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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 1-11314
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:
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TITLE OF STOCK NAME OF EACH EXCHANGE ON 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
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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 $145,150,000 as of February 23, 2000.
26,009,254
(Number of shares of common stock outstanding as of February 23, 2000)
Part III is incorporated by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held on May 22, 2000.
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ITEM 1. BUSINESS
GENERAL
LTC 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, 1999, we had a gross investment portfolio (adjusted to include
mortgage loans to third parties underlying our investment in REMIC certificates)
of $923,701,000. Our investment portfolio consisted of $611,437,000 in 266
skilled nursing facilities with 30,304 beds, $280,747,000 in 96 assisted living
facilities with 4,553 units and $31,517,000 in six schools. The properties in
our portfolio are operated by 71 healthcare providers and two education
providers in 36 states.
OWNED PROPERTIES. During 1999, we acquired seven skilled nursing facilities with
a total of 804 beds, three assisted living residences with a total of 169 units
and one rehabilitation hospital with 84 beds for a gross purchase price of
$36,453,000 and invested approximately $8,797,000 in the expansion and
improvement of existing properties. Mortgage loans with outstanding principal
balances totaling $47,554,000 that were secured by 15 long-term care facilities
with 1,116 beds/units and one educational facility were converted into owned
properties. As of December 31, 1999, our investment in owned properties
consisted of 69 skilled nursing facilities with a total of 8,193 beds, 85
assisted living facilities with a total of 3,894 units and six schools in 26
states, representing a net investment of approximately $494,913,000.
Our long-term care 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 1999, we originated mortgage loans of $6,678,000 secured by
three assisted living facilities with 106 units and advanced $1,890,000 for
renovation and expansion under a mortgage loan previously provided on an
educational facility. At December 31, 1999, we had 56 mortgage
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loans secured by first mortgages on 54 skilled nursing facilities with a total
of 5,982 beds and 11 assisted living residences with 659 units located in 23
states.
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 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 and 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. At December 31, 1999, we had
investments in REMIC certificates with a carrying value of $97,605,000 and an
estimated fair value of approximately $89,349,000.
FINANCING AND OTHER TRANSACTIONS. During 1999, we obtained a $25,000,000 term
loan that bears interest at LIBOR plus 1.25% and matures on October 2, 2000.
Five of the skilled nursing facilities acquired during 1999 were acquired
subject to the assumption of existing non-recourse mortgage debt of $10,595,000
that bears interest at a weighted average rate of 11.4% and two of the skilled
nursing facilities and the rehabilitation hospital were acquired with
non-recourse mortgage financing of $6,500,000 from a third-party lender that
bears interest at the prime rate of interest. During 1999, we also obtained
non-recourse mortgage financing secured by 10 existing assisted living
facilities totaling $18,485,000 and bearing interest at 8.81% from a third-party
lender.
We have a $170,000,000 Senior Unsecured Revolving Line of Credit that expires on
October 3, 2000. As of December 31, 1999 borrowings of $135,000,000 bearing
interest at LIBOR plus 1.25% were outstanding under the revolving credit
facility.
INVESTMENT AND OTHER POLICIES
OBJECTIVES AND POLICIES. We currently invest primarily in income-producing
long-term care facilities. Our investments consist of:
- mortgage loans secured by long-term care facilities;
- fee ownership of long-term care facilities which are leased to
operators; or
- 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:
- type of property;
- the location;
- construction quality, condition and design of the property;
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- the property's current and anticipated cash flow and its adequacy to
meet operational needs and lease obligations or debt service
obligations;
- the quality, reputation and solvency of the property's operator;
- the payor mix of private, Medicare and Medicaid patients;
- the growth, tax and regulatory environments of the communities in
which the properties are located;
- the occupancy and demand for similar facilities in the area
surrounding the property, and
- 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 and 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.
The terms of our existing revolving credit facility limit our investments in
the education and child care industry to $37.5 million and limit our
investments outside of health care real estate and the education and child
care industry to $20 million. There are no other formal restrictions imposed
in our investment in any single type of property or joint venture however,
difficult capital market conditions in the health care industry have limited
our access to traditional forms of growth capital. As a result of the tight
capital markets for the health care industry, we reduced our investment
activity in 1999 and intend to continue to limit our investment activity in
2000. At December 31, 1999, we had no outstanding commitments to provide
mortgage or sale/leaseback financing.
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
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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 prohibitions against:
- acquiring any real property unless the consideration paid for such
real property is based on the fair market value of the property;
- 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;
- investing in commodities or commodity futures contracts (other than
interest rate futures, when used solely for hedging purposes);
- 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;
- 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
In the healthcare industry, we compete for real property investments with
healthcare providers, other healthcare related REITS, real estate partnerships,
banks, insurance companies and other investors. Many of our competitors are
significantly larger and have greater financial resources and lower cost of
capital than we have available to us. Our ability to compete successfully for
real property investments will be determined by numerous factors, including our
ability to identify suitable acquisition targets, our ability to negotiate
acceptable terms for any such acquisition and the availability and cost of
capital. Difficult capital market conditions for the health care industry have
limited our access to traditional forms of growth capital. As a result of the
tight capital markets for the health care industry, we reduced our investment
activity in 1999 and intend to continue to limit our investment activity in
2000.
