.5 Action on Instructions of Lenders. The Agent shall in all cases be
fully protected in acting, or in refraining from acting, hereunder and under any
other Loan Document in accordance with written instructions signed by the
Required Lenders, and such instructions and any action taken or failure to act
pursuant thereto shall be binding on all of the Lenders and on all holders of
Notes. At the request of the Required Lenders the Agent shall give any notice
described in Section 9.3. The Agent shall be fully justified in failing or
refusing to take any action hereunder and under any other Loan Document unless
it shall first be indemnified to its satisfaction by the Lenders pro rata
against any and all liability, cost and expense that it may incur by reason of
taking or continuing to take any such action.
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12.6 Employment of Agents and Counsel. The Agent may execute any of its
duties as Agent hereunder and under any other Loan Document by or through
employees, agents, and attorneys-infact and shall not be answerable to the
Lenders, except as to money or securities received by it or its authorized
agents, for the default or misconduct of any such agents or attorneys-in-fact
selected by it with reasonable care. The Agent shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and under any other Loan Document.
12.7 Reliance on Documents; Counsel. The Agent shall be entitled to rely
upon any Note, notice, consent, certificate, affidavit, letter, telegram,
statement, paper or document believed by it to be genuine and correct and to
have been signed or sent by the proper person or persons, and, in respect to
legal matters, upon the opinion of counsel selected by the Agent, which counsel
may be employees of the Agent.
12.8 Agent's Reimbursement and Indemnification. The Lenders agree to
reimburse and indemnify the Agent ratably in proportion to their respective
Commitments (i) for any expenses incurred by the Agent on behalf of the Lenders,
in connection with the preparation, execution, delivery, administration and
enforcement of the Loan Documents and (ii) for any liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements of any kind and nature whatsoever which may be imposed on,
incurred by or asserted against the Agent in any way relating to or arising out
of the Loan Documents or any other document delivered in connection therewith or
the transactions contemplated thereby, or the enforcement of any of the terms
thereof or of any such other documents, provided that no Lender shall be liable
for any of the foregoing to the extent they arise from the gross negligence or
willful misconduct of the Agent. The obligations of the Lenders under this
Section 12.8 shall survive payment of the Obligations and termination of this
Agreement.
12.9 Rights as a Lender. In the event the Agent is a Lender, the Agent
shall have the same rights and powers hereunder and under any other Loan
Document as any Lender and may exercise the same as though it were not the
Agent, and the term "Lender" or "Lenders" shall, at any time when the Agent is a
Lender, unless the context otherwise indicates, include the Agent in its
individual capacity. The Agent may accept deposits from, lend money to, and
generally engage in any kind of trust, debt, equity or other transaction, in
addition to those contemplated by this Agreement or any other Loan Document,
with the Borrower or any of its Subsidiaries in which the Borrower or such
Subsidiary is not restricted hereby from engaging with any other Person.
12.10 Lender Credit Decision. Each Lender acknowledges that it has,
independently and without reliance upon the Agent or any other Lender and based
on the financial statements prepared by the Borrower and such other documents
and information as it has deemed appropriate, made its own credit analysis and
decision to enter into this Agreement and the other Loan Documents. Each Lender
also acknowledges that it will, independently and without reliance upon the
Agent or any other Lender and based on such documents and information as it
shall deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement and the other Loan Documents.
12.11 Successor Agent. The Agent may resign at any time by giving written
notice thereof to the Lenders and the Borrower, and the Agent may be removed at
any time with or without cause by the Required Lenders, such resignation or
removal to be effective upon the appointment of a successor Agent or, if no
successor Agent has been appointed, forty-five days after the retiring Agent
gives notice of its intention to resign or thirty days after removal notice has
been given to the Agent. Upon any such resignation or removal, the Required
Lenders shall have the right to appoint, with the consent (which shall not be
unreasonably withheld) of the Borrower, if no Default has occurred and is
continuing, on behalf of the Borrower and the Lenders, a successor Agent. If no
successor Agent shall
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have been so appointed by the Required Lenders within thirty days after the
resigning Agent's giving notice of its intention to resign, then the resigning
Agent may appoint, on behalf of the Borrower and the Lenders, a successor Agent.
If the Agent has resigned or been removed and no successor Agent has been
appointed, the Lenders may perform all the duties of the Agent hereunder and the
Borrower shall make all payments in respect of the Obligations to the applicable
Lender and for all other purposes shall deal directly with the Lenders. No
successor Agent shall be deemed to be appointed hereunder until such successor
Agent has accepted the appointment. Any such successor Agent shall be a
commercial bank having capital and retained earnings of at least $150,000,000.
Upon the acceptance of any appointment as Agent hereunder by a successor Agent,
such successor Agent shall thereupon succeed to and become vested with all the
rights, powers, privileges and duties of the resigning Agent. Upon the
effectiveness of the resignation or removal of the Agent, the departing Agent
shall be discharged from its duties and obligations hereunder and under the Loan
Documents. After the effectiveness of the resignation or removal of an Agent,
the provisions of this Article 12 shall continue in effect for the benefit of
such Agent in respect of any actions taken or omitted to be taken by it while it
was acting as the Agent hereunder and under the other Loan Documents.
12.12 Documentation Agent. None of the financial institutions identified
on the facing page, preamble or signature pages of this Agreement as a
"documentation agent" shall have any right, power, obligation, liability,
responsibility or duty under this Agreement other than those applicable to all
Lenders as such. Without limiting the foregoing, none of the Lenders so
identified as a "documentation agent" shall have or be deemed to have any
fiduciary relationship with any Lender. Each Lender acknowledges that it has not
relied, and will not rely, on any of the financial institutions so identified in
deciding to enter into this Agreement or in taking or not taking action
hereunder.
ARTICLE 13
SETOFF; RATABLE PAYMENTS
13.1 Setoff. Upon the occurrence and during the continuance of any Event
of Default, the Lenders are hereby authorized at any time and from time to time,
to the fullest extent permitted by law, to set off and apply any and all
deposits (general or special, time or demand, provisional or final) at any time
held and other indebtedness at any time owing by any Lender to or for the credit
or the account of the Borrower against any and all obligations of the Borrower
now or hereafter existing under the Loan Documents, irrespective of whether or
not any Lender shall have made any demand under this Agreement and although such
obligations may be unmatured. The rights of the Lenders under this Section are
in addition to other rights and remedies (including other rights of setoff) that
the Lenders may have.
13.2 Ratable Payments. If any Lender, whether by setoff or otherwise, has
payment made to it upon its Loans (other than payments received pursuant to
Section 3.1, 3.2 or 3.3) in a greater proportion than that received by any other
Lender, such Lender agrees, promptly upon demand, to purchase a portion of the
Loans held by the other Lenders so that after such purchase each Lender will
hold its ratable proportion of Loans. If any Lender, whether in connection with
setoff or amounts which might be subject to setoff or otherwise, receives
collateral or other protection for its Obligations or such amounts which may be
subject to setoff, such Lender agrees, promptly upon demand, to take such action
necessary such that all Lenders share in the benefits of such collateral ratably
in proportion to their respective Loans. In case any such payment is disturbed
by legal process, or otherwise, appropriate further adjustments shall be made.
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ARTICLE 14
BENEFIT OF AGREEMENT; ASSIGNMENTS; PARTICIPATIONS
14.1 Successors and Assigns. The terms and provisions of the Loan
Documents shall be binding upon and inure to the benefit of the Borrower and the
Lenders and their respective successors and assigns, except that (i) the
Borrower shall not have the right to assign its rights or obligations under the
Loan Documents and (ii) any assignment by any Lender must be made in compliance
with Section 14.3. Notwithstanding clause (ii) of this Section, any Lender may
at any time, without the consent of the Borrower or the Agent, assign all or any
portion of its rights under this Agreement and its Notes to a Federal Reserve
Bank; provided, however, that no such assignment shall release the transferor
Lender from its obligations hereunder. The Agent may treat the payee of any Note
as the owner thereof for all purposes hereof unless and until such payee
complies with Section 14.3 in the case of an assignment thereof or, in the case
of any other transfer, a written notice of the transfer is filed with the Agent.
Any assignee or transferee of a Note agrees by acceptance thereof to be bound by
all the terms and provisions of the Loan Documents. Any request, authority or
consent of any Person, who at the time of making such request or giving such
authority or consent is the holder of any Note, shall be conclusive and binding
on any subsequent holder, transferee or assignee of such Note or of any Note or
Notes issued in exchange therefor.
14.2 Participations.
(i) Permitted Participants; Effect. Any Lender may, in the ordinary course
of its business and in accordance with applicable law, at any time sell to one
or more banks or other entities ("Participants") participating interests in any
Loan owing to such Lender, any Note held by such Lender, any Commitment of such
Lender or any other interest of such Lender under the Loan Documents. In the
event of any such sale by a Lender of participating interests to a Participant,
such Lender's obligations under the Loan Documents shall remain unchanged, such
Lender shall remain solely responsible to the other parties hereto for the
performance of such obligations, such Lender shall remain the holder of any such
Note for all purposes under the Loan Documents, all amounts payable by the
Borrower under this Agreement shall be determined as if such Lender had not sold
such participating interests, and the Borrower and the Agent shall continue to
deal solely and directly with such Lender in connection with such Lender's
rights and obligations under the Loan Documents.
(ii) Voting Rights. Each Lender shall retain the sole right to approve,
without the consent of any Participant, any amendment, modification or waiver of
any provision of the Loan Documents other than any amendment, modification or
waiver with respect to any Loan or Commitment in which such Participant has an
interest which forgives principal, interest or fees or reduces the interest rate
or fees payable with respect to any such Loan or Commitment, which postpones any
date fixed for any regularly scheduled payment of principal of, or interest or
fees on, any such Loan or Commitment or which is otherwise subject to 100%
Lender approval under Section 10.3.
(iii) Benefit of Setoff. The Borrower agrees that each Participant shall
be deemed to have the right of setoff provided in Section 13.1 in respect of its
participating interest in amounts owing under the Loan Documents to the same
extent as if the amount of its participating interest were owing directly to it
as a Lender under the Loan Documents, provided that each Lender shall retain the
right of setoff provided in Section 13.1 with respect to the amount of
participating interests sold to each Participant. The Lenders agree to share
with each Participant, and each Participant, by exercising the right of setoff
provided in Section 13.1, agrees to share with each Lender, any amount received
pursuant to the exercise of its right of setoff, such amounts to be shared in
accordance with Section 13.2 as if each Participant were a Lender.
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14.3 Assignments.
(i) Permitted Assignments. Any Lender may, in the ordinary course of its
business and in accordance with applicable law, at any time assign to one or
more Eligible Assignees ("Purchasers") all or any part of its rights and
obligations under the Loan Documents, provided, however, such assignments must
be in a minimum amount at least equal to $10,000,000 and must be on a pro rata
basis of all Obligations hereunder; provided, however, that if such Purchaser is
a Lender or an Affiliate thereof, no minimum amount shall be applicable. Such
assignment shall be substantially in the form of Exhibit C hereto. The consent
of the Borrower and the Agent shall be required prior to an assignment becoming
effective with respect to a Purchaser which is not a Lender or an Affiliate
thereof; provided, however, that if an Event of Default has occurred and is
continuing, the consent of the Borrower shall not be required. Such consent
shall not be unreasonably withheld or delayed.
(ii) Effect; Effective Date. Upon (a) delivery to the Agent of a notice of
assignment, substantially in the form attached as Exhibit I to Exhibit C hereto
(a "Notice of Assignment"), together with any consents required by Section
14.3(i), and (b) payment of a $3,000 fee to the Agent for processing such
assignment, such assignment shall become effective on the effective date
specified in such Notice of Assignment. The Notice of Assignment shall contain a
representation by the Purchaser to the effect that it is an Eligible Assignee
and that none of the consideration used to make the purchase of the Commitment
and Loans under the applicable assignment agreement are "plan assets" as defined
under ERISA and that the rights and interests of the Purchaser in and under the
Loan Documents will not be "plan assets" under ERISA. On and after the effective
date of such assignment, such Purchaser shall for all purposes be a Lender party
to this Agreement and any other Loan Document executed by the Lenders and shall
have all the rights and obligations of a Lender under the Loan Documents, to the
same extent as if it were an original party hereto, and no further consent or
action by the Borrower, the Lenders or the Agent shall be required to release
the transferor Lender with respect to the percentage of the Aggregate Commitment
and Loans assigned to such Purchaser. Upon the consummation of any assignment to
a Purchaser pursuant to this Section 14.3(ii), the transferor Lender, the Agent
and the Borrower shall make appropriate arrangements so that replacement Notes
are issued to such transferor Lender and new Notes or, as appropriate,
replacement Notes, are issued to such Purchaser, in each case in principal
amounts reflecting its Commitment, as adjusted pursuant to such assignment.
14.4 Dissemination of Information. The Borrower authorizes each Lender to
disclose to any Participant or Purchaser or any other Person acquiring an
interest in the Loan Documents by operation of law (each a "Transferee") and any
prospective Transferee any and all information in such Lender's possession
concerning the creditworthiness of the Borrower and its Subsidiaries, provided
that each prospective Transferee shall execute and deliver to the Agent a
confidentiality agreement (in form and substance reasonably satisfactory to the
Borrower and the Agent).
14.5 Tax Treatment. If any interest in any Loan Document is transferred to
any Transferee which is organized under the laws of any jurisdiction other than
the United States or any State thereof, the transferor Lender shall cause such
Transferee, concurrently with the effectiveness of such transfer, to comply with
the provisions of Section 2.21.
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ARTICLE 15
NOTICES
15.1 Giving Notice. Except as otherwise permitted by Section 2.10 with
respect to notices regarding conversion or continuation of Advances and Section
2.11 with respect to notices regarding Advances, all notices and other
communications provided to any party hereto under this Agreement or any other
Loan Document shall be in writing or by facsimile and addressed or delivered to
the Borrower and the Agent at their respective addresses set forth below their
respective signatures hereto and to each Lender at its address set forth on
Schedule 1 hereto or at such other address as may be designated by such party in
a notice to the other parties. Any notice, if mailed and properly addressed with
postage prepaid, shall be deemed given when received; any notice, if transmitted
by facsimile, shall be deemed given when transmitted (answerback confirmed in
the case of telexes).
15.2 Change of Address. The Borrower, the Agent and any Lender may each
change the address for service of notice upon it by a notice in writing to the
other parties hereto.
ARTICLE 16
COUNTERPARTS
This Agreement may be executed in any number of counterparts, all of which
taken together shall constitute one agreement, and any of the parties hereto may
execute this Agreement by signing any such counterpart. This Agreement shall be
effective when it has been executed by the Borrower, the Agent and the Lenders
and each party has notified the Agent by telex or telephone, that it has taken
such action.
IN WITNESS WHEREOF, the Borrower, the Lenders, the Agent and the
Documentation Agent have executed this Agreement as of the date first above
written.
LTC PROPERTIES, INC.
By: /S/ DARRELL D. STRUCK
----------------------------------
Darrell D. Struck
Treasurer
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
Attention: Darrell D. Struck
Treasurer
Telecopier: (805) 981-8663
Telephone: (805) 981-8655
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BANK OF MONTREAL, as Administrative
Agent and Lender
By: /S/ KANU MODI
----------------------------------
Name: Kanu Modi
---------------------------------
Title: Director
--------------------------------
115 South LaSalle Street
Chicago, Illinois 60603
Attention: Kanu Modi
Director
Telecopier: (312) 750-6057
Telephone: (312) 750-3891
with a copy of any notice to:
601 South Figueroa Street, Suite 4900
Los Angeles, California 90017
Attention: Ronald Launsbach
Director
Telecopier: (213) 239-0602
Telephone: (213) 239-0680
SANWA BANK CALIFORNIA, as
Documentation Agent and Lender
By: /S/ DIRK A. PRICE
----------------------------------
Dirk A. Price
Vice President
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SCHEDULE 1
LENDERS AND APPLICABLE LENDING OFFICES
Lender Commitment Applicable Lending Office
- ------ ---------- -------------------------
Bank of $15,000,000 115 South LaSalle Street
Montreal Chicago, Illinois 60603
Attention: Kanu Modi
Director
Telecopier: (312) 750-6057
with a copy of any notice to:
601 South Figueroa Street,
Suite 4900
Los Angeles, California 90017
Attention: Ronald Launsbach
Director
Telecopier: (213) 239-0602
Sanwa Bank $10,000,000 601 South Figueroa Street
California Los Angeles, California 90017
Attention: Dirk A. Price
Vice President
Telecopier: (213) 896-7090
Total Commitments: $25,000,000
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SCHEDULE 2
SUBSIDIARIES
(See Section 5.7)
Percent
Investment In Owned By Ownership Jurisdiction
- ------------- -------- --------- ------------
Kansas-LTC LTC Properties, Inc. 100.000% Delaware
Corporation
L-Tex GP, Inc. LTC Properties, Inc. 100.000% Delaware
LTC GP I, Inc. LTC Properties, Inc. 100.000% Delaware
LTC GP II, Inc. LTC Properties, Inc. 100.000% Delaware
LTC GP III, Inc. LTC Properties, Inc. 100.000% Delaware
LTC GP IV, Inc. LTC Properties, Inc. 100.000% Delaware
LTC GP V, Inc. LTC Properties, Inc. 100.000% Delaware
LTC Remic LTC Properties, Inc. 100.000% Delaware
Corporation
L-TEX L.P. LTC Properties, Inc. 100.000% Delaware
Corporation
Florida-LTC, Inc. LTC Properties, Inc. 100.000% Nevada
LTC-Dearfield, Inc. LTC Properties, Inc. 100.000% Nevada
LTC Remic IV LTC Properties, Inc. 100.000% Delaware
Corporation
LTC-Tampa, Inc. LTC Properties, Inc. 100.000% Nevada
LTC West, Inc. LTC Properties, Inc. 100.000% Nevada
University Park LTC-Tampa, Inc. 100.000% Florida
Convalescent
Center, Inc.