The operators of our healthcare properties compete on a local, regional and, in
some instances, national basis with other healthcare operators. The ability of
our operators to compete successfully for patients at our facilities depends
upon several factors, including the quality of care and services provided at the
facilities, the operational reputation of the providers, physician referral
patterns, physical appearances of the facilities, family preferences, financial
condition of the operator and other competitive systems of healthcare delivery
within the community, population and demographics.
DIFFICULTIES EXPERIENCED BY MAJOR OPERATORS
The regulatory and reimbursement environments in which nursing homes operate
have experienced significant adverse changes in recent months. See
"GOVERNMENT FINANCING AND REGULATION OF HEALTH CARE". Given the negative
impact of these changes on the financial performance of operators of
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nursing homes and assisted living facilities, we evaluated our real estate
investment portfolio during the fourth quarter of 1999. As a result of our
analysis, we recorded a non-cash impairment charge and costs of foreclosure
and lease terminations on certain properties in our real estate investment
portfolio totaling approximately $14.9 million. See "Item 8. FINANCIAL
STATEMENTS- NOTE 5. IMPAIRMENT CHARGE."
SUN HEALTHCARE GROUP, INC. During October 1999, Sun Healthcare Group, Inc.
("Sun") filed for reorganization under Chapter 11 of the Bankruptcy Code.
Prior to Sun's filing for bankruptcy protection, we initiated negotiations
with Sun that resulted in the restructuring and reduction of our investment
in properties operated by Sun. During 1999, Sun was replaced as the operator
of 18 properties. In addition, mortgage loans on two facilities leased to Sun
were repaid by the borrower. In addition to the above, we further reduced our
investment in properties operated by Sun by terminating the lease on two
properties, converting a mortgage loan into an owned property, consenting to
the acquisition of one property for the amount of the debt that was
outstanding by LTC Healthcare and acquiring five properties for the amount of
debt that was outstanding. Eight properties have, in turn, been leased to LTC
Healthcare, Inc. ("LTC Healthcare"). As a result, at December 31, 1999, Sun
operated 41 facilities representing approximately 12% ($111.6 million) of our
gross real estate investment portfolio. The facilities operated by Sun at
December 31, 1999 consisted of the following:
- - approximately $39.4 million invested in long-term care facilities leased
directly to Sun;
- - approximately $11.9 million of mortgage loans secured by long-term care
facilities that are owned and operated by Sun;
- - approximately $9.9 million of mortgage loans payable to the REMIC pools
underlying our investment in REMIC certificates that are secured by
long-term care facilities owned and operated by Sun;
- - approximately $3.5 million of mortgage loans secured by long-term care
facilities that are owned by independent parties who lease the property to
Sun;
- - approximately $46.9 million of mortgage loans payable to the REMIC pools
underlying our investment in REMIC certificates that are secured by
long-term care facilities owned by independent parties who lease the
property to Sun.
Sun is currently operating its business as a debtor-in-possession subject to the
jurisdiction of the Bankruptcy Court. Effective December 1, 1999, two mortgage
loans secured by five skilled nursing facilities with aggregate outstanding
principal of $9,047,000 and a weighted average interest rate of 11.1% were
placed on temporary non-accrual due to non-payment pending the outcome of our
current negotiations with Sun.
INTEGRATED HEALTH SERVICES, INC. During February 2000, Integrated Health
Services, Inc. ("Integrated Health") filed for reorganization under Chapter 11
of the Bankruptcy Code. At December 31, 1999, Integrated Health operated 16
facilities representing approximately 4.6% ($42.6 million) of our gross real
estate investment portfolio. The facilities operated by Integrated Health at
December 31, 1999 consisted of the following:
- - a mortgage loan of approximately $2.7 million payable to a REMIC pool
underlying our investment in REMIC certificates that is secured by a
skilled nursing facility that is owned and operated by Integrated Health;
- - approximately $15.1 million of mortgage loans secured by skilled nursing
facilities that are owned by independent parties who lease the property to
Integrated Health;
- - approximately $24.8 million of mortgage loans payable to the REMIC pools
underlying our investment in REMIC certificates that are secured by skilled
nursing facilities owned by independent parties who lease the property to
Integrated Health.
Integrated Health is currently operating its business as a debtor-in-possession
subject to the jurisdiction of the Bankruptcy Court. All payments due on our
investments with Integrated Health are current.
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RETIREMENT GROUP, L.L.C. At December 31, 1999, we had three mortgage loans to
Retirement Group, L.L.C. ("Retirement Group") secured by three skilled nursing
facilities with an aggregate outstanding principal balance of $8.5 million. In
addition, the mortgage loans securing the 1998-1 REMIC pool included one
mortgage loan to Retirement Group secured by two skilled nursing facilities with
an outstanding principal balance of $8.6 million. Retirement Group had leased
the properties securing the loans to Sun who, due to a dispute between Sun and
Retirement Group, was offsetting the lease payments due to Retirement Group
against certain alleged obligations of Retirement Group to Sun. Since Retirement
Group was not receiving the lease payments from Sun they were not making the
mortgage payments due to us or the 1998-1 REMIC pool. We initiated foreclosure
proceedings against Retirement Group; however, in May 1999 Retirement Group
filed a petition for reorganization under Chapter 11 of the Bankruptcy Code and
the Bankruptcy Court placed a temporary stay on the foreclosure proceedings.