Western Healthcare LTC Properties, Inc. 100.000% Nevada
Funding, Inc.
Education Property LTC Properties, Inc. 100.000% Nevada
Investors, Inc.
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SCHEDULE 3
DEBT
(See Section 8.1(ii))
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SCHEDULE 4
LIENS
(See Section 8.8)
Description Amount
----------- ------
Washington Bonds $ 8,300,000
Oregon Bonds 4,210,000
-----------
Total $12,510,000
-----------
-----------
See also mortgage loans on Schedule 3.
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SCHEDULE 5
INVESTMENTS
(See Section 8.10(xi))
Percent
Investment In Owned By Ownership Jurisdiction
- ------------- -------- --------- ------------
LTC Partners I, L.P. LTC GP I, Inc. 80.380% Delaware
LTC Partners II, L.P. LTC GP I, Inc. 68.820% Delaware
LTC Partners III, L.P. LTC GP I, Inc. 74.921% Delaware
LTC Partners IV, L.P. LTC GP I, Inc. 79.375% Delaware
LTC Partners V, L.P. LTC GP II, Inc. 10.024% Delaware
LTC Partners VI, L.P. LTC GP III, Inc. 81.320% Delaware
LTC Partners VII, L.P. LTC GP IV, Inc. 10.045% Delaware
LTC Partners VIII,
L.P. LTC GP V, Inc. 99.000% Delaware
Texas-LTC Limited L-Tex L.P.
Partnership Corporation 99.000% Texas
Texas-LTC Limited
Partnership L-Tex GP, Inc. 1.000% Texas
LTC Development LTC Properties,
Company, Inc. Inc. 99.000% Nevada
LTC Assisted Living, LTC Properties,
Inc. Inc. 99.000% Nevada
Also included as Investments are those subsidiaries listed on Schedule 2.
-v-
<PAGE>
SCHEDULE 6
TERMS OF SUBORDINATION
No payment made on any Subordinated Indebtedness by the Borrower if the
following events occur:
A. A Default under the Term Loan Agreement which permits the Lenders to
accelerate maturity; and
B. Either (i) such Default is the subject of a judicial proceeding or
(ii) the Lenders have delivered a notice of Default to the Borrower
under the Term Loan Agreement.
No Subordinated Indebtedness payment shall be made until the Default under the
Term Loan Agreement has been cured or waived or has otherwise ceased to exist.
-vi-
<PAGE>
EXHIBIT A
TERM LOAN NOTE
$_______________ __________, ____
LTC PROPERTIES, INC., a Maryland corporation (the "Borrower"), promises to
pay to the order of _________________________ (the "Lender") the principal sum
of _____________________ Dollars ($__________) or such lesser amount as advanced
by the Lender under the Term Loan Agreement referred to below, in immediately
available funds at the account designated from time to time by Bank of Montreal,
as Administrative Agent, together with interest on the unpaid principal amount
hereof at the rates and on the dates set forth in the Term Loan Agreement. The
Borrower shall pay the principal of and accrued and unpaid interest on the Loans
in full on the Facility Termination Date.
The Lender shall, and is hereby authorized to, record on the schedule
attached hereto, or to otherwise record in accordance with its usual practice,
the date and amount of each Loan made by the Lender and the date and amount of
each principal payment hereunder.
This Note is one of the Notes issued pursuant to, and is entitled to the
benefits of, the Term Loan Agreement dated as of March 8, 1999 (the "Term Loan
Agreement") among the Borrower, the Lender and the other lenders referred to
therein, Bank of Montreal, as Administrative Agent, and Sanwa Bank California,
as Documentation Agent, to which Term Loan Agreement, as it may be amended,
restated, supplemented or otherwise modified from time to time, reference is
hereby made for a statement of the terms and conditions governing this Note,
including the terms and conditions under which this Note may be prepaid or its
maturity date accelerated. Capitalized terms used herein and not otherwise
defined herein are used with the meanings attributed to them in the Term Loan
Agreement.
The Borrower waives notice of default, presentment or demand for payment,
protest or notice of nonpayment or dishonor or any other notices or demands.
The Borrower shall reimburse the Lender for all costs and expenses,
including without limitation reasonable attorneys' fees, as set forth in the
Term Loan Agreement.
LTC PROPERTIES, INC.
By:
-----------------------------
Name:
--------------------------
Title:
--------------------------
-1-
<PAGE>
SCHEDULE OF LOANS AND PAYMENTS OF PRINCIPAL
TO
NOTE OF LTC PROPERTIES, INC.
Principal Maturity Principal
Amount of of Interest Amount Unpaid
Date Loan Period Maturity Paid Balance
- ---- --------- ----------- -------- --------- -------
-2-
<PAGE>
EXHIBIT B
COMPLIANCE CERTIFICATE
To: The Lenders Parties to the Term
Loan Agreement Described Below
This Certificate is furnished pursuant to the Term Loan Agreement dated as
of March 8, 1999 (as amended, restated or otherwise modified from time to time,
the "Term Loan Agreement") among LTC Properties, Inc. (the "Borrower"), the
lenders referred to therein, Bank of Montreal, as Administrative Agent, and
Sanwa Bank California, as Documentation Agent. Unless otherwise defined herein,
capitalized terms used in this Certificate have the meanings ascribed thereto in
the Term Loan Agreement.
THE UNDERSIGNED HEREBY CERTIFIES AS SET FORTH BELOW.
1. I am the duly [elected/appointed] _________________ of the Borrower.
2. I have reviewed the terms of the Term Loan Agreement and have made, or
have caused to be made under my supervision, a detailed review of the
transactions and condition of the Borrower during the accounting period covered
by the attached financial statements.
3. The reviews described in paragraph 2 did not disclose, and I have no
knowledge of, the existence of any condition or event which constitutes a
Default during or at the end of the accounting period covered by the attached
financial statements or as of the date of this Certificate, except as set forth
below.
4. Schedule 1 attached hereto sets forth financial data and computations
evidencing the Borrower's compliance with Sections 6.1-6.5, 8.5 and 8.10 of the
Term Loan Agreement, all of which data and computations are true, complete and
correct.
Described below are the exceptions, if any, to paragraph 3, listing in
detail the nature of the condition or event, the period during which it has
existed and the action which the Borrower has taken, is taking or proposes to
take with respect to each such condition or event:
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
- --------------------------------------------------------------
The foregoing certifications, together with the computations set forth in
Schedule 1 hereto and the financial statements delivered with this Certificate
in support hereof, are made and delivered this ____ day of __________, ____.
-------------------------
-1-
<PAGE>
EXHIBIT C
ASSIGNMENT AGREEMENT
This Assignment Agreement (this "Assignment Agreement") between [NAME OF
ASSIGNOR] (the "Assignor") and [NAME OF ASSIGNEE] (the "Assignee") is dated as
of ___________, ____. The parties hereto agree as follows:
1. PRELIMINARY STATEMENT. The Assignor is a party to that certain Term
Loan Agreement (which, as it may be amended, restated or otherwise modified from
time to time, is herein called the "Loan Agreement") described in Item 1 of
Schedule 1 attached hereto ("Schedule 1"). Capitalized terms used herein and not
otherwise defined herein shall have the meanings attributed to them in the Loan
Agreement.
2. ASSIGNMENT AND ASSUMPTION. The Assignor hereby sells and assigns to the
Assignee, and the Assignee hereby purchases and assumes from the Assignor, an
interest in and to the Assignor's rights and obligations under the Loan
Agreement such that after giving effect to such assignment the Assignee shall
have purchased pursuant to this Assignment Agreement the percentage interest
specified in Item 3 of Schedule 1 of all outstanding rights and obligations
under the Loan Agreement relating to the facilities listed in Item 3 of Schedule
1 and the other Loan Documents. The aggregate Commitment (or Loan, if the
applicable Commitment has been terminated) purchased by the Assignee hereunder
is set forth in Item 4 of Schedule 1.
3. EFFECTIVE DATE. The effective date of this Assignment Agreement (the
"Effective Date") shall be the date specified in Item 5 of Schedule 1. A Notice
of Assignment substantially in the form of Exhibit "I" attached hereto must be
delivered to the Agent. Such Notice of Assignment must include any consents
required to be delivered to the Agent by Section 14.3(i) of the Loan Agreement.
In no event will the Effective Date occur if the payments required to be made by
the Assignee to the Assignor on the Effective Date under Sections 4 and 5 hereof
are not made on the Effective Date. The Assignor will notify the Assignee of the
Effective Date no later than the Business Day prior to the Effective Date. As of
the Effective Date, (i) the Assignee shall have the rights and obligations of a
Lender under the Loan Documents with respect to the rights and obligations
assigned to the Assignee hereunder and (ii) the Assignor shall relinquish its
rights and be released from its corresponding obligations under the Loan
Documents with respect to the rights and obligations assigned to the Assignee
hereunder.
4. PAYMENTS OBLIGATIONS. On and after the Effective Date, the Assignee
shall be entitled to receive from the Agent all payments of principal, interest
and fees with respect to the interest assigned hereby. The Assignee shall
advance funds directly to the Agent with respect to all Loans and reimbursement
payments made on or after the Effective Date with respect to the interest
assigned hereby. In consideration for the sale and assignment of Loans
hereunder, with respect to any Loan made by the Assignor and assigned to the
Assignee hereunder which is outstanding on the Effective Date, (a) on the last
day of the Interest Period therefor or (b) on such earlier date agreed to by the
Assignor and the Assignee or (c) on the date on which any Loan either becomes
due (by acceleration or otherwise) or is prepaid (the date as described in the
foregoing clauses (a), (b) or (c) being hereinafter referred to as the "Payment
Date"), the Assignee shall pay the Assignor an amount equal to the principal
amount of the portion of such Loan assigned to the Assignee which is outstanding
on the Payment Date. If the Assignor and the Assignee agree that the Payment
Date for such Loan shall be the Effective Date, they shall agree to the interest
rate applicable to the portion of such Loan assigned hereunder for the period
from the Effective Date to the end of the existing Interest Period applicable to
any Loan (the "Agreed Interest Rate") and any interest received by the Assignee
in excess of the Agreed Interest Rate shall be remitted to the Assignor. In the
event interest for the period from the Effective Date to but not including the
Payment Date is not paid by the Borrower with respect to any Loan sold by the
Assignor to the Assignee hereunder, the Assignee shall pay to the Assignor
interest for such period on the portion of such Loan sold by the Assignor to the
Assignee hereunder at the applicable rate provided by the Loan
-1-
<PAGE>
Agreement. In the event a prepayment of any Loan which is existing on the
Payment Date and assigned by the Assignor to the Assignee hereunder occurs after
the Payment Date but before the end of the Interest Period applicable to such
Loan, the Assignee shall remit to the Assignor the excess of the prepayment
penalty paid with respect to the portion of such Loan assigned to the Assignee
hereunder over the amount which would have been paid if such prepayment penalty
was calculated based on the Agreed Interest Rate. The Assignee will also
promptly remit to the Assignor (i) any principal payments received from the
Agent with respect to a Loan prior to the Payment Date and (ii) any amounts of
interest on Loans and fees received from the Agent which relate to the portion
of the Loans assigned to the Assignee hereunder for periods prior to the Payment
Date, and not previously paid by the Assignee to the Assignor. In the event that
either party hereto receives any payment to which the other party hereto is
entitled under this Assignment Agreement, then the party receiving such amount
shall promptly remit it to the other party hereto.
5. REPRESENTATIONS OF THE ASSIGNOR; LIMITATIONS ON THE ASSIGNOR'S
LIABILITY. The Assignor represents and warrants that it is the legal and
beneficial owner of the interest being assigned by it hereunder and that such
interest is free and clear of any adverse claim created by the Assignor. It is
understood and agreed that the assignment and assumption hereunder are made
without recourse to the Assignor and that the Assignor makes no other
representation or warranty of any kind to the Assignee. Neither the Assignor nor
any of its officers, directors, employees, agents or attorneys shall be
responsible for (i) the due execution, legality, validity, enforceability,
genuineness, sufficiency or collectability of any Loan Document, including
without limitation, documents granting the Assignor and the other Lenders a
security interest in assets of the Borrower or any guarantor, (ii) any
representation, warranty or statement made in or in connection with any of the
Loan Documents, (iii) the financial condition or creditworthiness of the
Borrower or any guarantor, (iv) the performance of or compliance with any of the
terms or provisions of any of the Loan Documents, (v) inspecting any of the
Property, books or records of the Borrower, (vi) the validity, enforceability,
perfection, priority, condition, value or sufficiency of any collateral securing
or purporting to secure the Loans or (vii) any mistake, error of judgment, or
action taken or omitted to be taken in connection with the Loans or the Loan
Documents.
6. REPRESENTATIONS OF THE ASSIGNEE. The Assignee (i) confirms that it has
received a copy of the Loan Agreement, together with copies of the financial
statements requested by the Assignee and such other documents and information as
it has deemed appropriate to make its own credit analysis and decision to enter
into this Assignment Agreement, (ii) agrees that it will, independently and
without reliance upon the Agent, the Assignor or any other Lender and based on
such documents and information as it shall deem appropriate at the time,
continue to make its own credit decisions in taking or not taking action under
the Loan Documents, (iii) appoints and authorizes the Agent to take such action
as agent on its behalf and to exercise such powers under the Loan Documents as
are delegated to the Agent by the terms thereof, together with such powers as
are reasonably incidental thereto, (iv) agrees that it will perform in
accordance with their terms all of the obligations which by the terms of the
Loan Documents are required to be performed by it as a Lender, (v) agrees that
its payment instructions and notice instructions are as set forth in the
attachment to Schedule 1, (vi) confirms that none of the funds, monies, assets
or other consideration being used to make the purchase and assumption hereunder
are "plan assets" as defined under ERISA and that its rights, benefits and
interests in and under the Loan Documents will not be "plan assets" under ERISA
[1 and (vii) attaches the forms prescribed by the Internal Revenue Service of
the United States certifying that the Assignee is entitled to receive payments
under the Loan Documents without deduction or withholding of any United States
federal income taxes.]
7. INDEMNITY. The Assignee agrees to indemnify and hold the Assignor
harmless against any and all losses, costs and expenses (including, without
limitation, reasonable attorneys' fees) and liabilities incurred by the Assignor
in connection with or arising in any manner from the Assignee's non-performance
of the obligations assumed under this Assignment Agreement.
- ----------
1 Bracketed provision to be included if Assignee is organized under the laws of
any jurisdiction other than the United States or any state thereof.
-2-
<PAGE>
8. SUBSEQUENT ASSIGNMENTS. After the Effective Date, the Assignee shall
have the right pursuant to Section 12.3(i) of the Loan Agreement to assign the
rights which are assigned to the Assignee hereunder to any entity or person,
provided that (i) any such subsequent assignment does not violate any of the
terms and conditions of the Loan Documents or any law, rule, regulation, order,
writ, judgment, injunction or decree and that any consent required under the
terms of the Loan Documents has been obtained and (ii) unless the prior written
consent of the Assignor is obtained, the Assignee is not thereby released from
its obligations to the Assignor hereunder, if any remain unsatisfied, including,
without limitation, its obligations under Sections 4, 5 and 8 hereof.
9. REDUCTIONS OF AGGREGATE COMMITMENT. If any reduction in the Aggregate
Commitment occurs between the date of this Assignment Agreement and the
Effective Date, the percentage interest specified in Item 3 of Schedule 1 shall
remain the same, but the dollar amount purchased shall be recalculated based on
the reduced Aggregate Commitment.
10. ENTIRE AGREEMENT. This Assignment Agreement and the attached Notice of
Assignment embody the entire agreement and understanding between the parties
hereto and supersede all prior agreements and understandings between the parties
hereto relating to the subject matter hereof.
11. GOVERNING LAW. This Assignment Agreement shall be governed by the
internal laws, and not the law of conflicts, of the State of California.
12. NOTICES. Notices shall be given under this Assignment Agreement in the
manner set forth in the Loan Agreement. For the purpose hereof, the addresses of
the parties hereto (until notice of a change is delivered) shall be the address
set forth in the attachment to Schedule 1.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Assignment
Agreement by their duly authorized officers as of the date first above written.
[ASSIGNOR]
By:
-----------------------------
Name:
--------------------------
Title:
--------------------------
[ASSIGNEE]
By:
-----------------------------
Name:
--------------------------
Title:
--------------------------
-4-
<PAGE>
SCHEDULE 1
to Assignment Agreement
1. Description and date of Loan Agreement: Term Loan Agreement dated as of
March 8, 1999 among LTC Properties, Inc., the Lenders referred to therein,
Bank of Montreal, as Administrative Agent, and Sanwa Bank California, as
Documentation Agent.
2. Date of Assignment Agreement: ___________, ____
3. Amounts (as of date of Item 2 above):
a. Total Commitments under Loan Agreement $__________
b. Assignee's percentage purchased
under the Assignment Agreement __________%
4. Assignee's Aggregate
Commitment amount purchased
hereunder: $__________
5. Effective Date: _______________, ____
Accepted and Agreed:
[ASSIGNOR] [ASSIGNEE]
By: By:
----------------------------- -----------------------------
Name: Name:
-------------------------- --------------------------
Title: Title:
-------------------------- --------------------------
<PAGE>
Attachment to SCHEDULE 1 to ASSIGNMENT AGREEMENT
Attach Assignor's Administrative Information Sheet, which must include
notice addresses for the Assignor and the Assignee
(unless set forth on Schedule 1 to the Loan Agreement)
<PAGE>
EXHIBIT "I"
to Assignment Agreement
NOTICE OF ASSIGNMENT
___________, ____
To: LTC Properties, Inc.
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
Attention: Darrell Struck
Treasurer
Bank of Montreal, as Administrative Agent
115 South LaSalle Street
Chicago, Illinois 60603
Attention:
---------------
From: [ASSIGNOR] (the "Assignor")
[ASSIGNEE] (the "Assignee")
1. We refer to the Term Loan Agreement (the "Loan Agreement") described in
Item 1 of Schedule 1 attached hereto ("Schedule 1"). Capitalized terms used
herein and not otherwise defined herein shall have the meanings attributed to
them in the Loan Agreement.
2. This Notice of Assignment (this "Notice") is given and delivered to the
Borrower and the Agent pursuant to Section 14.3(ii) of the Loan Agreement.
3. The Assignor and the Assignee have entered into an Assignment
Agreement, dated as of ___________, ____ (the "Assignment"), pursuant to which,
among other things, the Assignor has sold, assigned, delegated and transferred
to the Assignee, and the Assignee has purchased, accepted and assumed from the
Assignor the percentage interest specified in Item 3 of Schedule 1 of all
outstanding, rights and obligations under the Loan Agreement relating to the
facilities listed in Item 3 of Schedule 1. The Effective Date of the Assignment
shall be the date specified in Item 5 of Schedule 1, provided that the Effective
Date shall not occur if any condition precedent agreed to by the Assignor and
the Assignee has not been satisfied.
4. The Assignor and the Assignee hereby give to the Borrower and the Agent
notice of the assignment and delegation referred to herein. The Assignor will
confer with the Agent before the date specified in Item 5 of Schedule 1 to
determine if the Assignment Agreement will become effective on such date
pursuant to Section 3 hereof, and will confer with the Agent to determine the
Effective Date pursuant to Section 3 hereof if it occurs thereafter. The
Assignor shall notify the Agent and the Borrower if the Assignment Agreement
does not become effective on the Effective Date as a result of the failure to
satisfy the conditions precedent agreed to by the Assignor and the Assignee. At
the request of the Agent and/or the Borrower, the Assignor will give the Agent
and the Borrower written confirmation of the satisfaction of the conditions
precedent.
5. If Notes are outstanding on the Effective Date, the Assignor and the
Assignee request and direct that the Agent prepare and cause the Borrower to
execute and deliver new Notes or, as appropriate, replacements
<PAGE>
notes, to the Assignor and the Assignee. The Assignor and, if applicable, the
Assignee each agree to deliver to the Agent the original Note received by it
from the Borrower upon its receipt of a new Note in the appropriate amount.
6. The Assignee advises the Agent that notice and payment instructions are
set forth in the attachment to Schedule 1.
7. The Assignee hereby represents and warrants that none of the funds,
monies, assets or other consideration being used to make the purchase pursuant
to the Assignment are "plan assets" as defined under ERISA and that its rights,
benefits, and interests in and under the Loan Documents will not be "plan
assets" under ERISA.
8. The Assignee authorizes the Agent to act as its agent under the Loan
Documents in accordance with the terms thereof. The Assignee acknowledges that
the Agent has no duty to supply information with respect to the Borrower or the
Loan Documents to the Assignee until the Assignee becomes a party to the Loan
Agreement.
[ASSIGNOR] [ASSIGNEE]
By: By:
----------------------------- -----------------------------
Name: Name:
-------------------------- --------------------------
Title: Title:
-------------------------- --------------------------
Acknowledged and consented to:
BANK OF MONTREAL, as LTC PROPERTIES, INC.
Administrative Agent
By: By:
----------------------------- -----------------------------
Name: Name:
-------------------------- --------------------------
Title: Title:
-------------------------- --------------------------
[Attach photocopy of Schedule 1 to Assignment.]
-2-
<PAGE>
EXHIBIT D
NOTICE OF BORROWING
___________, ____
Bank of Montreal, as Administrative Agent
115 South LaSalle Street
Chicago, Illinois 60603
Attention: Kanu Modi
Director
Re: Term Loan Agreement dated as of March 8, 1999 (the "Loan Agreement")
with LTC Properties, Inc.
Ladies and Gentlemen:
Pursuant to the provisions of Section 2.12 of the Loan Agreement, LTC
Properties, Inc. (the "Borrower") hereby gives irrevocable and binding notice to
you, as Administrative Agent, that the Borrower is requesting a Loan to be made
under the Loan Agreement, as follows (capitalized terms have the definitions set
forth in the Loan Agreement):
1. Type of Loan: LIBOR/Base Rate Loan
2. Aggregate Loan Amount: $___________ [at least $5,000,000 and in an
integral multiple of $1,000,000]
3. Borrowing Date: ___________, ____ [same day for Base Rate Loans; at
least 3 Business Days for LIBOR Loans]
4. Loans will be LIBOR Loans ($__________) and/or Base Loans
($_________)
5. LIBOR Loans will have the following Interest Periods [1, 2, 3 or 6
months]:
$ ______________: _____ months $ ______________: _____ months
6. The undersigned certifies that:
(a) There exists no Default.
(b) The representations and warranties contained in Article 5 of
the Loan Agreement are true and correct as of the Borrowing
Date.
-1-
<PAGE>
(c) No event has occurred, or condition exists, which could have a
Material Adverse Effect.
Sincerely,
LTC PROPERTIES, INC.
By:
-----------------------------
Name:
--------------------------
Title:
--------------------------
-2-
<PAGE>
EXHIBIT E
BORROWING BASE CERTIFICATE
Accounting period ended ___________, ____
Reference is made to the Term Loan Agreement dated as of March 8, 1999 (as
amended, restated or otherwise modified from time to time, the "Term Loan
Agreement") among LTC Properties, Inc. (the "Borrower"), the Lenders referred to
therein, Bank of Montreal, as Administrative Agent, and Sanwa Bank California,
as Documentation Agent. Capitalized terms used in this Certificate have the
respective meanings assigned to them in the Term Loan Agreement.
Pursuant to Section 7.1(iv) of the Term Loan Agreement, the undersigned,
the _________________________ of the Borrower, hereby certifies that, to the
best of his/her knowledge, attached as Annex 1 is a true and accurate
calculation of the Borrowing Base as of ___________, ____, determined in
accordance with the requirements of the Term Loan Agreement.
IN WITNESS WHEREOF, the undersigned has caused this Certificate to be duly
executed as of the ___ day of __________, ____.
--------------------------------------
Name:
Title:
<PAGE>
ANNEX 1
to Borrowing Base Certificate
BORROWING BASE INFORMATION
Eligible Mortgage Loans $101,682,696
75% of Eligible Mortgage Loans ----------- $ 76,262,022
Eligible Owned Property $239,162,771
Less prorated Depreciation 16,939,000
Eligible Owned Property less -----------
Depreciation $222,223,771
60% of Eligible Owned Property $133,334,263
------------
Total Eligible Borrowing Base $209,596,285
Less any outstanding Senior Debt $125,000,000
------------
Net Available Borrowing Base $ 84,596,285
Net Available Borrowing Base
Less Term Loan Balance Outstanding -0-
------------
Additional availability as of February 28, 1998 $ 84,596,285
------------
------------
<PAGE>
SECOND AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Second Amended and Restated Employment Agreement (the
"Agreement") is made as of March 26, 1999, by and between LTC Properties, Inc.,
a corporation organized under the laws of the State of Maryland ("LTC" or the
"Company"), and Andre C. Dimitriadis ("Executive"), and amends and restates the
Amended and Restated Employment Agreement dated June 30, 1998, by and between
LTC and Executive (the "Prior Employment Agreement"), and is effective as of
March 26, 1999.
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. Appointment, Title and Duties. LTC hereby employs Executive to
serve as its Chairman of the Board and Chief Executive Officer. In such
capacity, Executive shall report to the Board of Directors of the Company, and
shall have such duties, powers and responsibilities as are customarily assigned
to the Chairman of the Board and Chief Executive Officer of a publicly-held
corporation. In addition, Executive shall have such other duties and
responsibilities as the Board of Directors may assign him, with his consent,
including serving with the consent or at the request of the Company on the board
of directors of affiliated corporations.
2. Term of Agreement. The initial term of this Agreement shall be
for a four (4) year period, ending March 26, 2003. Unless the employment
hereunder shall have been terminated in accordance with the provisions hereof,
the term of this Agreement shall be extended beyond March 26, 2003, such that at
each and every moment of time hereafter the remaining term shall not be less
than four (4) years.
3. Acceptance of Position. Executive accepts the position of
Chairman of the Board and Chief Executive Officer of LTC, and agrees that during
the term of this Agreement he will faithfully perform his duties and, except as
expressly approved by the Board of Directors of LTC, will devote substantially
all of his business time to the business and affairs of LTC, and will not
engage, for his own account or for the account of any other person or entity, in
a business which competes with LTC. It is acknowledged and agreed that Executive
may serve as an officer and/or director of companies in which LTC owns voting or
non-voting stock. In addition, it is acknowledged and agreed that Executive may,
from time to time, serve as a member of the board of directors of other
companies, in which event the Board of Directors of LTC must expressly approve
such service pursuant to a Board resolution maintained in the Company's minute
books. Any compensation or remuneration which Executive receives in
consideration of his service on the board of directors of other companies shall
be the sole and exclusive property of Executive, and LTC shall have no right or
entitlement at any time to any such compensation or remuneration.
4. Salary and Benefits. During the term of this Agreement:
a. LTC shall pay to Executive a base salary at an annual
rate of not less than Four Hundred Thousand Dollars ($400,000) per annum,
paid in approximately equal installments at intervals based on any
reasonable Company policy. LTC agrees from time to time to consider
increases in such base salary in the discretion of the Board of Directors.
Any increase, once granted, shall automatically amend this Agreement to
provide that
thereafter Executive's base salary shall not be less than the annual amount to
which such base salary has been increased.
1
<PAGE>
b. Executive shall participate in all health, retirement,
Company-paid insurance, sick leave, disability, expense reimbursement and
other benefit programs which LTC makes available to any of its senior
executives, and shall be eligible for bonuses in the discretion of the
Board of Directors.
c. Executive shall be entitled to reasonable vacation time,
not less than four (4) weeks per year, provided that not more than two (2)
weeks of such vacation time may be taken consecutively without prior
notice to and non-objection by the Compensation Committee of the Board of
Directors or, if there is no Compensation Committee, the Board of
Directors.
5. Certain Terms Defined. For purposes of this Agreement:
a. Executive shall be deemed to be "disabled" if a physical
or mental condition shall occur and persist which, in the written opinion
of a licensed physician selected by the Board of Directors in good faith,
has rendered Executive unable to perform the duties of Chairman of the
Board and Chief Executive Officer of LTC for a period of sixty (60) days
or more and, in the written opinion of such physician, the condition will
continue for an indefinite period of time, rendering Executive unable to
return to his duties.
b. A termination of Executive's employment by LTC shall be
deemed for "Cause" if, and only if, it is based upon (i) conviction of a
felony; (ii) material disloyalty to the Company such as embezzlement,
misappropriation of corporate assets or, except as permitted pursuant to
Section 3 of this Agreement, breach of Executive's agreement not to engage
in business for another enterprise of the type engaged in by the Company;
or (iii) the engaging in unethical or illegal behavior which is of a
public nature, brings LTC into disrepute, and results in material damage
to the Company. The Company shall have the right to suspend Executive,
with pay, for a reasonable period to investigate allegations of conduct
which, if proven, would establish a right to terminate this Agreement for
Cause, or to permit a felony charge to be tried. Immediately upon the
conclusion of such temporary period, unless Cause to terminate this
Agreement has been established, Executive shall be restored to all duties
and responsibilities as if such suspension had never occurred.
c. A resignation by Executive shall not be deemed to be
voluntary and shall be deemed to be a resignation with "Good Reason" if it
is based upon (i) a diminution in Executive's title, duties, or salary;
(ii) a reduction in benefits which is not part of an across-the-board
reduction in benefits of all senior executive personnel; (iii) a direction
by the Board of Directors that Executive report to any person or group
other than the Board of Directors, or (iv) a geographic relocation of
Executive's place of work a distance of more than seventy five (75) miles
from LTC's offices located at 300 Esplanade Drive, Suite 1860, Oxnard,
California. It shall also constitute Good Reason for Executive to resign
his employment if the shareholders of LTC shall fail to elect or reelect
him to the Board of Directors of LTC, unless he declines to be elected to
such Board of Directors.
d. "Affiliate" means with respect to any Person, a Person
who, directly or indirectly, through one or more intermediaries, controls,
is controlled by or is under common control, with the Person specified.
e. "Base Salary" means, as of any date of termination of
employment, the highest base salary of Executive in the then current
fiscal year or in any of the last four fiscal years immediately preceding
such date of termination of employment.
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f. "Beneficial Owner" shall have the meaning given to such
term in Rule 13d-3 under the Exchange Act;
g. A "Change in Control" occurs if:
i) any Person or related group of Persons (other than
Executive and his Related Persons, the Company or a Person that directly
or indirectly controls, is controlled by, or is under common control with,
the Company) is or becomes the Beneficial Owner, directly or indirectly,
of securities of the Company representing 30% or more of the combined
voting power of the Company's then outstanding securities; or
ii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation (or other entity),
other than a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing
to represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) more than 66-2/3% of the
combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation; provided, however, that a merger or consolidation effected
to implement a recapitalization of the Company (or similar transaction) in
which no Person acquires more than 30% of the combined voting power of the
Company's then outstanding securities shall not constitute a Change in
Control; or
iii) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all of the Company's
assets; or
iv) a majority of the members of the Board of Directors
of the Company cease to be Continuing Directors.
h. "Code" means the Internal Revenue Code of 1986, as amended.
i. "Continuing Directors" means, as of any date of
determination, any member of the Board of Directors who (i) was a member
of such Board of Directors on the date of the Agreement or (ii) was
nominated for election or elected to such Board of Directors with the
approval of a majority of the Continuing Directors who were members of
such Board of Directors at the time of such nomination or election.
j. "Exchange Act" means the Exchange Act of 1934, as amended.
k. "Person" means any individual, corporation, partnership,
limited liability company, trust, association or other entity.
l. "Related Person" means any immediate family member
(spouse, partner, parent, sibling or child whether by birth or adoption)
of the Executive and any trust, estate or foundation, the beneficiary of
which is the Executive and/or an immediate family member of the Executive.