Subsequently, we entered into a stipulation with Retirement Group whereby, upon
confirmation of a plan of reorganization by the Bankruptcy Court, Retirement
Group will pay all unpaid pre-petition and post-petition interest by December
31, 2000. Concurrent with the stipulation we entered into with Retirement Group,
Retirement Group terminated the leases with Sun and four of the properties are
now operated by other long-term care providers. The remaining facility has been
temporarily closed. Retirement Group resumed principal and interest payments
beginning September 1, 1999.
SENSITIVE CARE, INC. During January 1999, the state of Texas took control of the
operations of five skilled nursing facilities that were leased to Sensitive
Care, Inc. ("Sensitive Care"). In response to the actions taken by the state of
Texas, on March 1, 1999, we leased the five skilled nursing facilities to
another of our Texas-based operators. Prior to licensure for the five
facilities, the new operator was operating the properties under trustee
supervision and Medicaid payments were placed on hold. During 1999, we provided
this operator with a line of credit secured by patient receivables to fund
working capital requirements while Medicaid payments were on hold.
Beginning January 1, 2000, LTC Healthcare began operating these five facilities.
NEWCARE HEALTH CORP. On June 22, 1999, Newcare Health Corp. ("Newcare") filed
for reorganization under Chapter 11 of the Bankruptcy Code. At the time of
the bankruptcy filing we leased two skilled nursing facilities and one
assisted living facility to Newcare and had mortgage loans to Newcare secured
by three skilled nursing facilities. On September 30, 1999, in an auction
held by the Bankruptcy Court, we purchased the three skilled nursing
facilities for the amount of the outstanding mortgage loans and the two
skilled nursing facilities and one assisted living facility were leased to
another operator. On October 1, 1999, the three skilled nursing facilities
acquired in the auction were leased to LTC Healthcare. On January 1, 2000 LTC
Healthcare began leasing the two skilled nursing facilities that were
previously leased to another operator.
Other than Sun, no long-term care provider operated over 10% of our adjusted
gross real estate investment portfolio. Sun is a publicly traded company, and as
such is subject to the filing requirements of the Securities and Exchange
Commission. Our financial position and our ability to make distributions may be
adversely affected by financial difficulties experienced by Sun, or any of our
other 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.
LTC HEALTHCARE
During 1998, we acquired 4,002 shares of LTC Healthcare, Inc. ("LTC Healthcare")
non-voting common stock for $2,001,000 in cash. We also contributed net assets
with a book value of $21,619,000 in exchange for 36,000 additional shares of LTC
Healthcare non-voting common stock a note receivable from LTC
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Healthcare. On September 30, 1998, the 40,002 shares of LTC Healthcare
non-voting common stock held by us 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 of our common stock, Cumulative Convertible
Series C Preferred Stock and Convertible Subordinated Debentures. We incurred
costs of approximately $500,000 in connection with the distribution. Upon
completion of the distribution, LTC Healthcare began operating as a separate
public company.
As of December 31,1999, 17 of our skilled nursing facilities with a gross
carrying value of $36,055,000 were leased to Healthcare. Also, as of December
31, 1999, Healthcare had mortgage loans secured by eight skilled nursing
facilities with total outstanding principal of $30,424,000 and a weighted
average interest rate of 9.18% payable to REMIC pools originated by us. Two
of the skilled nursing facilities securing the mortgage loans payable to the
REMIC pools are operated by Healthcare and the remaining six skilled nursing
facilities are leased to third party operators. Effective January 1, 2000,
Healthcare began operating an additional 13 facilities with a gross carrying
value of $40,009,000 owned by us. Leases on 19 of the facilities operated by
Healthcare with current annual base rents totaling $4,118,000 will expire in
2000. The terms of these leases will be renegotiated prior to their
expiration; however, there can be no assurance that the leases will be
renewed or that if renewed, the annual base rents will remain at the current
level. Current annual base rents on the remaining 11 facilities leased to LTC
Healthcare are approximately $3,979,000. As of December 31, 1999 and 1998, we
owned 239,900 and 299,900 shares, respectively, of LTC Healthcare common
stock.
EMPLOYEES
We currently employ 21 persons.
GOVERNMENTAL REGULATION
GENERAL. The operators of our healthcare properties derive a substantial portion
of their revenue from third party payors, including the Medicare and Medicaid
programs. The Medicare program was enacted in 1965 to provide a nationwide,
federally funded health insurance program for the elderly and certain disabled
persons. The Medicaid program is a joint federal-state cooperative arrangement
established for the purpose of enabling states to furnish medical assistance on
behalf of aged, blind or disabled individuals, and members of families with
dependent children, whose income and resources are insufficient to meet the
costs of necessary medical services. Within the Medicare and Medicaid statutory
framework, there are substantial areas subject to administrative regulations and
rulings, interpretation and discretion which may affect payments made to
providers under these programs. The amounts of program payments received by our
operators can be changed by legislative or regulatory actions and by
determinations made by fiscal intermediaries and other payment agents acting on
behalf of the programs.