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6. Certain Benefits Upon Termination. Executive's employment shall
be terminated upon the earlier of (i) the voluntary resignation of Executive
with or without Good Reason; (ii) Executive's death or permanent disability, or
(iii) upon the termination of Executive's employment by LTC for any reason at
any time. In the event of such termination, the below provisions of this Section
6 shall apply.
a. If Executive's employment by LTC terminates for any reason
other than as a result of (i) a termination for Cause, or (ii) a voluntary
resignation by Executive without a Good Reason, or (iii) a Change in
Control of the Company, then LTC shall pay Executive a lump sum severance
payment equal to four times his Base Salary; provided that if employment
terminates by reason of Executive's death or disability, then such salary
shall be paid only to the extent the Company has available "key man" life,
disability or similar insurance relating to the death or disability of
Executive.
b. Upon a Change in Control of the Company whether or not
Executive's employment is terminated thereby, in lieu of the severance
payment described in Section 6(a) above, LTC shall pay Executive a lump
sum severance payment in cash equal to $5.0 million;
c. If Executive's employment by LTC terminates for any
reason, except for LTC's termination of Executive's employment for Cause
or a voluntary resignation by Executive without a Good Reason, LTC shall
offer to Executive the opportunity to participate in all Company-provided
medical and dental plans to the extent Executive elects and remains
eligible for coverage under COBRA and for a maximum period of eighteen
(18) months at Company expense; provided, however, in the event
Executive's employment by LTC terminates upon a Change in Control of the
Company, then Executive shall not be given the opportunity to participate
in any of such medical and dental plans except to the extent required by
law.
d. In the event that Executive's employment terminates by
reason of his death, all benefits provided in this Section 6 shall be paid
to his estate or as his executor shall direct, but payment may be deferred
until Executive's executor or personal representative has been appointed
and qualified pursuant to the laws in effect in Executive's jurisdiction
of residence at the time of his death.
e. LTC shall make all payments pursuant to the foregoing
subsections (a) through (d) within seven (7) days following the date of
termination of Executive's employment or consummation of a Change in
Control of the Company, as applicable.
f. LTC shall have no liability under this Section if
Executive's employment pursuant to this Agreement is terminated by LTC for
Cause or by Executive without a Good Reason; provided, however, that if
Executive's employment pursuant to this Agreement is terminated by LTC for
Cause or by Executive without a Good Reason at any time after a Change of
Control which did not result in Executive's employment being terminated,
such post-Change of Control termination by LTC for Cause or by Executive
without a Good Reason shall not affect in any way Executive's entitlement
to the lump sum severance payment described in Section 6(b), above or any
other rights, benefits or entitlements to which Executive may be entitled
as a result of such Change of Control.
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g. Gross-Up.
i) If it shall be determined that any payment,
distribution or benefit received or to be received by Executive from the
Company (whether payable pursuant to the terms of this Agreement or any
other plan, arrangements or agreement with the Company or an Affiliate (as
defined above) ("Payments") would be subject to the excise tax imposed by
Section 4999 of the Code (the "Excise Tax"), then Executive shall be
entitled to receive an additional payment (the "Excise Tax Gross-Up
Payment) in an amount such that the net amount retained by Executive,
after the calculation and deduction of any Excise Tax on the Payments and
any federal, state and local income taxes and excise tax on the Excise Tax
Gross-Up Payment provided for in this Section 6(g), shall be equal to the
Payments. In determining this amount, the amount of the Excise Tax
Gross-Up Payment attributable to federal income taxes shall be reduced by
the maximum reduction in federal income taxes that could be obtained by
the deduction of the portion of the Excise Tax Gross-Up Payment
attributable to state and local income taxes. Finally, the Excise Tax
Gross-Up Payment shall be reduced by income or excise tax withholding
payments made by the Company or any Affiliate of either to any federal,
state or local taxing authority with respect to the Excise Tax Gross-Up
Payment that was not deducted from compensation payable to Executive.
ii) All determinations required to be made under this
Section 6(g), including whether and when an Excise Tax Gross-Up Payment is
required and the amount of such Excise Tax Gross-Up Payment and the
assumptions to be utilized in arriving at such determination, except as
specified in Section 6(g)(i) above, shall be made by the Company's
independent auditors (the "Accounting Firm"), which shall provide detailed
supporting calculations both to the Company and Executive within 15
business days after the Company makes any Payments to Executive. Such
determination of tax liability made by the Accounting Firm shall be
subject to review by Executive's tax advisor and, if Executive's tax
advisor does not agree with such determination reached by the Accounting
Firm, then the Accounting Firm and Executive's tax advisor shall jointly
designate a nationally recognized public accounting firm, which shall make
such determination. All reasonable fees and expenses of the accountants
and tax advisors retained by either Executive or the Company shall be
borne by the Company. Any Excise Tax Gross-Up Payment, as determined
pursuant to this Section 6(g), shall be paid by the Company to Executive
within five days after the receipt of such determination. Any
determination by a jointly designated public accounting firm shall be
binding upon the Company and Executive.
iii) As a result of the uncertainty in the application
of Subsection 4999 of the Code at the time of the initial determination
hereunder, it is possible that Excise Tax Gross-Up Payments will not have
been made by the Company that should have been made consistent with the
calculations required to be made hereunder ("Underpayment"). In the event
that Executive thereafter is required to make a payment of any Excise Tax,
any such Underpayment calculated in accordance with and in the same manner
as the Excise Tax Gross-Up Payment in Section 6(g)(i) above shall be
promptly paid by the Company to or for the benefit of Executive. In the
event that the Excise Tax Gross-Up Payment exceeds the amount subsequently
determined to be due, such excess shall constitute a loan from the Company
to Executive payable on the fifth day after demand by the Company
(together with interest at the rate provided in Section 1274(b)(2)(B) of
the Code).
7. Tax Liability Loan. Upon a Change in Control of the Company,
whether or
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not Executive's employment is terminated as a result thereof, the Company shall
offer Executive an unsecured loan in the amount necessary to fund Executive's
tax liability arising from the accelerated vesting of restricted shares held by
Executive, if any. Such loan shall be due, in full, in ten (10) years from the
date made and shall bear interest at the then-current Applicable Federal Rate
(the minimum rate necessary to avoid "unstated interest" under Section 7872 of
the Code) with interest payments to be paid to the Company annually. Such loan
shall be evidenced by a promissory note signed by, and with full recourse to,
Executive.
8. Indemnification. LTC shall indemnify Executive and hold him
harmless from and against all claims, actions, losses, damages, expense or
liabilities (including expenses of defense and settlement) ("Claim") based upon
or in any way arising from or connected with his employment by LTC, to the
maximum extent permitted by law. To the extent permitted by law, LTC shall
advance to Executive any expenses necessary in connection with the defense of
any Claim which is brought if indemnification cannot be determined to be
available prior to the conclusion of, or the investigation of, such Claim. The
parties hereto agree that each understands and has understood, at all times
under all prior employment agreements between LTC and Executive, that
notwithstanding the above-stated provisions, nothing herein shall require LTC to
hold harmless or indemnify Executive with respect to any Claim which is brought
or asserted against Executive by LTC. LTC shall investigate in good faith the
availability and cost of directors' and officers' insurance and shall include
Executive as an insured in any policy of such insurance it maintains.
9. Attorney Fees. In the event that any action or proceeding is
brought to enforce the terms and provisions of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys fees.
10. Notices. All notices and other communications provided to
either party hereto under this Agreement shall be in writing and delivered by
certified or registered mail to such party at its address set forth below its
signature hereto, or at such other address as may be designated by such party in
a notice to the other party. Any notice, if mailed and properly addressed with
postage prepaid, shall be deemed given when received.
11. Construction. In construing this Agreement, if any portion of
this Agreement shall be found to be invalid or unenforceable, the remaining
terms and provisions of this Agreement shall be given effect to the maximum
extent permitted without considering the void, invalid or unenforceable
provision. In construing this Agreement, the singular shall include the plural,
the masculine shall include the feminine and neuter genders as appropriate, and
no meaning or effect shall be given to the captions of the sections in this
Agreement, which are inserted for convenience of reference only.
12. Headings. The section headings hereof have been inserted for
convenience of reference only and shall not be construed to affect the meaning,
construction or effect of this Agreement.
13. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the internal laws of the State of
California as at the time in effect.
14. Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all other prior agreements (including the Prior
Employment Agreement) and undertakings, both written and oral, among Executive
and the Company, with respect to the subject matter hereof.
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IN WITNESS WHEREOF, this Agreement has been executed on the date set forth
below, to be effective as of the date specified in the first paragraph of this
Agreement.
LTC PROPERTIES, INC.,
a Maryland Corporation
Address: By: /s/ James J. Pieczynski
-------------------------- -----------------------------------
President and Chief
- ---------------------------------- Financial Officer
- ---------------------------------- Date Signed: March 26, 1999
--------------------------
By: /s/ Wendy L. Simpson
-----------------------------------
Chairman of Compensation
Committee
Date Signed: March 26, 1999
--------------------------
Address: /s/ Andre C. Dimitriadis
-------------------------- ----------------------------------------
Executive
- ----------------------------------
Date Signed: March 26, 1999
- ---------------------------------- --------------------------
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AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (the "Agreement") is made
as of March 26, 1999, by and between LTC Properties, Inc., a corporation
organized under the laws of the State of Maryland ("LTC" or the "Company"), and
James J. Pieczynski ("Executive") and amends and restates the Employment
Agreement dated June 30, 1998, by and between LTC and Executive (the "Prior
Employment Agreement") and is effective as of March 26, 1999.
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. Appointment, Title and Duties. LTC hereby employs Executive to
serve as its President and Chief Financial Officer. In such capacity, Executive
shall report to the Chief Executive Officer of the Company, and shall have such
duties, powers and responsibilities as are customarily assigned to the President
and Chief Financial Officer of a publicly held corporation, but shall also be
responsible to the Board of Directors and to any committee thereof. In addition,
Executive shall have such other duties and responsibilities as the Chief
Executive Officer may assign him, with his consent, including serving with the
consent or at the request of the Company on the board of directors of affiliated
corporations.
2. Term of Agreement. The initial term of this Agreement shall be
for a three (3) year period, ending March 26, 2002. Unless the employment
hereunder shall have been terminated in accordance with the provisions hereof,
the term of this Agreement shall be extended beyond March 26, 2002, such that at
each and every moment of time hereafter the remaining term shall not be less
than three (3) years.
3. Acceptance of Position. Executive accepts the position of
President and Chief Financial Officer of LTC, and agrees that during the term of
this Agreement he will faithfully perform his duties and, except as expressly
approved by the Board of Directors of LTC, will devote substantially all of his
business time to the business and affairs of LTC, and will not engage, for his
own account or for the account of any other person or entity, in a business
which competes with LTC. It is acknowledged and agreed that Executive may serve
as an officer and/or director of companies in which LTC owns voting or
non-voting stock. In addition, it is acknowledged and agreed that Executive may,
from time to time, serve as a member of the board of directors of other
companies, in which event the Board of Directors of LTC must expressly approve
such service pursuant to a Board resolution maintained in the Company's minute
books. Any compensation or remuneration which Executive receives in
consideration of his service on the board of directors of other companies shall
be the sole and exclusive property of Executive, and LTC shall have no right or
entitlement at any time to any such compensation or remuneration.
4. Salary and Benefits. During the term of this Agreement:
a. LTC shall pay to Executive a base salary at an annual rate
of not less than Two Hundred Sixty-Five Thousand Dollars ($265,000) per annum,
paid in approximately equal installments at intervals based on any reasonable
Company policy. LTC agrees from time to time to consider increases in such base
salary in the discretion of the Board
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of Directors. Any increase, once granted, shall automatically amend this
Agreement to provide that thereafter Executive's base salary shall not be less
than the annual amount to which such base salary has been increased.
b. Executive shall participate in all health, retirement,
Company-paid insurance, sick leave, disability, expense reimbursement and other
benefit programs which LTC makes available to any of its senior executives, and
shall be eligible for bonuses in the discretion of the Board of Directors.
c. Executive shall be entitled to reasonable vacation time,
not less than four (4) weeks per year, provided that not more than two (2) weeks
of such vacation time may be taken consecutively without prior notice to and
non-objection by the Compensation Committee of the Board of Directors or, if
there is no Compensation Committee, the Board of Directors.
5. Certain Terms Defined. For purposes of this Agreement:
a. Executive shall be deemed to be "disabled" if a physical or
mental condition shall occur and persist which, in the written opinion of a
licensed physician selected by the Board of Directors in good faith, has
rendered Executive unable to perform the duties of President and Chief Financial
Officer of LTC for a period of sixty (60) days or more and, in the written
opinion of such physician, the condition will continue for an indefinite period
of time, rendering Executive unable to return to his duties.
b. A termination of Executive's employment by LTC shall be
deemed for "Cause" if, and only if, it is based upon (i) conviction of a felony;
(ii) material disloyalty to the Company such as embezzlement, misappropriation
of corporate assets or, except as permitted pursuant to Section 3 of this
Agreement, breach of Executive's agreement not to engage in business for another
enterprise of the type engaged in by the Company; or (iii) the engaging in
unethical or illegal behavior which is of a public nature, brings LTC into
disrepute, and results in material damage to the Company. The Company shall have
the right to suspend Executive, with pay, for a reasonable period to investigate
allegations of conduct which, if proven, would establish a right to terminate
this Agreement for Cause, or to permit a felony charge to be tried. Immediately
upon the conclusion of such temporary period, unless Cause to terminate this
Agreement has been established, Executive shall be restored to all duties and
responsibilities as if such suspension had never occurred.
c. A resignation by Executive shall not be deemed to be
voluntary and shall be deemed to be a resignation with "Good Reason" if it is
based upon (i) a diminution in Executive's title, duties, or salary; (ii) a
reduction in benefits which is not part of an across-the-board reduction in
benefits of all senior executive personnel; (iii) a direction by the Board of
Directors that Executive report to any person or group other than the Chief
Executive Officer or the Board of Directors, or (iv) a geographic relocation of
Executive's place of work a distance of more than seventy five (75) miles from
LTC's offices located at 300 Esplanade Drive, Suite 1860, Oxnard, California. It
shall also constitute Good Reason for Executive to resign his employment if the
shareholders of LTC shall fail to elect or reelect him to the Board of
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Directors of LTC, unless he declines to be elected to such Board of Directors.
d. "Affiliate" means with respect to any Person, a Person who,
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under common control, with the Person specified.
e. "Base Salary" means, as of any date of termination of
employment, the highest base salary of Executive in the then current fiscal year
or in any of the last four fiscal years immediately preceding such date of
termination of employment.
f. "Beneficial Owner" shall have the meaning given to such
term in Rule 13d-3 under the Exchange Act;
g. A "Change in Control" occurs if:
i) any Person or related group of Persons (other than
Executive and his Related Persons, the Company or a Person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) is or becomes the Beneficial Owner, directly or indirectly, of
securities of the Company representing 30% or more of the combined voting power
of the Company's then outstanding securities; or
ii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation (or other entity), other
than a merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than 66-2/3% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; provided, however, that a merger
or consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person acquires more than 30% of the combined
voting power of the Company's then outstanding securities shall not constitute a
Change in Control; or
iii) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets; or
iv) a majority of the members of the Board of Directors
of the Company cease to be Continuing Directors.
h. "Code" means the Internal Revenue Code of 1986, as amended.
i. "Continuing Directors" means, as of any date of
determination, any member of the Board of Directors who (i) was a member of such
Board of Directors on the date of the Agreement or (ii) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such Board of Directors at the
time of such nomination or election.
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j. "Exchange Act" means the Exchange Act of 1934, as amended.
k. "Person" means any individual, corporation, partnership,
limited liability company, trust, association or other entity.
l. "Related Person" means any immediate family member (spouse,
partner, parent, sibling or child whether by birth or adoption) of the Executive
and any trust, estate or foundation, the beneficiary of which is the Executive
and/or an immediate family member of the Executive.
6. Certain Benefits Upon Termination. Executive's employment shall
be terminated upon the earlier of (i) the voluntary resignation of Executive
with or without Good Reason; (ii) Executive's death or permanent disability, or
(iii) upon the termination of Executive's employment by LTC for any reason at
any time. In the event of such termination, the below provisions of this Section
6 shall apply.
a. If Executive's employment by LTC terminates for any reason
other than as a result of (i) a termination for Cause, or (ii) a voluntary
resignation by Executive without a Good Reason, or (iii) a Change in Control of
the Company, then LTC shall pay Executive a lump sum severance payment equal to
three times his Base Salary; provided that if employment terminates by reason of
Executive's death or disability, then such salary shall be paid only to the
extent the Company has available "key man" life, disability or similar insurance
relating to the death or disability of Executive.
b. Upon a Change in Control of the Company whether or not
Executive's employment is terminated thereby, in lieu of the severance payment
described in Section 6(a) above, LTC shall pay Executive a lump sum severance
payment in cash equal to$1.6 million;
c. If Executive's employment by LTC terminates for any reason,
except for LTC's termination of Executive's employment for Cause or a voluntary
resignation by Executive without a Good Reason, LTC shall offer to Executive the
opportunity to participate in all Company-provided medical and dental plans to
the extent Executive elects and remains eligible for coverage under COBRA and
for a maximum period of eighteen (18) months at Company expense; provided,
however, in the event Executive's employment by LTC terminates upon a Change in
Control of the Company, then Executive shall not be given the opportunity to
participate in any of such medical and dental plans except to the extent
required by law.
d. In the event that Executive's employment terminates by
reason of his death, all benefits provided in this Section 6 shall be paid to
his estate or as his executor shall direct, but payment may be deferred until
Executive's executor or personal representative has been appointed and qualified
pursuant to the laws in effect in Executive's jurisdiction of residence at the
time of his death.
e. LTC shall make all payments pursuant to the foregoing
subsections (a) through (d) within seven (7) days following the date of
termination of Executive's employment or consummation of a Change in Control of
the Company, as applicable.
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f. Notwithstanding the foregoing, LTC shall have no liability
under this Section if Executive's employment pursuant to this Agreement is
terminated by LTC for Cause or by Executive without a Good Reason; provided,
however, that if Executive's employment pursuant to this Agreement is terminated
by LTC for Cause or by Executive without a Good Reason at any time after a
Change of Control which did not result in Executive's employment being
terminated, such post-Change of Control termination by LTC for Cause or by
Executive without a Good Reason shall not affect in any way Executive's
entitlement to the lump sum severance payment described in Section 6(b), above
or any other rights, benefits or entitlements to which Executive may be entitled
as a result of such Change of Control.
g. Gross-Up.
i) If it shall be determined that any payment,
distribution or benefit received or to be received by Executive from the Company
(whether payable pursuant to the terms of this Agreement or any other plan,
arrangements or agreement with the Company or an Affiliate (as defined above)
("Payments") would be subject to the excise tax imposed by Section 4999 of the
Code (the "Excise Tax"), then Executive shall be entitled to receive an
additional payment (the "Excise Tax Gross-Up Payment) in an amount such that the
net amount retained by Executive, after the calculation and deduction of any
Excise Tax on the Payments and any federal, state and local income taxes and
excise tax on the Excise Tax Gross-Up Payment provided for in this Section 6(g),
shall be equal to the Payments. In determining this amount, the amount of the
Excise Tax Gross-Up Payment attributable to federal income taxes shall be
reduced by the maximum reduction in federal income taxes that could be obtained
by the deduction of the portion of the Excise Tax Gross-Up Payment attributable
to state and local income taxes. Finally, the Excise Tax Gross-Up Payment shall
be reduced by income or excise tax withholding payments made by the Company or
any Affiliate of either to any federal, state or local taxing authority with
respect to the Excise Tax Gross-Up Payment that was not deducted from
compensation payable to Executive.
ii) All determinations required to be made under this
Section 6(g), including whether and when an Excise Tax Gross-Up Payment is
required and the amount of such Excise Tax Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, except as specified in Section
6(g)(i) above, shall be made by the Company's independent auditors (the
"Accounting Firm"), which shall provide detailed supporting calculations both to
the Company and Executive within 15 business days after the Company makes any
Payments to Executive. Such determination of tax liability made by the
Accounting Firm shall be subject to review by Executive's tax advisor and, if
Executive's tax advisor does not agree with such determination reached by the
Accounting Firm, then the Accounting Firm and Executive's tax advisor shall
jointly designate a nationally recognized public accounting firm, which shall
make such determination. All reasonable fees and expenses of the accountants and
tax advisors retained by either Executive or the Company shall be borne by the
Company. Any Excise Tax Gross-Up Payment, as determined pursuant to this Section
6(g), shall be paid by the Company to Executive within five days after the
receipt of such determination. Any determination by a jointly designated public
accounting firm shall be binding upon the Company and Executive.
iii) As a result of the uncertainty in the application
of
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Subsection 4999 of the Code at the time of the initial determination hereunder,
it is possible that Excise Tax Gross-Up Payments will not have been made by the
Company that should have been made consistent with the calculations required to
be made hereunder ("Underpayment"). In the event that Executive thereafter is
required to make a payment of any Excise Tax, any such Underpayment calculated
in accordance with and in the same manner as the Excise Tax Gross-Up Payment in
Section 6(g)(i) above shall be promptly paid by the Company to or for the
benefit of Executive. In the event that the Excise Tax Gross-Up Payment exceeds
the amount subsequently determined to be due, such excess shall constitute a
loan from the Company to Executive payable on the fifth day after demand by the
Company (together with interest at the rate provided in Section 1274(b)(2)(B) of
the Code).
7. Tax Liability Loan. Upon a Change in Control of the
Company, whether or not Executive's employment is terminated as a result
thereof, the Company shall offer Executive an unsecured loan in the amount
necessary to fund Executive's tax liability arising from the accelerated vesting
of restricted shares held by Executive, if any. Such loan shall be due, in full,
in ten (10) years from the date made and shall bear interest at the then-current
Applicable Federal Rate (the minimum rate necessary to avoid "unstated interest"
under Section 7872 of the Code) with interest payments to be paid to the Company
annually. Such loan shall be evidenced by a promissory note signed by, and with
full recourse to, Executive.
8. Indemnification. LTC shall indemnify Executive and hold him
harmless from and against all claims, actions, losses, damages, expense or
liabilities (including expenses of defense and settlement) ("Claim") based upon
or in any way arising from or connected with his employment by LTC, to the
maximum extent permitted by law. To the extent permitted by law, LTC shall
advance to Executive any expenses necessary in connection with the defense of
any Claim which is brought if indemnification cannot be determined to be
available prior to the conclusion of, or the investigation of, such Claim. The
parties hereto agree that each understands and has understood, at all times
under all prior employment agreements between LTC and Executive, that
notwithstanding the above-stated provisions, nothing herein shall require LTC to
hold harmless or indemnify Executive with respect to any Claim which is brought
or asserted against Executive by LTC. LTC shall investigate in good faith the
availability and cost of directors' and officers' insurance and shall include
Executive as an insured in any policy of such insurance it maintains.
9. Attorney Fees. In the event that any action or proceeding
is brought to enforce the terms and provisions of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys fees.
10. Notices. All notices and other communications provided to
either party hereto under this Agreement shall be in writing and delivered by
certified or registered mail to such party at its address set forth below its
signature hereto, or at such other address as may be designated by such party in
a notice to the other party. Any notice, if mailed and properly addressed with
postage prepaid, shall be deemed given when received.
6
<PAGE>
11. Construction. In construing this Agreement, if any portion
of this Agreement shall be found to be invalid or unenforceable, the remaining
terms and provisions of this Agreement shall be given effect to the maximum
extent permitted without considering the void, invalid or unenforceable
provision. In construing this Agreement, the singular shall include the plural,
the masculine shall include the feminine and neuter genders as appropriate, and
no meaning or effect shall be given to the captions of the sections in this
Agreement, which are inserted for convenience of reference only.
12. Headings. The section headings hereof have been inserted
for convenience of reference only and shall not be construed to affect the
meaning, construction or effect of this Agreement.
13. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the internal laws of the State of
California as at the time in effect.
14. Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all other prior agreements and undertakings, both
written and oral, among Executive and the Company, with respect to the subject
matter hereof.
7
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed on the date set forth
below, to be effective as of the date specified in the first paragraph of this
Agreement.
LTC PROPERTIES, INC.,
a Maryland Corporation
Address: By: /s/ Andre C. Dimitriadis
----------------------- ------------------------------------
Chairman and Chief Executive Officer
- -------------------------------
- ------------------------------- Date Signed: March 26 1999
---------------------------
By: /s/ Wendy L. Simpson
------------------------------------
Chairman of Compensation Committee
Date Signed: March 26 1999
-------------------------
Address: /s/ James J. Pieczynski
-----------------------
Executive
- -------------------------------
Date Signed: March 26 1999
- ------------------------------- -------------------------
8
<PAGE>
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (the "Agreement") is made
as of March 26, 1999, by and between LTC Properties, Inc., a corporation
organized under the laws of the State of Maryland ("LTC" or the "Company"), and
Christopher T. Ishikawa ("Executive") and amends and restates the Employment
Agreement dated June 30, 1998, by and between LTC and Executive (the "Prior
Employment Agreement") and is effective as of March 26, 1999.
NOW THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereto agree as follows:
1. Appointment, Title and Duties. LTC hereby employs Executive to
serve as its Senior Vice President and Chief Investment Officer. In such
capacity, Executive shall report to the Chief Executive Officer of the Company,
and shall have such duties, powers and responsibilities as are customarily
assigned to the Senior Vice President and Chief Investment Officer of a publicly
held corporation, but shall also be responsible to the Board of Directors or to
any committee thereof. In addition, Executive shall have such other duties and
responsibilities as the Chief Executive Officer may assign him, with his
consent, including serving with the consent or at the request of the Company on
the board of directors of affiliated corporations.
2. Term of Agreement. The initial term of this Agreement shall be
for a two (2) year period, ending March 26, 2001. Unless the employment
hereunder shall have been terminated in accordance with the provisions hereof,
the term of this Agreement shall be extended beyond March 26, 2001 such that at
each and every moment of time hereafter the remaining term shall not be less
than two (2) years.
3. Acceptance of Position. Executive accepts the position of Senior
Vice President and Chief Investment Officer of LTC, and agrees that during the
term of this Agreement he will faithfully perform his duties and, except as
expressly approved by the Board of Directors of LTC, will devote substantially
all of his business time to the business and affairs of LTC, and will not
engage, for his own account or for the account of any other person or entity, in
a business which competes with LTC. It is acknowledged and agreed that Executive
may serve as an officer and/or director of companies in which LTC owns voting or
non-voting stock. In addition, it is acknowledged and agreed that Executive may,
from time to time, serve as a member of the board of directors of other
companies, in which event the Board of Directors of LTC must expressly approve
such service pursuant to a Board resolution maintained in the Company's minute
books. Any compensation or remuneration which Executive receives in
consideration of his service on the board of directors of other companies shall
be the sole and exclusive property of Executive, and LTC shall have no right or
entitlement at any time to any such compensation or remuneration.
4. Salary and Benefits. During the term of this Agreement:
a. LTC shall pay to Executive a base salary at an annual rate of
not less than Two Hundred Twenty Five Thousand Dollars ($225,000) per annum,
paid in approximately equal installments at intervals based on any reasonable
Company policy. LTC agrees from time to time to consider increases in such base
salary in the discretion of the Board of Directors. Any increase,
1
<PAGE>
once granted, shall automatically amend this Agreement to provide that
thereafter Executive's base salary shall not be less than the annual amount to
which such base salary has been increased.
b. Executive shall participate in all health, retirement,
Company-paid insurance, sick leave, disability, expense reimbursement and other
benefit programs which LTC makes available to any of its senior executives, and
shall be eligible for bonuses in the discretion of the Board of Directors.
c. Executive shall be entitled to reasonable vacation time, not less
than four (4) weeks per year, provided that not more than two (2) weeks of such
vacation time may be taken consecutively without prior notice to and
non-objection by the Compensation Committee of the Board of Directors or, if
there is no Compensation Committee, the Board of Directors.
5. Certain Terms Defined. For purposes of this Agreement:
a. Executive shall be deemed to be "disabled" if a physical or
mental condition shall occur and persist which, in the written opinion of a
licensed physician selected by the Board of Directors in good faith, has
rendered Executive unable to perform the duties of Senior Vice President and
Chief Investment Officer of LTC for a period of sixty (60) days or more and, in
the written opinion of such physician, the condition will continue for an
indefinite period of time, rendering Executive unable to return to his duties.
b. A termination of Executive's employment by LTC shall be
deemed for "Cause" if, and only if, it is based upon (i) conviction of a felony;
(ii) material disloyalty to the Company such as embezzlement, misappropriation
of corporate assets or, except as permitted pursuant to Section 3 of this
Agreement, breach of Executive's agreement not to engage in business for another
enterprise of the type engaged in by the Company; or (iii) the engaging in
unethical or illegal behavior which is of a public nature, brings LTC into
disrepute, and results in material damage to the Company. The Company shall have
the right to suspend Executive, with pay, for a reasonable period to investigate
allegations of conduct which, if proven, would establish a right to terminate
this Agreement for Cause, or to permit a felony charge to be tried. Immediately
upon the conclusion of such temporary period, unless Cause to terminate this
Agreement has been established, Executive shall be restored to all duties and
responsibilities as if such suspension had never occurred.
c. A resignation by Executive shall not be deemed to be
voluntary and shall be deemed to be a resignation with "Good Reason" if it is
based upon (i) a diminution in Executive's title, duties, or salary; (ii) a
reduction in benefits which is not part of an across-the-board reduction in
benefits of all senior executive personnel; (iii) a direction by the Board of
Directors that Executive report to any person or group other than the Chief
Executive Officer or the Board of Directors, or (iv) a geographic relocation of
Executive's place of work a distance of more than seventy five (75) miles from
LTC's offices located at 300 Esplanade Drive, Suite 1860, Oxnard, California.
d. "Affiliate" means with respect to any Person, a Person who,
directly or indirectly, through one or more intermediaries, controls, is
controlled by or is under
2
<PAGE>
common control, with the Person specified.
e. "Base Salary" means, as of any date of termination of
employment, the highest base salary of Executive in the then current fiscal year
or in any of the last four fiscal years immediately preceding such date of
termination of employment.
f. "Beneficial Owner" shall have the meaning given to such
term in Rule 13d-3 under the Exchange Act;
g. A "Change in Control" occurs if:
i) any Person or related group of Persons (other than
Executive and his Related Persons, the Company or a Person that directly or
indirectly controls, is controlled by, or is under common control with, the
Company) is or becomes the Beneficial Owner, directly or indirectly, of
securities of the Company representing 30% or more of the combined voting power
of the Company's then outstanding securities; or
ii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation (or other entity), other
than a merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than 66-2/3% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation; provided, however, that a merger
or consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person acquires more than 30% of the combined
voting power of the Company's then outstanding securities shall not constitute a
Change in Control; or
iii) the stockholders of the Company approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets; or
iv) a majority of the members of the Board of Directors
of the Company cease to be Continuing Directors.
h. "Code" means the Internal Revenue Code of 1986, as amended.
i. "Continuing Directors" means, as of any date of
determination, any member of the Board of Directors who (i) was a member of such
Board of Directors on the date of the Agreement or (ii) was nominated for
election or elected to such Board of Directors with the approval of a majority
of the Continuing Directors who were members of such Board of Directors at the
time of such nomination or election.
j. "Exchange Act" means the Exchange Act of 1934, as amended.
k. "Person" means any individual, corporation, partnership,
limited liability company, trust, association or other entity.
3
<PAGE>
l. "Related Person" means any immediate family member (spouse,
partner, parent, sibling or child whether by birth or adoption) of the Executive
and any trust, estate or foundation, the beneficiary of which is the Executive
and/or an immediate family member of the Executive.