COST BASED REIMBURSEMENT. The Medicare program historically utilized a
cost-based retrospective reimbursement system for nursing facilities. These
facilities were reimbursed for reasonable direct and indirect allowable costs
incurred in providing "routine services" (as defined by the program and subject
to certain limits) as well as capital costs and ancillary costs. Pursuant to the
Balanced Budget Act of 1997 (the "Balanced Budget Act") discussed below,
Medicare is phasing in a prospective payment system ("PPS") for skilled nursing
facilities starting with cost reporting periods beginning on or after July 1,
1998.
BALANCED BUDGET ACT - MEDICARE. The Balanced Budget Act, enacted on August 5,
1997, made numerous changes to the Medicare and Medicaid programs which affect
operators of our healthcare properties. With respect to the Medicare program,
the law required the Secretary of the Department of Health and Human Services
("HHS") to establish a PPS system for Medicare Part A skilled nursing facility
services, under which facilities are paid a federal per diem rate for virtually
all covered services. The PPS system is being
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phased in over three cost reporting periods, and started with cost reporting
periods beginning on or after July 1, 1998. Subsequent legislation (see
discussion below on the Balanced Budget Refinement Act) will increase the per
diem rate for certain higher-acuity patients.
All of our operators of skilled nursing facilities that participate in the
Medicare program are operating under PPS. PPS has resulted in more intense price
competition and lower margins for operators. There can be no assurance that
operators will be successful in reducing costs of services below the PPS
reimbursement rates, or that the failure of operators to do so will not have a
material adverse effect on their liquidity, financial condition and results of
operations which in turn could affect adversely their ability to make rental
payments or mortgage payments to us.
BALANCED BUDGET REFINEMENT ACT - MEDICARE. The Balanced Budget Refinement Act,
enacted November 29, 1999, is a legislative response to mitigate some of the
effects of the Balanced Budget Act. With respect to skilled nursing facilities,
the law temporarily increases the PPS per diem rates by 20 percent for 15
patient categories (based on acuity). This payment increase is intended to
compensate skilled nursing facilities for the provision of care to medically
complex patients, pending appropriate refinements to the PPS system. Facilities
providing care to patients falling within every non-rehabilitation patient
category above the presumptive (rebuttable) Medicare eligibility line will
benefit from this increase. Three patient categories falling within the "high"
and "medium" rehabilitation category also are subject to the increase. The
increased payments will begin on April 1, 2000, and end before the later of (1)
October 1, 2000, or (2) the date the Health Care Financing Administration
("HCFA") implements a refined PPS system that better accounts for
medically-complex patients. The law also provides for a four percent increase in
the federal per diem payment rates for all patient acuity categories in both
fiscal years 2001 and 2002. This increase is calculated exclusive of the 20
percent rate increase for the 15 acuity categories subject to direct
adjustments. The 20 percent rate increase for medical complexity will not be
built into the base payment rates, however, and therefore future updates to the
federal payment rates will be calculated from the initial base rate. The law
also provides for a one-time waiver for skilled nursing facilities which elect
to immediately transition to the full federal rate (rather than a blend of the
federal rate and a facility-specific rate during the three year transition
period) on or after December 15, 1999, for cost reporting periods beginning on
or after January 1, 2000. In addition to the per diem rate increases for certain
patient categories, the Balanced Budget Refinement Act temporarily suspended for
years 2000 and 2001 the reimbursement caps on Part B therapy services imposed by
the Balanced Budget Act.
BALANCED BUDGET ACT - MEDICAID. The Balanced Budget Act also contains a
number of changes affecting the Medicaid program. Among other things, the law
repealed the Boren Amendment, which required state Medicaid programs to
reimburse nursing facilities for the costs that are incurred by efficiently
and economically operated nursing homes. It is unclear at this time whether
state Medicaid programs will adopt changes in their Medicaid reimbursement
systems, or, if adopted and implemented, what effect such initiatives would
have on operators. In any event, there can be no assurance that future
changes in Medicaid reimbursement rates to nursing facilities will not have
an adverse effect on the operators, and thus, us. Further, the Balanced
Budget Act allows states to mandate enrollment in managed care systems
without seeking approval from the Secretary of HHS for waivers from certain
Medicaid requirements as long as certain standards are met. These managed
care programs have historically exempted institutional care although some
states have instituted pilot programs to provide such care under managed care
programs. Effective for Medicaid services provided on or after October 1,
1997, states have considerable flexibility in establishing payment rates. We
are not able to predict whether any states' waiver provisions will change the
Medicaid reimbursement systems for long-term care facilities from cost-based
or fee-for-service to managed care negotiated or capitated rates or otherwise
affect the level of payments to operators. Significant limits on the scope of
services reimbursed and on rates of reimbursement under the Medicaid program
could have a material adverse effect on the operators' liquidity, financial
condition and results of operations which in turn could affect adversely
their ability to make rental payments or mortgage payments to us.
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FUTURE LEGISLATIVE CHANGES. We expect Congress to continue to consider measures
to reduce the growth in Medicare and Medicaid expenditures. Both the Medicare
and Medicaid programs are subject to statutory and regulatory changes,
administrative rulings, interpretations of policy, intermediary determinations
and governmental funding restrictions, all of which may materially increase or
decrease the rate of program reimbursement to healthcare facilities. We cannot
predict at this time whether any additional measures will be adopted or if
adopted and implemented, what effect such proposals would have on operators of
our healthcare properties. There can be no assurance that payments under state
and federal governmental programs will remain at levels comparable to present
levels or will be sufficient to cover the costs of patients eligible for
reimbursement pursuant to the programs.