6. Certain Benefits Upon Termination. Executive's employment shall
be terminated upon the earlier of (i) the voluntary resignation of Executive
with or without Good Reason; (ii) Executive's death or permanent disability, or
(iii) upon the termination of Executive's employment by LTC for any reason at
any time. In the event of such termination, the below provisions of this Section
6 shall apply.
a. If Executive's employment by LTC terminates for any reason
other than as a result of (i) a termination for Cause, or (ii) a voluntary
resignation by Executive without a Good Reason, or (iii) a Change in Control of
the Company, then LTC shall pay Executive a lump sum severance payment equal to
two times his Base Salary; provided that if employment terminates by reason of
Executive's death or disability, then such salary shall be paid only to the
extent the Company has available "key man" life, disability or similar insurance
relating to the death or disability of Executive.
b. Upon a Change in Control of the Company whether or not
Executive's employment is terminated, in lieu of the severance payment described
in Section 6(a) above, LTC shall pay Executive a lump sum severance payment in
cash equal to $1.0 million;
c. If Executive's employment by LTC terminates for any reason,
except for LTC's termination of Executive's employment for Cause or a voluntary
resignation by Executive without a Good Reason, LTC shall offer to Executive the
opportunity to participate in all Company-provided medical and dental plans to
the extent Executive elects and remains eligible for coverage under COBRA and
for a maximum period of eighteen (18) months at Company expense; provided,
however, in the event Executive's employment by LTC terminates upon a Change in
Control of the Company, then Executive shall not be given the opportunity to
participate in any of such medical and dental plans except to the extent
required by law.
d. In the event that Executive's employment terminates by
reason of his death, all benefits provided in this Section 6 shall be paid to
his estate or as his executor shall direct, but payment may be deferred until
Executive's executor or personal representative has been appointed and qualified
pursuant to the laws in effect in Executive's jurisdiction of residence at the
time of his death.
e. LTC shall make all payments pursuant to the foregoing
subsections (a) through (d) within seven (7) days following the date of
termination of Executive's employment or consummation of a Change in Control of
the Company, as applicable.
f. Notwithstanding the foregoing, LTC shall have no liability
under this Section if Executive's employment pursuant to this Agreement is
terminated by LTC for
4
<PAGE>
Cause or by Executive without a Good Reason; provided, however, that if
Executive's employment pursuant to this Agreement is terminated by LTC for Cause
or by Executive without a Good Reason at any time after a Change of Control
which did not result in Executive's employment being terminated, such
post-Change of Control termination by LTC for Cause or by Executive without a
Good Reason shall not affect in any way Executive's entitlement to the lump sum
severance payment described in Section 6(b), above or any other rights, benefits
or entitlements to which Executive may be entitled as a result of such Change of
Control.
g. Gross-Up.
i) If it shall be determined that any payment,
distribution or benefit received or to be received by Executive from the Company
(whether payable pursuant to the terms of this Agreement or any other plan,
arrangements or agreement with the Company or an Affiliate (as defined above)
("Payments") would be subject to the excise tax imposed by Section 4999 of the
Code (the "Excise Tax"), then Executive shall be entitled to receive an
additional payment (the "Excise Tax Gross-Up Payment) in an amount such that the
net amount retained by Executive, after the calculation and deduction of any
Excise Tax on the Payments and any federal, state and local income taxes and
excise tax on the Excise Tax Gross-Up Payment provided for in this Section 6(g),
shall be equal to the Payments. In determining this amount, the amount of the
Excise Tax Gross-Up Payment attributable to federal income taxes shall be
reduced by the maximum reduction in federal income taxes that could be obtained
by the deduction of the portion of the Excise Tax Gross-Up Payment attributable
to state and local income taxes. Finally, the Excise Tax Gross-Up Payment shall
be reduced by income or excise tax withholding payments made by the Company or
any Affiliate of either to any federal, state or local taxing authority with
respect to the Excise Tax Gross-Up Payment that was not deducted from
compensation payable to Executive.
ii) All determinations required to be made under this
Section 6(g), including whether and when an Excise Tax Gross-Up Payment is
required and the amount of such Excise Tax Gross-Up Payment and the assumptions
to be utilized in arriving at such determination, except as specified in Section
6(g)(i) above, shall be made by the Company's independent auditors (the
"Accounting Firm"), which shall provide detailed supporting calculations both to
the Company and Executive within 15 business days after the Company makes any
Payments to Executive. Such determination of tax liability made by the
Accounting Firm shall be subject to review by Executive's tax advisor and, if
Executive's tax advisor does not agree with such determination reached by the
Accounting Firm, then the Accounting Firm and Executive's tax advisor shall
jointly designate a nationally recognized public accounting firm, which shall
make such determination. All reasonable fees and expenses of the accountants and
tax advisors retained by either Executive or the Company shall be borne by the
Company. Any Excise Tax Gross-Up Payment, as determined pursuant to this Section
6(g), shall be paid by the Company to Executive within five days after the
receipt of such determination. Any determination by a jointly designated public
accounting firm shall be binding upon the Company and Executive.
iii) As a result of the uncertainty in the application
of Subsection 4999 of the Code at the time of the initial determination
hereunder, it is possible that
5
<PAGE>
Excise Tax Gross-Up Payments will not have been made by the Company that should
have been made consistent with the calculations required to be made hereunder
("Underpayment"). In the event that Executive thereafter is required to make a
payment of any Excise Tax, any such Underpayment calculated in accordance with
and in the same manner as the Excise Tax Gross-Up Payment in Section 6(g)(i)
above shall be promptly paid by the Company to or for the benefit of Executive.
In the event that the Excise Tax Gross-Up Payment exceeds the amount
subsequently determined to be due, such excess shall constitute a loan from the
Company to Executive payable on the fifth day after demand by the Company
(together with interest at the rate provided in Section 1274(b)(2)(B) of the
Code).
7. Tax Liability Loan. Upon a Change in Control of the
Company, whether or not Executive's employment is terminated as a result
thereof, the Company shall offer Executive an unsecured loan in the amount
necessary to fund Executive's tax liability arising from the accelerated vesting
of restricted shares held by Executive, if any. Such loan shall be due, in full,
in ten (10) years from the date made and shall bear interest at the then-current
Applicable Federal Rate (the minimum rate necessary to avoid "unstated interest"
under Section 7872 of the Code) with interest payments to be paid to the Company
annually. Such loan shall be evidenced by a promissory note signed by, and with
full recourse to, Executive.
8. Indemnification. LTC shall indemnify Executive and hold him
harmless from and against all claims, actions, losses, damages, expense or
liabilities (including expenses of defense and settlement) ("Claim") based upon
or in any way arising from or connected with his employment by LTC, to the
maximum extent permitted by law. To the extent permitted by law, LTC shall
advance to Executive any expenses necessary in connection with the defense of
any Claim which is brought if indemnification cannot be determined to be
available prior to the conclusion of, or the investigation of, such Claim. The
parties hereto agree that each understands and has understood, at all times
under all prior employment agreements between LTC and Executive, that
notwithstanding the above-stated provisions, nothing herein shall require LTC to
hold harmless or indemnify Executive with respect to any Claim which is brought
or asserted against Executive by LTC. LTC shall investigate in good faith the
availability and cost of directors' and officers' insurance and shall include
Executive as an insured in any policy of such insurance it maintains.
9. Attorney Fees. In the event that any action or proceeding
is brought to enforce the terms and provisions of this Agreement, the prevailing
party shall be entitled to recover reasonable attorneys fees.
10. Notices. All notices and other communications provided to
either party hereto under this Agreement shall be in writing and delivered by
certified or registered mail to such party at its address set forth below its
signature hereto, or at such other address as may be designated by such party in
a notice to the other party. Any notice, if mailed and properly addressed with
postage prepaid, shall be deemed given when received.
11. Construction. In construing this Agreement, if any portion
of this Agreement shall be found to be invalid or unenforceable, the remaining
terms and provisions of this Agreement shall be given effect to the maximum
extent permitted without considering the
6
<PAGE>
void, invalid or unenforceable provision. In construing this Agreement, the
singular shall include the plural, the masculine shall include the feminine and
neuter genders as appropriate, and no meaning or effect shall be given to the
captions of the sections in this Agreement, which are inserted for convenience
of reference only.
12. Headings. The section headings hereof have been inserted
for convenience of reference only and shall not be construed to affect the
meaning, construction or effect of this Agreement.
13. Governing Law. The provisions of this Agreement shall be
construed and interpreted in accordance with the internal laws of the State of
California as at the time in effect.
14. Entire Agreement. This Agreement constitutes the entire
agreement and supersedes all other prior agreements (including the Prior
Employment Agreement) and undertakings, both written and oral, among Executive
and the Company, with respect to the subject matter hereof.
7
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed on the date set forth
below, to be effective as of the date specified in the first paragraph of this
Agreement.
LTC PROPERTIES, INC.,
a Maryland Corporation
Address: By: /s/ Andre C. Dimitriadis
----------------------- ------------------------------------
Chairman and Chief Executive Officer
- -------------------------------
- ------------------------------- Date Signed: March 26 1999
---------------------------
By: /s/ Wendy L. Simpson
------------------------------------
Chairman of Compensation Committee
Date Signed: March 26 1999
---------------------------
Address: /s/ Christopher T. Ishikawa
----------------------- ----------------------------------------
Executive
- -------------------------------
Date Signed: March 26 1999
- ------------------------------- ---------------------------
8
<PAGE>
LTC PROPERTIES, INC.
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Company State of Organization
- ------- ---------------------
LTC REMIC Corporation Delaware
LTC REMIC IV Corporation Delaware
LTC GP I, Inc. Delaware
LTC GP II, Inc. Delaware
LTC GP III, Inc Delaware
LTC GP IV, Inc Delaware
LTC GP V, Inc Delaware
LTC Partners I, L.P. Delaware
LTC Partners II, L.P. Delaware
LTC Partners III, L.P. Delaware
LTC Partners IV, L.P. Delaware
LTC Partners V, L.P. Delaware
LTC Partners VI, L.P. Delaware
LTC Partners VII, L.P. Delaware
LTC Partners VIII, L.P. Delaware
L-Tex GP, Inc. Delaware
L-Tex LP Corporation Delaware
Kansas-LTC Corporation Delaware
University Park Convalescent Center, Inc. Florida
Florida-LTC, Inc. Nevada
LTC-West, Inc. Nevada
LTC-Tampa, Inc. Nevada
Education Property Investors, Inc. Nevada
Western Healthcare, Funding, Inc. Nevada
LTC-Dearfield, Inc. Nevada
Texas-LTC Limited Partnership Texas
<PAGE>
LTC PROPERTIES, INC.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-2444) and in the Registration Statement (Form S-8 No.
33-85252) of LTC Properties, Inc. of our report dated January 19, 1999 with
respect to the consolidated financial statements and schedules of LTC
Properties, Inc., included in its Annual Report (Form 10-K) for the year
ended December 31, 1998.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 31, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM LTC
PROPERTIES, INC'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1998 FILED HEREWITH AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000887905
<NAME> LTC PROPERTIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,503
<SECURITIES> 100,595
<RECEIVABLES> 180,964
<ALLOWANCES> 1,250
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 410,659
<DEPRECIATION> 26,972
<TOTAL-ASSETS> 689,814
<CURRENT-LIABILITIES> 0
<BONDS> 12,256
0
165,000
<COMMON> 277
<OTHER-SE> 275,623
<TOTAL-LIABILITY-AND-EQUITY> 689,814
<SALES> 0
<TOTAL-REVENUES> 89,391
<CGS> 0
<TOTAL-COSTS> 41,927
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,267
<INCOME-PRETAX> 50,593
<INCOME-TAX> 0
<INCOME-CONTINUING> 50,593
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,593
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.39
</TABLE>
<PAGE>
LTC PROPERTIES, INC.
EXHIBIT 99
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision in our company. The risks and uncertainties described below
are not the only ones facing our company and there may be additional risks that
we do not presently know of or that we currently consider immaterial. All of
these risks could adversely affect our business, financial condition, results of
operations and cash flows. As a result, our ability to pay distributions on, and
the market price of, our common stock may be adversely affected if any of such
risks are realized.
In accordance with "plain English" guidelines provided by the Securities and
Exchange Commission, whenever we refer to "our company" or to "us," or use the
terms "we" or "our," we are referring to LTC Properties, Inc. and its
subsidiaries.
Our Performance is Subject to Risks Associated with Health Care Real Estate
Investment
There are Factors Outside of our Control that Affect the Performance and Value
of our Real Estate. Real property investments in the health care industry are
subject to varying degrees of risk. The economic performance and values of
health care real estate can be affected by many factors including governmental
regulation, economic conditions, and demand for health care services. We cannot
assure that the value of any property acquired by us will appreciate or that the
value of property securing any of our mortgage loans or any property acquired by
us will not depreciate. Certain significant expenditures associated with an
investment in real estate (such as mortgage payments, real estate taxes and
maintenance costs) generally do not decline when circumstances cause a reduction
in income from the property.
Income and Returns from Health Care Facilities Can be Volatile. The possibility
that the health care facilities in which we invest will not generate income
sufficient to meet operating expenses, will generate income and capital
appreciation, if any, at rates lower than those anticipated or will yield
returns lower than those available through investments in comparable real estate
or other investments are additional risks of investing in health care related
real estate. Income from properties and yields from investments in such
properties may be affected by many factors, including changes in governmental
regulation (such as zoning laws), general or local economic conditions (such as
fluctuations in interest rates and employment conditions), the available local
supply of and demand for improved real estate, a reduction in rental income as
the result of an inability to maintain occupancy levels, natural disasters (such
as earthquakes and floods) or similar factors.
Real Estate Investments are Illiquid. Real estate investments are relatively
illiquid and, therefore, tend to limit our ability to vary our portfolio
promptly in response to changes in economic or other conditions. All of our
properties are "special purpose" properties that could not be readily converted
to general residential, retail or office use. Transfers of operations of nursing
homes and other health care-related facilities are subject to regulatory
approvals not required for transfers of other types of commercial operations and
other types of real estate. Thus, if the operation of any of our properties
becomes unprofitable due to competition, age of improvements or other factors
such that the borrower or lessee becomes unable to meet its obligations on the
debt or lease, the liquidation value of the property may be substantially less
than would be the case if the property were readily adaptable to
<PAGE>
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 and funds available for distribution would
be adversely affected.
Some Potential Losses are not Covered by Insurance. We currently require, and we
intend to continue to require, all borrowers of funds from us and lessees of any
of our properties to secure adequate comprehensive property and liability
insurance that covers us as well as the borrower and/or lessee. Certain risks
may, however, be uninsurable or not economically insurable and there can be no
assurance we or a lessee will have adequate funds to cover all contingencies
itself. Certain losses such as losses due to floods or seismic activity may be
insured subject to certain limitations including large deductibles or
co-payments and policy limits. If an uninsured loss or a loss in excess of
insured limits occurs with respect to one or more of our properties, we could
lose the capital we invested in the properties, as well as the anticipated
future revenue from the properties and, in the case of debt which is with
recourse to us, we would remain obligated for any mortgage debt or other
financial obligations related to the properties.
We Depend on Lease Income and Mortgage Payments from Real Property. Since a
substantial portion of our income is derived from mortgage payments and lease
income from real property, our income would be adversely affected if a
significant number of our borrowers were unable to meet their obligations to us
or if we were unable to lease our properties or make mortgage loans on
economically favorable terms. There can be no assurance that any lessee will
exercise its option to renew its lease upon the expiration of the initial term
or that if such failure to renew were to occur, we could lease the property to
others on favorable terms.
Our Borrowers and Lessees Face Competition in the Healthcare Industry.
The long-term care industry is highly competitive and we expect that it may
become more competitive in the future. Our borrowers and lessees are competing
with numerous other companies providing similar long-term care services or
alternatives such as home health agencies, life care at home, community-based
service programs, retirement communities and convalescent centers. There can be
no assurance that our borrowers and lessees will not encounter increased
competition in the future which could limit their ability to attract residents
or expand their businesses and therefore affect their ability to make their debt
or lease payments to us.
The Healthcare Industry is Heavily Regulated by the Government.
Our borrowers and lessees who operate health care facilities are subject to
heavy regulation by federal, state and local governments. These laws and
regulations are subject to frequent and substantial changes resulting from
legislation, adoption of rules and regulations, and administrative and judicial
interpretations of existing law. These changes may have a dramatic effect on the
definition of permissible or impermissible activities, the relative costs
associated with doing business and the amount of reimbursement by both
government and other third-party payors. These changes may be applied
retroactively. The ultimate timing or effect of these changes cannot be
predicted. The failure of any borrower of funds from us or lessee of any of our
properties to comply with such laws, requirements and regulations could affect
its ability to operate its facility or facilities and could adversely affect
such borrower's or lessee's ability to make debt or lease payments to us.
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Our Borrowers and Lessees Rely on Government and Third Party Reimbursement. The
ability of our borrowers and lessees to generate revenue and profit determines
the underlying value of that facility to us. Revenues of our borrowers and
lessees are generally derived from payments for patient care. Sources of such
payments include the federal Medicare program, state Medicaid programs, private
insurance carriers, health care service plans, health maintenance organizations,
preferred provider arrangements, self-insured employers, as well as the patients
themselves.
A significant portion of the revenue of our borrowers and lessees is derived
from governmentally-funded reimbursement programs, such as Medicare and
Medicaid. Because of significant health care costs paid by such government
programs, both federal and state governments have adopted and continue to
consider various health care reform proposals to control health care costs. In
recent years, there have been fundamental changes in the Medicare program which
resulted in reduced levels of payment for a substantial portion of health care
services. In many instances, revenues from Medicaid programs are already
insufficient to cover the actual costs incurred in providing care to those
patients. Moreover, health care facilities have experienced increasing pressures
from private payors attempting to control health care costs, and reimbursement
from private payors has in many cases effectively been reduced to levels
approaching those of government payors.
Moreover, health care facilities have experienced increasing pressures from
private payors attempting to control health care costs, and reimbursement from
private payors has in many cases effectively been reduced to levels approaching
those of government payors.
Governmental and public concern regarding health care costs may result in
significant reductions in payment to health care facilities, and there can be no
assurance that future payment rates for either governmental or private payors
will be sufficient to cover cost increases in providing services to patients.
Any changes in reimbursement policies which reduce reimbursement to levels that
are insufficient to cover the cost of providing patient care could adversely
affect revenues of our borrowers and lessees and thereby adversely affect those
borrowers' and lessees' abilities to make their debt or lease payments to us.
Failure of the borrowers or lessees to make their debt or lease payments would
have a direct and material adverse impact on us.
Regulations Have Been Adopted to Eliminate Fraud and Abuse. There are various
federal and state laws prohibiting fraud by health care providers, including
criminal provisions which prohibit filing false claims or making false
statements to receive payment or certification under Medicare and Medicaid, or
failing to refund overpayments or improper payments. Violation of these federal
provisions is a felony punishable by up to five years imprisonment and/or
$25,000 fines. Civil provisions prohibit the knowing filing of a false claim or
the knowing use of false statements to obtain payment. The penalties for such a
violation are fines of not less than $5,000 nor more than $10,000, plus treble
damages, for each claim filed.
There are also laws which govern referrals and financial relationships. The
federal Anti-Kickback Law prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for, or to induce,
the referral of Medicare and Medicaid patients. A wide array of relationships
and arrangements, including ownership interests in a company by persons who
refer or who are in a position to refer patients, as well as personal services
agreements, have under certain circumstances, been alleged or been found to
violate these provisions. In addition to the Anti-Kickback Statute, the federal
government restricts certain financial relationships between physicians and
other providers of health care services.
State and federal governments are devoting increasing attention and resources to
anti-fraud initiatives against health care providers. The Health Insurance
Portability and Accountability Act of 1996 and the Balanced Budget Act of 1997
expand the penalties for health care fraud, including broader provisions for the
exclusion of providers from the Medicare and Medicaid programs. Further, under
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Operation Restore Trust, a major anti-fraud demonstration project, the Office of
Inspector General of the U.S. Department of Health and Human Services, in
cooperation with other federal and state agencies, has focused on the activities
of skilled nursing facilities, home health agencies, hospices and durable
medical equipment suppliers in certain states, including states, in which we
have properties.
Based upon information we have periodically received from our operators over the
terms of their respective leases and loans, we believe that the nursing
facilities in which we have investments are in substantial compliance with the
various regulatory requirements applicable to them, although there can be no
assurance that the operators are in compliance or will remain in compliance in
the future.
Congress Has Enacted Health Care Reform Measures. The health care industry is
facing various challenges, including increased government and private payor
pressure on health care providers to control costs. The pressure to control
health care costs intensified during 1994 and 1995 as a result of the national
health care reform debate and continues into 1999 as Congress attempted to slow
the rate of growth of federal health care expenditures as part of its effort to
balance the federal budget.
The Balanced Budget Act enacted significant changes to the Medicare and Medicaid
programs designed to "modernize" payment and health care delivery systems while
achieving substantial budgetary savings. In seeking to limit Medicare
reimbursement for long term care services, Congress established the prospective
payment system for skilled nursing facility services to replace the cost-based
reimbursement system. Skilled nursing facilities may need to restructure their
operations to accommodate the new Medicare prospective payment system
reimbursement. In part because of the uncertainty as to the effect of the
prospective payment system on skilled nursing facilities, in November 1998,
Standard and Poor's, an international rating agency that provides credit
analysis and information through the rating of financial instruments, placed
many skilled nursing facility companies on a "credit watch" because of the
potential negative impact of the implementation of the prospective payment
system on the financial condition of skilled nursing facilities, including the
ability to make interest and principal payments on outstanding borrowings. In
early March 1999, Standard & Poor's lowered the ratings of several skilled
nursing facility companies, including companies that operate skilled nursing
facilities in which we invest, because of the impact of the implementation of
the prospective payment system, particularly those companies with substantial
debt.
In addition, there are numerous initiatives at the federal and state levels for
comprehensive reforms affecting the payment for and availability of health care
services. Congress and state legislatures can be expected to continue to review
and assess alternative health care delivery systems and payment methodologies.
Changes in the law, new interpretations of existing laws, or changes in payment
methodology may have a dramatic effect on the definition of permissible or
impermissible activities, the relative costs associated with doing business and
the amount of reimbursement by the government and other third party payors.
In light of forthcoming regulations and continuing state Medicaid program
reform, no assurance can be given that the implementation of such regulations
and reform will not have a material adverse effect on our financial condition or
results of operations.
Our Facilities are Subject to Licensing, Certification and Accreditation. In
addition to the requirements to be met by skilled nursing facilities for
participation in the Medicare and Medicaid programs, skilled nursing facilities
are subject to regulatory and licensing requirements of federal, state and local
authorities. The operator of each skilled nursing facility is licensed annually
by the board of health or other applicable agency in each state. In granting and
renewing licenses, regulatory agencies
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consider, among other things, the physical buildings and equipment, the
qualifications of the administrative personnel and nursing staff, the quality of
care and continuing compliance with the laws and regulations relating to the
operation of the facilities. State licensing of facilities is a prerequisite to
certification under the Medicare and Medicaid programs. In the ordinary course
of business, the operators receive notices of deficiencies for failure to comply
with various regulatory requirements and take appropriate corrective and
preventive actions.
Failure to obtain licensure or loss of licensure would prevent a facility from
operating. Failure to maintain certification in the Medicare and Medicaid
programs would result in a loss of funding from those programs. Although
accreditation is generally voluntary, loss of accreditation could result in a
facility not meeting eligibility requirements to participate in various
reimbursement programs. These events could adversely affect the facility
operator's ability to make rent and debt payments.
In addition to licensing requirements, state and local laws may regulate
expansion, including the addition of new beds or services or acquisition of
medical equipment, and occasionally the contraction of health care facilities by
requiring certificate of need or other similar approval programs. States vary in
their utilization of these programs. In addition, health care facilities are
subject to the Americans with Disabilities Act and building and safety codes
which govern access, physical design requirements for facilities, and building
standards.
Skilled Nursing Facilities. Skilled nursing facilities are regulated primarily
through the licensing of such facilities against a common background established
by federal law enacted as part of the Omnibus Budget Reconciliation Act of 1987.
Regulatory authorities and licensing standards vary from state to state, and in
some instances from locality to locality. These standards are constantly
reviewed and revised. Agencies periodically inspect facilities, at which time
deficiencies may be identified. The facilities must correct these deficiencies
as a condition to continued licensing or certification and participation in
government reimbursement programs. Depending on the nature of such deficiencies,
remedies can be routine or costly. Similarly, compliance with regulations which
cover a broad range of areas such as patients' rights, staff training, quality
of life and quality of resident care may increase facility start-up and
operating costs.
Assisted Living Facilities. We have increased our investments in assisted living
facilities in recent years. Assisted living facilities are subject to certain
state regulations and licensing requirements. To qualify as a state licensed
facility, assisted living facilities must comply with regulations which address,
among other things, staffing, physical design, required services and resident
characteristics. Assisted living facilities are also subject to various local
building codes and other ordinances, including fire safety codes. These
requirements vary from state to state and are monitored to varying degrees by
state agencies. Failure to comply with these laws and regulations could result
in the denial of reimbursement, the imposition of fines, suspension or
decertification from the Medicare and Medicaid program, and in extreme cases,
the revocation of a facility's license or closure of a facility. Such actions
may have an effect on the revenues of the borrowers and lessees of properties
owned by us and therefore adversely impact our revenues.
Currently, assisted living facilities are not regulated as such by the federal
government. State standards required for assisted living facility providers are
less stringent than those required of other licensed health care operators.
There can be no assurance that federal regulations governing the operation of
assisted living facilities will not be implemented in the future or that
existing state regulations will not be expanded. In addition, only certain
states have adopted laws or regulations permitting individuals with higher
acuity levels to remain in assisted living communities who may otherwise qualify
for placement in a nursing facility. While only certain states presently provide
for
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any Medicaid reimbursement for assisted living residences, several states are
currently reviewing their policies and reimbursement programs to provide funding
for assisted living residences. There can be no assurance that such states will
adopt the Medicaid waiver program.
Environmental Problems Are Possible and Can Be Costly. Under various federal,
state and local environmental laws, ordinances and regulations, an owner of real
property or a secured lender (such as our company) may be liable for the costs
of removal or remediation of hazardous or toxic substances at, under or disposed
of in connection with such property, as well as other potential costs relating
to hazardous or toxic substances (including government fines and damages for
injuries to persons and adjacent property). Such laws often impose such
liability without regard to whether the owner or secured lender knew of, or was
responsible for, the presence or disposal of such substances and may be imposed
on the owner or secured lender in connection with the activities of an operator
of the property. The cost of any required remediation, removal, fines or
personal or property damages and the owner's or secured lender's liability
therefore could exceed the value of the property, and/or the assets of the owner
or secured lender. In addition, the presence of such substances, or the failure
to properly dispose of or remediate such substances, may adversely affect the
owner's ability to sell or rent such property or to borrow using such property
as collateral which, in turn, would reduce our revenues.
Although the mortgage loans that we provide and leases covering our properties
require the borrower and the lessee to indemnify us for certain environmental
liabilities, the scope of such obligations may be limited and we cannot assure
that any such borrower or lessee would be able to fulfill its indemnification
obligations.
We Rely on a Few Major Operators
As of December 31, 1998, Sun Healthcare Group, Inc. operated 70 facilities
representing 19% ($174.3 million) of our adjusted gross real estate investment
portfolio (adjusted to include the mortgage loans to third parties underlying
the investment in REMIC certificates). Other than Sun Healthcare, no long-term
care provider operated over 10% of our adjusted gross real estate investment
portfolio. Sun Healthcare is a publicly traded company, and as such is subject
to the filing requirements of the Securities and Exchange Commission. Our
financial position and our ability to make distributions may be adversely
affected by financial difficulties experienced by Sun Healthcare, or any of our
other major operators, including bankruptcy, insolvency or general downturn in
business of any such operator, or in the event any such operator does not renew
and/or extend its relationship with us or its borrowers as it expires.
We Invest in Mortgage Loans
Borrowers May be Unable to Make Debt Service Payments. We invest in mortgages.
In general, investments in mortgages include the risks that borrowers may not be
able to make debt service payments or pay principal when due, that the value of
the mortgaged property may be less than the principal amount of the mortgage
note secured by the property and that interest rates payable on the mortgages
may be lower than our cost of funds to acquire these mortgages. In any of these
events, our ability to make distributions on, and the market price of, our
common stock could be adversely affected.
Our Remedies May Be Limited When Mortgage Loans Default. To the extent we invest
in mortgage loans, such mortgage loans may or may not be recourse obligations of
the borrower and generally will not be insured or guaranteed by governmental
agencies or otherwise. In the event of a default under
<PAGE>
such obligations, we may have to foreclose the mortgage or protect our interest
by acquiring title to a property and thereafter making substantial improvements
or repairs in order to maximize the property's investment potential. Borrowers
may contest enforcement of foreclosure or other remedies, seek bankruptcy
protection against such enforcement and/or bring claims for lender liability in
response to actions to enforce mortgage obligations. Relatively high "loan to
value" ratios and declines in the value of the property may prevent us from
realizing an amount equal to our mortgage loan upon foreclosure.
There are Disadvantages to Investments in Commercial Mortgage Backed Securities
Investments in Commercial Mortgage Backed Securities are Subject to Real Estate
Risks Relating to the Underlying Properties. We retain subordinated portions of
the REMIC certificates issued in our securitizations. These REMIC certificates
are a form of mortgage backed securities and as such, we are subject to the same
risks associated with investing directly in the underlying mortgage loans. This
is especially true in our case due to the nature of the collateral properties
securing the underlying mortgages in our securitizations. All of these
properties are special purpose facilities used for the delivery of long-term
care services. Any risks associated with investing in these types of properties
could impact the value of our investment in the REMIC certificates we retain.
Investments in Commercial Mortgage-Backed Securities are Subject to Risks
Associated with Prepayment of the Underlying Mortgages. As with many interest
bearing mortgage-backed instruments, prepayments of the underlying mortgages may
expose us to the risk that an equivalent rate of return is not available in the
current market and that new investment of equivalent risk will have lower rates
of return. Certain types of investments in commercial mortgage-backed securities
may be interest-only securities which expose the holder to the risk that the
underlying mortgages may prepay at a faster rate than anticipated at
acquisition. Faster than anticipated prepayments may cause the investment in
interest-only commercial mortgage-backed securities to have a lower than
anticipated rate of return and could result in a loss of the initial investment
under extreme prepayment scenarios.
Subordinated Securities may not be Repaid Upon Default. We invest in
subordinated tranches of commercial mortgage backed securities. In general,
subordinated tranches of commercial mortgage backed securities are entitled to
receive repayment of principal only after all principal payments have been made
on more senior tranches and also have subordinated rights as to receipt of
interest distributions. In addition, an active secondary market for such
subordinated securities is not as well developed as the market for other
mortgage backed securities. Accordingly, such subordinated commercial mortgage
backed securities may have limited marketability and there can be no assurance
that a more efficient secondary market will develop.
Third Parties That Operate Our Properties May Become Bankrupt
If third parties that operate properties we invest in become bankrupt, any
investments we make in assets operating in workout modes or under Chapter 11 of
the Bankruptcy Code could be subordinated or disallowed, and we could be liable
to third parties. Furthermore, if we receive any distributions relating to such
investments, they could be recovered from us if the distribution is regarded as
a fraudulent conveyance or preferential payment. Bankruptcy laws, including the
automatic stay imposed upon the filing of a bankruptcy petition, may delay our
ability to realize on collateral securing loans made by us or may adversely
affect the priority of our loans through doctrines such as "equitable
subordination" or may result in a restructure of the debt through principles
such as the "cramdown" provisions of the bankruptcy laws.
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We may be Unable to Consummate Acquisitions, Leasings and Financings on
Advantageous Terms Due in Part to Competition
We intend to continue to acquire, lease and finance health care facilities.
These types of investments in health care facilities entail the risk that they
will fail to perform in accordance with our expectations. Estimates of the costs
of improvements necessary for us to bring an acquired property up to market
standards may prove inaccurate. Further, we anticipate significant competition
for attractive investment opportunities from other major health care facility
investors with significant capital including other REITs, real estate
partnerships, health care providers and other investors, including banks and
insurance companies. We expect that future investments will be financed through
a combination of borrowings and proceeds from equity or debt offerings by us,
which could have an adverse effect on our cash flow. We may not be able to
invest in additional facilities. Our inability to finance any future investments
on favorable terms or the failure of investments to conform with our
expectations or investment criteria could have a direct and adverse impact on
us.
We are Subject to Risks and Liabilities in Connection with Properties Owned
Through Joint Ventures, Limited Liability Companies and Partnerships
We have ownership interests in joint ventures, limited liability companies
and/or partnerships. We may make additional investments through these ventures
in the future. Partnership, limited liability company or joint venture
investments may involve risks such as the following:
o our partners, co-members or joint venturers might become bankrupt (in
which event we and any other remaining general partners, members or joint
venturers would generally remain liable for the liabilities of the
partnership, limited liability company or joint venture);
o our partners, co-members or joint venturers might at any time have
economic or other business interests or goals which are inconsistent with
our business interests or goals;
o our partners, co-members or joint venturers may be in a position to take
action contrary to our instructions, requests, policies or objectives,
including our policy with respect to maintaining our qualification as a
REIT; and
o agreements governing joint ventures, limited liability companies and
partnerships often contain restrictions on the transfer of a joint
venturer's, member's or partner's interest or "buy-sell" or other
provisions which may result in a purchase or sale of the interest at a
disadvantageous time or on disadvantageous terms.
We will, however, generally seek to maintain sufficient control of our
partnerships, limited liability companies and joint ventures to permit us to
achieve our business objectives. Our organizational documents do not limit the
amount of available funds that we may invest in partnerships, limited liability
companies or joint ventures. The occurrence of one or more of the events
described above could have a direct and adverse impact on us.
<PAGE>
We Could Incur More Debt
We operate with a policy of incurring debt when, in the opinion of our
directors, it is advisable. Accordingly, we could become more highly leveraged.