Certain states are currently evaluating various proposals to restructure
healthcare delivery within their respective jurisdictions. It is uncertain at
this time what legislation of this type will ultimately be enacted and
implemented or whether other changes in the administration or interpretation of
governmental healthcare programs will occur. We anticipate that state
legislatures will continue to review and assess various healthcare reform
proposals and alternative healthcare systems and payment methodologies. We are
unable to predict the ultimate impact of any future state restructuring of the
healthcare delivery system, but such changes could have a material adverse
effect on the operators' liquidity, financial condition and results of
operations which in turn could affect adversely their ability to make rental
payments or mortgage payments to us.
LICENSURE. Our healthcare properties are subject to extensive state and local
laws and regulations relating to licensure, conduct of operations, ownership of
facilities, and services provided within the facilities. The nursing facilities
of our operators are subject to regulation and licensing by state and local
health and social services agencies and other regulatory authorities. In order
to maintain their operating licenses, healthcare facilities must comply with
standards concerning medical care, equipment and hygiene. Although regulatory
requirements vary from state to state, these requirements generally address
among other things: personnel education and training; staffing levels; patient
records; facility services; quality of care provided; physical residence
specifications; food and housekeeping services; and residents' rights and
responsibilities. These facilities are subject to periodic survey and inspection
by governmental authorities. Our facilities are also subject to various state
and local building codes and other ordinances, including zoning and safety
codes.
CERTIFICATE OF NEED. Certificate of Need ("CON") statutes and regulations
control the development and expansion of healthcare services and facilities in
certain states. The CON process is intended to promote quality healthcare and to
avoid the unnecessary duplication of services, equipment and facilities. CON or
similar laws generally require that approval be obtained from the designated
state health planning agency for certain acquisitions and capital expenditures,
and that such agency determine that a need exists prior to the expansion of
existing facilities, construction of new facilities, addition of beds,
acquisition of major items of equipment or introduction of new services.
Additionally, several states have instituted moratoria on new CONs or the
approval of new beds. CONs or other similar approvals may be required in
connection with our future acquisitions and/or expansions. There can be no
assurance that we or our operators will be able to obtain the CONs or other
approvals necessary for any or all such projects.
SURVEY AND CERTIFICATION. Long-term care facilities must comply with certain
requirements to participate either as a skilled nursing facility under
Medicare or a nursing facility under Medicaid. Regulations promulgated
pursuant to the Omnibus Budget Reconciliation Act of 1987 obligate facilities
to demonstrate compliance with requirements relating to resident rights,
resident assessment, quality of care, quality of life, physician services,
nursing services, pharmacy services, dietary services, rehabilitation
services, infection control, physical environment and administration.
Regulations governing survey, certification, and enforcement procedures to be
used by state and federal survey agencies to determine facilities' level of
compliance with the participation requirements for Medicare and Medicaid were
adopted by HCFA effective
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July 1, 1995. These regulations require that surveys focus on resident
outcomes. They also state that all deviations from participation requirements
will be considered deficiencies, but a facility may have certain minor
deficiencies and be in substantial compliance with the regulations. The
regulations identify various remedies that may be imposed against facilities
and specify the categories of deficiencies for which they will be applied.
These remedies include, but are not limited to: civil money penalties of up
to $10,000 per day or "per instance"; facility closure and/or transfer of
residents in emergencies; denial of payment for new or all admissions;
directed plans of correction; and directed in-service training. Failure to
comply with applicable requirements for participation may also result in
termination of the provider's Medicare and Medicaid provider agreements.
Termination of an operator's Medicare or Medicaid provider agreement could
have a material adverse effect on the operator's liquidity, financial
condition and results of operations which, in turn, could affect adversely
its ability to make rental payments or mortgage payments to us.
President Clinton has announced initiatives designed to improve the quality of
care in nursing homes and to reduce fraud in the Medicare program. These
initiatives include tougher enforcement measures by state surveying authorities,
empowering specialized contractors to track down Medicare scams and program
waste, and the creation of a Medicare financial management team made up of 100
"fraud fighters" to be located in the offices of every Medicare contractor
nationwide.
REFERRAL RESTRICTIONS AND FRAUD AND ABUSE. The Medicare and Medicaid
anti-kickback statute, 42 U.S.C. Section 1320a-7b(b), prohibits the knowing and
willful solicitation or receipt of any remuneration "in return for" referring an
individual, or for recommending or arranging for the purchase, lease, or
ordering, of any item or service for which payment may be made under Medicare or
a state healthcare program. In addition, the statute prohibits the offer or
payment of remuneration "to induce" a person to refer an individual, or to
recommend or arrange for the purchase, lease, or ordering of any item or service
for which payment may be made under the Medicare or state healthcare programs.
The statute and the so-called safe harbor regulations establish numerous
exceptions by defining conduct which is not subject to prosecution or other
enforcement remedies. Violation of the anti-kickback statute could result in
criminal conviction, as well as civil money penalties and exclusions.
The Ethics in Patient Referrals Act ("Stark I"), effective January 1, 1992,
generally prohibits physicians from referring Medicare patients to clinical
laboratories for testing if the referring physician (or a member of the
physician's immediate family) has a "financial relationship," through ownership
or compensation, with the laboratory. The Omnibus Budget Reconciliation Act of
1993 contains provisions commonly known as "Stark II" ("Stark II") expanding
Stark I by prohibiting physicians from referring Medicare and Medicaid patients
to an entity with which a physician has a "financial relationship" for the
furnishing of certain items set forth in a list of "designated health services,"
including physical therapy, occupational therapy, home health services, and
other services. Subject to certain exceptions, if such a financial relationship
exists, the entity is generally prohibited from claiming payment for such
services under the Medicare or Medicaid programs, and civil monetary penalties
may be assessed for each prohibited claim submitted.
Other provisions in the Social Security Act and in other federal and state laws
authorize the imposition of penalties, including criminal and civil fines and
exclusions from participation in Medicare and Medicaid, for false claims,
improper billing and other offenses.
We are unable to predict the effect of future administrative or judicial
interpretations of the laws discussed above, or whether other legislation or
regulations on the federal or state level in any of these areas will be adopted,
what form such legislation or regulations may take, or their impact on operators
of our healthcare properties. We endeavor to structure our arrangements with our
facilities' operators and others to comply with applicable regulatory
requirements, but there can be no assurance that statutory or regulatory
changes, or subsequent administrative rulings or interpretations, will not
require us to modify or restructure certain arrangements, or that we will not be
required to expend significant amounts to maintain compliance.
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DRAFT COMPLIANCE PROGRAM. On October 28, 1999, the Office of Inspector General
of HHS ("OIG") issued draft guidance to help nursing facilities design effective
voluntary compliance programs to prevent fraud, waste, and abuse in health care
programs, including Medicare and Medicaid. The draft guidance, COMPLIANCE
PROGRAM GUIDANCE FOR NURSING FACILITIES, was published as a notice in the
FEDERAL REGISTER. After reviewing and incorporating comments received during a
comment period, as appropriate, the OIG will publish a final version of the
voluntary compliance guidance in the FEDERAL REGISTER, which is expected in
Spring 2000.
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;
(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:
- 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,
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including rents from real property, or from certain types of
temporary investment income.
- 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.
Cancellation of indebtedness income generated by us is not taken into account in
applying the 75% and 95% income tests discussed above. 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 four tests relating to the nature of our assets.
- 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.
- Second, not more than 25% of our total assets may be represented
by securities other than those in the 75% asset class.
- 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.
- Fourth, the recently enacted Tax Relief Extension Act of 1999
("99 Act"), provides that, subject to certain exceptions, for
taxable years commencing after December 31, 2000, we may not own
more than 10 percent of the total value of the securities of any
corporation. See the 99 Act description contained at page 14.
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
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.
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 will be treated for tax purposes as a partnership or
qualified real estate investment trust
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<PAGE>
subsidiary, respectively, although no assurance can be given that the
Internal Revenue Service will not successfully challenge the status of any
such organization.
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% (90% for taxable years beginning after December 31, 2000) of
our "real estate investment trust taxable income" (computed without
regard to the dividends paid deduction and our net capital gain); and
(B) 95% (90% for taxable years beginning after December 31, 2000) 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 they are:
- declared before we timely file our tax return for such year;
- paid on or before the first regular dividend payment date after
such declaration; and
- elected by us and we 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% (90% for taxable years beginning after December
31, 2000), 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% (90% for taxable years beginning after December 31, 2000) 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.
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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.
99 ACT. The 99 Act has made a number of substantial changes to the qualification
and tax treatment of REITS. The REIT changes are generally effective for taxable
years commencing after December 31, 2000. The following is a brief summary of
certain of the significant REIT provisions contained in the 99 Act.
1) INVESTMENT LIMITATIONS AND TAXABLE REIT SUBSIDIARIES
The 99 Act modifies the REIT asset test by adding a requirement that except for
(I) "Safe Harbor Debt" and (II) the ownership of stock in "taxable REIT
subsidiaries", a REIT can not own more than 10 percent of the total value of the
securities of any corporation ("10% Rule"). The 10% Rule becomes effective for
taxable years commencing after December 31, 2000. "Safe Harbor debt" is
non-contingent, non-convertible debt ("straight-debt") which satisfies one of
the following three requirements: (a) the straight-debt is issued by an
individual, or (b) all of the securities of the issuer owned by the REIT is
"straight debt" or (c) the issuer is a partnership in which the REIT owns at
least 20 percent of its profits.
For a corporation to qualify as a taxable REIT subsidiary the following
requirements must be satisfied.
(1) The REIT must own stock in the subsidiary corporation.
(2) Both the REIT and the subsidiary corporation must join in an election
that the subsidiary corporation be treated as a "taxable REIT
subsidiary" of the REIT.
(3) The subsidiary corporation can not directly or indirectly operate or
manage a healthcare facility.
(4) The subsidiary corporation generally cannot provide to any person
rights to any brand name under which hotels or healthcare facilities
are operated.
A taxable REIT subsidiary can provide a limited amount of services to tenants of
REIT property (even if such services were not considered customarily furnished
in connection with the rental of real property) and can manage or operate
properties, generally for third parties, without causing the rents received by
the REIT from such parties not to be treated as rent from real properties. The
rule that rents paid to a REIT do not qualify as rental from real property if
the REIT owns more than 10 percent of the corporation paying the rent is
modified by excepting rents paid by taxable REIT subsidiaries provided that 90
percent of the space is leased to third parties at comparable rents for
comparable space.