The degree of leverage could have important consequences to stockholders,
including affecting our ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, development or other
general corporate purposes and making us more vulnerable to a downturn in
business or the economy generally.
Debt Financing, Financial Covenants, Degree of Leverage and Increases in
Interest Rates Could Adversely Affect Our Economic Performance
Scheduled Debt Payments Could Adversely Affect Our Financial Condition. We are
subject to risks normally associated with debt financing, including the risks
that our cash flow will be insufficient to make distributions to our
stockholders, that we will be unable to refinance existing indebtedness on our
properties (which in all cases will not have been fully amortized at maturity)
and that the terms of refinancing will not be as favorable as the terms of
existing indebtedness.
As of December 31, 1998, we had total debt outstanding of approximately
$229,695,000 including:
o approximately $100,000,000 outstanding under our senior unsecured $170
million revolving line of credit with a maturity date of October 3, 2000
and a current interest rate of LIBOR plus 1.25%;
o $56,667,000 aggregate principal amount of convertible subordinated
debentures with maturities in 1999, 2001 and 2002 and a weighted average
interest rate of 8.3%;
o $17,596,000 aggregate principal amount of capital leases and tax exempt
revenue bonds with various maturities through 2025 and a weighted average
interest rate of 7.2%;
o $55,432,000 aggregate principal amount of mortgage loans with various
maturities ranging from 2002 through 2006 and a weighted average interest
rate of 10.6%;
If we are unable to refinance or extend principal payments due at maturity or
pay them with proceeds of other capital transactions, we expect that our cash
flow will not be sufficient in all years to pay distributions to our
stockholders and to repay all such maturing debt. Furthermore, if prevailing
interest rates or other factors at the time of refinancing (such as the
reluctance of lenders to make commercial real estate loans) result in higher
interest rates upon refinancing, the interest expense relating to that
refinanced indebtedness would increase. This increased interest expense would
adversely affect our financial condition and results of operations.
Rising Interest Rates Could Adversely Affect Our Cash Flow. As of December 31,
1998, we had $100,000,000 outstanding under a variable rate line of credit. In
addition, we may incur other variable rate indebtedness in the future. Increases
in interest rates on this indebtedness could increase our interest expense,
which would adversely affect our financial condition and results of operations.
Accordingly, we have entered into an interest rate swap agreement, which expires
in November 2000, to effectively fix our interest rate exposure on our line of
credit. We may in the future engage in further transactions to limit our
exposure to rising interest rates.
We Are Dependent on External Sources of Capital. In order to qualify as a REIT
under the Internal Revenue Code, we are required each year to distribute to our
stockholders at least 95% of our REIT taxable income (determined without regard
to the dividends-paid deduction and by excluding any net
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capital gain). Because of this distribution requirement, we may not be able to
fund all future capital needs, including capital needs in connection with
acquisitions, from cash retained from operations. As a result, to fund capital
needs, we rely on third-party sources of capital, which we may not be able to
obtain on favorable terms or at all. Our access to third-party sources of
capital depends upon a number of factors, including general market conditions
and the market's perception of our growth potential and our current and
potential future earnings and cash distributions and the market price of the
shares of our capital stock. Additional debt financing may substantially
increase our leverage.
Financial Covenants Could Adversely Affect our Financial Condition. If a
property is mortgaged to secure payment of indebtedness and we are unable to
meet mortgage payments, the mortgagee could foreclose on the property, resulting
in loss of income and asset value. The mortgages on our properties contain
customary negative covenants which, among other things, limit our ability,
without the prior consent of the lender, to further mortgage the property, to
enter into new leases or materially modify existing leases, and to discontinue
insurance coverage. In addition, our line of credit contains customary
restrictions, requirements and other limitations on our ability to incur
indebtedness, including maximum leverage ratios, minimum debt-service coverage
ratios, cash flow coverage ratios and minimum consolidated tangible net worth.
Foreclosure on mortgaged properties or an inability to refinance existing
indebtedness would likely have a negative impact on our financial condition and
results of operations.
We Could Default on Cross-Defaulted Debt. Our line of credit and convertible
subordinated debenture indenture contain cross-default provisions which are
triggered in the event that our other material indebtedness is in default. These
cross-default provisions may require us to repay or restructure the line of
credit and the convertible subordinated debentures in addition to any mortgage
or other debt which is in default, which could adversely affect our financial
condition and results of operations.
Our Hedging Policies Involve Risks of Unanticipated Movements in Interest Rates
In connection with our line of credit, we have employed hedging techniques
designed to protect us against adverse movements in interest rates. While we may
benefit from the use of these hedging mechanisms generally, unanticipated
changes in interest rates, securities prices, or currency exchange rates may
result in a poorer overall performance for us than if it had not entered into
such hedging transactions.
In connection with the financing of real estate investments, we may use
derivative financial instruments primarily to reduce exposure to adverse
fluctuations in interest rates and foreign exchange rates. We do not intend to
enter into derivative financial instruments for trading purposes. We would use
any derivative position we maintain to reduce risk by hedging an underlying
economic exposure. We intend to invest in derivatives having straightforward
instruments with liquid markets. In order to reduce counter-party credit or
legal enforcement risk, we will have all counter-parties be major investment or
commercial banks and we will execute all transactions with documentation
consistent with accepted industry practice.
<PAGE>
Conflicts of Interest
Some of our Executive Officers and Board Members are also Executive Officers and
Board Members of a Real Estate and Healthcare Investment Company.
o Andre C. Dimitriadis, who is currently our Chairman and Chief Executive
Officer serves in the same positions with LTC Healthcare, Inc., a Nevada
corporation ("LTC Healthcare");
o James J. Pieczynski, who is currently our President and Chief Financial
Officer serves in the same positions with LTC Healthcare; and
o Christopher T. Ishikawa, who is currently our Senior Vice President and
Chief Investment Officer serves in the same positions with LTC Healthcare.
LTC Healthcare engages in the following activities: (1) ownership of leveraged
properties leased to third parties; (2) ownership of secured high yield mortgage
loans; (3) operation of long-term care facilities; (4) development of long-term
care properties, and (5) ownership of equity investments in long-term care
companies. Although none of the members of our management is committed to
spending a particular amount of time on LTC Healthcare's affairs, each of the
members of management of LTC Healthcare spend approximately 25% of his or her
time on LTC Healthcare's affairs. The continued involvement in LTC Healthcare by
some of our executive officers and directors could divert management's attention
from our day-to-day operations.
Conflicts of Interest May Arise in Interpretations of Intercompany Agreements
Between our Company and LTC Healthcare. Because our management is largely the
same as LTC Healthcare's management, conflicts may arise with respect to the
operation and effect of our intercompany agreements and relationships which
could have an adverse effect on us if not properly resolved. More specifically,
overlapping members of the board of directors and senior management of both
companies may be presented with conflicts of interest with respect to matters
affecting us and LTC Healthcare, such as the determination of which company may
take advantage of potential business opportunities, decisions concerning the
business focus of each company (including decisions concerning the types of
properties and geographic locations in which such companies make investments),
potential competition between the business activities conducted, or sought to be
conducted, by such companies (including competition for properties and tenants),
possible corporate transactions (such as acquisitions), and other strategic
decisions affecting the future of such companies. Conflicts also may arise with
respect to the restriction on LTC Healthcare's right to engage in activities or
make investments that involve real estate unless we were first offered the
opportunity and declined to pursue such activities or investments.
If We Issue Additional Equity Securities, the Investment of Existing
Stockholders Will be Diluted
We may from time to time raise additional capital from the issuance and sale of
equity securities. Any such issuances may significantly dilute the interests of
the existing holders of our securities, including our common stock.
Limitations in Our Charter and Bylaws Could Prevent a Change in Control
Our Charter and Bylaws contain provisions that may delay, defer or prevent a
change in control or other transaction that could provide the holders of our
common stock with the opportunity to realize a
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premium over the then-prevailing market price for our common stock. To maintain
our qualification as a REIT for federal income tax purposes:
o Not more than 50% in value of our outstanding stock may be owned,
actually or constructively, by five or fewer individuals (as defined in
the Internal Revenue Code to include certain entities) during the last
half of a taxable year after the first taxable year for which a REIT
election is made.
o After the first taxable year for which a REIT election is made, our
common stock must be held by a minimum of 100 persons for at least 335
days of a 12-month taxable year (or a proportionate part of a taxable year
of less than 12 months).
o If we, or an owner of 10% or more of our stock, actually or
constructively owns 10% or more of one of our tenants (or a tenant of any
partnership in which we are a partner), the rent received by us (either
directly or through any such partnership) from that tenant will not be
qualifying income for purposes of the REIT gross income tests of the
Internal Revenue Code.
In order to protect us against the risk of losing our REIT status for federal
income tax purposes, we prohibit the ownership (actually or by virtue of
application of certain constructive ownership provisions of the Internal Revenue
Code) by any single person of more than 9.8% (by value or number of shares,
whichever is more restrictive) of the issued and outstanding shares of our
common stock and more than 9.8% (by value or number of shares, whichever is more
restrictive) of the issued and outstanding shares of each class of our preferred
stock by any single person so that no such person, taking into account all of
our stock so owned by such person, may own in excess of 9.8% of our issued and
outstanding capital stock. We refer to this limitation as the "ownership limit."
We will redeem shares acquired or held in excess of the ownership limit. In
addition, any acquisition of our common stock or preferred stock that would
result in our disqualification as a REIT is null and void. The ownership limit
may have the effect of delaying, deferring or preventing a change in control
and, therefore, could adversely affect our stockholders' ability to realize a
premium over the then-prevailing market price for the shares of our common stock
in connection with such transaction. The Board of Directors of has waived the
ownership limit applicable to our common stock with respect to National Health
Investors, Inc., allowing it to own greater than 9.8% of our outstanding shares
of Series C Preferred Stock.
Our Charter authorizes us to issue additional shares of common stock and one or
more series of preferred stock and to establish the preferences, rights and
other terms of any series of preferred stock that we issue. Although our Board
of Directors has no intention to do so at the present time, it could establish a
series of preferred stock that could delay, defer or prevent a transaction or a
change in control that might involve a premium price for our common stock or
otherwise be in the best interests of our stockholders.
Our Charter, our Bylaws and Maryland law also contain other provisions that may
delay, defer or prevent a transaction, including a change in control, that might
involve payment of a premium price for our common stock or otherwise be in the
best interests of our stockholders. Those provisions include the following:
o the provision in our Bylaws requiring a two-thirds vote of stockholders
for any amendment of our Bylaws;
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o the requirement in the Bylaws that the request of the holders of 25% or
more of our common stock is necessary for stockholders to call a special
meeting;
o the requirement of Maryland law that stockholders may only take action
by written consent with the unanimous approval of all stockholders
entitled to vote on the matter in question; and
o the requirement in the Bylaws of advance notice by stockholders for the
nomination of directors or proposal of business to be considered at a
meeting of stockholders.
These provisions may impede various actions by stockholders without approval of
our Board of Directors, which in turn may delay, defer or prevent a transaction
involving a change of control.
We Could Change Our Investment and Financing Policies without a Vote of
Stockholders
Subject to our fundamental investment policy to maintain our qualification as a
REIT (unless a change is approved by the Board of Directors under certain
circumstances), the Board of Directors will determine our investment and
financing policies, our growth strategy and our debt, capitalization,
distribution and operating policies. Although the Board of Directors has no
present intention to revise or amend these strategies and policies, the Board of
Directors may do so at any time without a vote of stockholders. Accordingly,
stockholders will have no control over changes in our strategies and policies
(other than through the election of directors), and any such changes may not
serve the interests of all stockholders and could adversely affect our financial
condition or results of operations, including our ability to distribute cash to
stockholders.
Various Market Conditions Affect the Price of Our Common Stock
As with other publicly-traded equity securities, the market price of our common
stock will depend upon various market conditions, which may change from time to
time. Among the market conditions that may affect the market price of our common
stock are the following:
o the extent of investor interest in us;
o the general reputation of REITs and the attractiveness of their equity
securities in comparison to other equity securities (including securities
issued by other real estate-based companies);
o our financial performance and that of our operators;
o the contents of analyst reports regarding us and the REIT industry; and
o general stock and bond market conditions, including changes in interest
rates on fixed income securities which may lead prospective purchasers of
our common stock to demand a higher annual yield from future
distributions. Such an increase in the required yield from distributions
may adversely affect the market price of our common stock.
Other factors such as governmental regulatory action and changes in tax laws
could also have a significant impact on the future market price of our common
stock.
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Earnings and Cash Distributions, Asset Value and Market Interest Rates Affect
the Price of Our Common Stock
The market value of the equity securities of a REIT generally is based primarily
upon the market's perception of the REIT's growth potential and its current and
potential future earnings and cash distributions, and is based secondarily upon
the real estate market value of the underlying assets. For that reason, shares
of our common stock may trade at prices that are higher or lower than the net
asset value per share. To the extent we retain operating cash flow for
investment purposes, working capital reserves or other purposes, these retained
funds, while increasing the value of our underlying assets, may not
correspondingly increase the market price of our common stock. Our failure to
meet the market's expectation with regard to future earnings and cash
distributions likely would adversely affect the market price of our common
stock. Another factor that may influence the price of our common stock will be
the distribution yield on our common stock (as a percentage of the price of our
common stock) relative to market interest rates. An increase in market interest
rates might lead prospective purchasers of our common stock to expect a higher
distribution yield, which would adversely affect the market price of our common
stock. If the market price of our common stock declines significantly, we might
breach covenants with respect to debt obligations, which might adversely affect
our liquidity and our ability to make future acquisitions and pay distributions
to our stockholders.
There are Federal Income Tax Risks Associated with a REIT
Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences to Our
Stockholders. We intend to operate so as to qualify as a REIT under the Internal
Revenue Code. We believe that we have been organized and have operated in a
manner which would allow us to qualify as a REIT under the Internal Revenue Code
beginning with our taxable year ended December 31, 1992. However, it is possible
that we have been organized or have operated in a manner which would not allow
us to qualify as a REIT, or that our future operations could cause us to fail to
qualify. Qualification as a REIT requires us to satisfy numerous requirements
(some on an annual and quarterly basis) established under highly technical and
complex Code provisions for which there are only limited judicial and
administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within our control. For example,
in order to qualify as a REIT, at least 95% of our gross income in any year must
be derived from qualifying sources, and we must pay dividends to stockholders
aggregating annually at least 95% of our REIT taxable income (determined without
regard to the dividends paid deduction and by excluding capital gains).
Legislation, new regulations, administrative interpretations or court decisions
could significantly change the tax laws with respect to qualification as a REIT
or the federal income tax consequences of such qualification. However, we are
not aware of any pending tax legislation that would adversely affect our ability
to operate as a REIT.
If we fail to qualify as a REIT in any taxable year, we will be subject to
federal income tax (including any applicable alternative minimum tax) on our
taxable income at regular corporate rates. Unless we are entitled to relief
under statutory provisions, we would be disqualified from treatment as a REIT
for the four taxable years following the year during which we lost
qualification. If we lose our REIT status, our net earnings available for
investment or distribution to stockholders would be significantly reduced for
each of the years involved. In addition, we would no longer be required to make
distributions to stockholders.
We Pay Some Taxes. Even if we qualify as a REIT, we are subject to certain
federal, state and local taxes on our income and property.
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We May Experience Risks Associated With Year 2000 Problems
We believe our internal accounting and information systems will be Year 2000
compliant by mid- 1999. However, we cannot guarantee that we will achieve these
results. In addition, we cannot be assured that other third parties whose
systems and operations impact us will be compliant nor can we and our lessees be
assured that the federal and state governments, upon which our lessees rely for
Medicare and Medicaid revenue, will be in compliance in a timely manner. If we,
our third-party tenants or other third-parties, including the federal and state
governments, with which we and our lessees do business, are not year 2000
compliant, we could experience disruptions to our business and operations that
could have a material impact on our financial position, results of operations or
liquidity.
We will also have year 2000 exposure in non-information technology areas as it
relates to owned properties. There is a risk that embedded chips in elevators,
security systems, electrical systems and similar technology-driven devices may
stop functioning on January 1, 2000. All of our owned properties are leased
under triple-net leases and as such, the cost to repair any of these items will
be paid by the lessee.
We are Dependent on our Key Personnel
We depend on the efforts of our executive officers, particularly Messrs.
Dimitriadis and Pieczynski. While we believe that we could find suitable
replacements for these key personnel, the loss of their services or the
limitation of their availability could have an adverse impact on our operations.
Although we have entered into employment agreements with our executive officers,
these employment agreements may not assure their continued service.