Interest paid by a taxable REIT subsidiary to the related REIT is subject to the
earnings stripping rules contained in Section 163(j) of the Code and therefore
the taxable REIT subsidiary cannot deduct interest in any year that would exceed
50 percent of the subsidiary's adjusted gross income. If any amount of interest,
rent, or other deductions of the taxable REIT subsidiary to be paid to the REIT
is determined not to be at
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arm's length, an excise tax of 100 percent is imposed on the portion that is
determined to be excessive. However, rent received by a REIT shall not fail
to qualify as rents from real property by reason of the fact that all or any
portion of such rent is redetermined for purposes of the excise tax.
The Act permits a REIT to own up to 100 percent of the stock of a "taxable REIT
subsidiary". However, the value of all of the securities of taxable REIT
subsidiaries owned by the REIT can not exceed 20 percent of the value of the
REIT's assets.
The 10% Rule generally will not apply to securities owned by a REIT on July 12,
1999 ("Transition Rule"). However, the Transition Rule would cease to apply to
securities of a corporation if such corporation after July 12, 1999 engages in a
substantial new line of business, or acquires any substantial assets, other than
in a reorganization or in a transaction qualifying under Section 1031 or 1033 of
the Code.
2) OWNERSHIP OF HEALTHCARE FACILITIES. The 99 Act permits a REIT to own and
operate a healthcare facility for at least two years, and treat it as
permitted "foreclosure" property, if the facility is acquired by the
termination or expiration of a lease of the property.
3) REIT DISTRIBUTION REQUIREMENTS. The 99 Act reduces the requirement that a
REIT must distribute at least 95 percent of its income as deductible
dividends to 90 percent of its income.
4) RENTS FROM PERSONAL PROPERTY. A REIT may treat rent from personal property
as rent from real property so long as the rent from personal property does
not exceed 15 percent of the total rent from both real and personal
property for the taxable year. This rule is currently determined by
comparing the basis of the personal property to the total basis of the real
and personal property. The Act provides that this determination will be
made by comparing the fair market value of the personal property to the
fair market value of the real and personal property.
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 our facilities as it affects the continuing
ability of such operators to meet their obligations to us under the terms of
our agreements with our 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.
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ITEM 2. PROPERTIES
INVESTMENT PORTFOLIO
At December 31, 1999, our real estate investment portfolio consisted of
investments in 266 skilled nursing facilities with 30,304 beds, 96 assisted
living facilities with 4,553 units and six schools in 36 states. We had
approximately $494,913,000 (before accumulated depreciation of $39,975,000)
invested in facilities we own and lease to operators, approximately $132,443,000
invested in mortgage loans (before allowance for doubtful accounts of
$1,250,000), and investments in REMIC certificates with a carrying value of
approximately $97,605,000.
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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OWNED PROPERTIES. At December 31, 1999, we owned 69 skilled nursing
facilities with a total of 8,193 beds, 85 assisted living facilities with a
total of 3,894 units and six schools in 26 states, representing a gross
investment of approximately $494,913,000. With the exception of certain
properties leased to LTC Healthcare under one year or month-to-month leases,
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, 1999:
<TABLE>
<CAPTION>
No. of No. of No. of No. of Beds Current Current Annual
Location SNFs ALFs Schools /Units(3) Encumbrances Lease Term (4) Investment Rent Payments
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama 8 1 912 $ 14,265,000 59 $ 29,288,000 $ 3,526,000
Arizona 2 3 4 597 7,384,000 115 47,036,000 5,094,000
California 2 2 346 124 16,516,000 1,659,000
Colorado 6 270 6,949,000 108 18,402,000 1,840,000
Florida 12 5 1,922 2,381,000 80 69,699,000 7,343,000
Georgia 6 619 9,050,000 23 11,695,000 1,270,000
Idaho 4 148 114 9,756,000 1,008,000
Illinois 3 325 975,000 41 8,788,000 1,005,000
Indiana 2 78 126 5,070,000 501,000
Iowa 7 1 645 7,977,000 50 14,683,000 1,433,000
Kansas 6 4 571 10,058,000 74 16,655,000 1,523,000
Minnesota 1 - 163 3,814,000 386,000
Nebraska 4 156 114 9,332,000 993,000
New Jersey 1 1 39 165 11,111,000 1,183,000
New Mexico 1 109 158 8,432,000 760,000
N. Carolina 1 5 310 92 14,411,000 1,582,000
Ohio 7 301 133 23,109,000 2,335,000
Oklahoma 6 221 4,766,000 92 12,316,000 1,210,000
Oregon 1 5 432 4,162,000 113 25,685,000 2,583,000
Pennsylvania 1 69 220 8,327,000 786,000
South Carolina 3 128 108 7,610,000 803,000
Tennessee 2 224 55 5,550,000 594,000
Texas 14 13 2,542 29,277,000 81 69,801,000 7,863,000
Virginia 3 443 30 10,058,000 337,000
Washington 2 8 497 10,388,000 158 24,959,000 2,599,000
Wyoming 3 183 158 12,810,000 1,137,000
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL 69 85 6 12,087 $107,632,000(1) $494,913,000(2) $51,353,000
=============================================================================================================================
</TABLE>
(1) Consists of: i) $90,536,000 of non-recourse mortgages payable by the
Company secured by 34 skilled nursing facilities containing a total of
4,069 beds, 10 assisted living facilities with 420 units and one
rehabilitation hospital with 84 beds, ii) $7,815,000 of tax-exempt bonds
secured by 5 assisted living facilities in Washington with 184 units, iii)
$5,119,000 of capital lease obligations on 4 assisted living facilities in
Kansas with 134 units, and iv) $4,162,000 of multi-unit housing tax-exempt
revenue bonds on one assisted living facility in Oregon with 112 units. As
of December 31, 1999, the Company's gross investment in encumbered
properties was $154,355,000.
(2) Of the total purchase price, $211,010,000 relates to investments in skilled
nursing facilities, $252,386,000 relates to investments in assisted living
facilities and $31,517,000 relates to investments in 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.
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MORTGAGE LOANS. At December 31, 1999, we had 56 mortgage loans secured by first
mortgages on 54 skilled nursing facilities with a total of 5,982 beds and 11
assisted living residences with 659 units located in 23 states. At December 31,
1999, the mortgage loans had a weighted average interest rate of 11.56%,
generally have 25-year amortization schedules, have balloon payments due from
2000 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, 1999:
<TABLE>
<CAPTION>
No. of Average Current Amount of Current Annual
No. of No. of Beds Interest Months to Face Amount of Mortgage Loans Debt Service (1)
Location SNFs ALFs /Units Rate % Maturity Mortgage Loans
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alabama 1 40 10.13 223 $ 500,000 $ 490,000 $ 58,000
Arizona 2 1 479 10.96-12.00 51 10,650,000 10,342,000 1,269,000
Arkansas 2 274 10.38-10.58 135 3,400,000 3,168,000 406,000
California 6 886 9.90-13.50 134 13,076,000 12,575,000 1,625,000
Colorado 4 318 11.50-12.82 73 7,330,000 7,151,000 909,000
Florida 5 2 758 10.02-12.15 85 19,529,000 18,933,000 2,342,000
Georgia 3 1 355 10.13-11.30 83 8,250,000 8,121,000 974,000
Illinois 1 120 9.71 99 1,950,000 1,921,000 208,000
Iowa 4 1 472 11.00-12.15 131 9,190,000 6,577,000 1,047,000
Mississippi 1 180 11.32 81 5,464,000 5,407,000 662,000
Missouri 1 90 9.01 221 1,500,000 1,456,000 162,000
Montana 1 34 11.22 166 2,346,000 2,335,000 273,000
Nebraska 4 163 10.33-11.22 106 10,911,000 10,829,000 1,241,000
Nevada 1 100 10.75 127 1,200,000 1,103,000 146,000
N. Carolina 1 101 12.50 7 2,100,000 2,002,000 273,000
Ohio 1 150 10.49 75 5,200,000 5,031,000 591,000
Oklahoma 1 161 11.28 138 1,300,000 1,226,000 164,000
S. Carolina 5 509 12.30 37 11,250,000 10,895,000 1,426,000
S. Dakota 1 34 11.00 111 2,346,000 2,339,000 268,000
Tennessee 3 201 11.10 69 4,842,000 4,706,000 579,000
Texas 7 791 10.38-13.25 134 10,145,000 9,391,000 1,271,000
Washington 4 310 11.50-12.00 132 4,500,000 4,332,000 570,000
Wisconsin 1 115 11.00 206 2,200,000 2,113,000 272,000
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL 54 11 6,641 $139,179,000 $132,443,000(2) $16,736,000
==============================================================================================================================
</TABLE>
(1) Includes principal and interest payments.
(2) Of the total current principal balance, $104,082,000 and $28,361,000
relates to investments in skilled nursing facilities and assisted living
facilities, 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 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.
19
<PAGE>
REMIC CERTIFICATES. At December 31, 1999, the carrying value of the REMIC
certificate investments was $97,605,000 ($98,670,000, 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
111 first mortgage loans secured by 175 skilled nursing facilities with a total
of 20,051 beds in 24 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 $361,896,000 current principal amount of mortgage
loans represented by the REMIC certificates have a weighted average interest
rate of approximately 11.10%, and scheduled maturities ranging from 2000 to
2028.
The following table sets forth certain information regarding the mortgage loans
securing the REMIC certificates as of December 31, 1999:
<TABLE>
<CAPTION>
Original Principal Current Principal
Number of Number of Amount of Remaining Amount of Remaining Current Annual
Location Facilities Beds Mortgage Loans Mortgage Loans (1) Debt Service
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alabama 9 1,189 $ 22,526,000 $ 21,614,000 $ 2,778,000
Arizona 5 955 26,018,000 24,913,000 2,890,000
California 23 2,532 48,835,000 38,363,000 5,413,000
Colorado 1 177 2,000,000 1,946,000 237,000
Connecticut 2 240 5,576,000 5,300,000 734,000
Florida 7 945 32,310,000 31,026,000 3,743,000
Georgia 12 1,318 27,272,000 26,265,000 3,335,000
Illinois 4 464 9,226,000 8,786,000 1,133,000
Iowa 11 810 16,731,000 16,604,000 1,904,000
Kansas 1 66 1,200,000 1,160,000 144,000
Louisiana 1 127 1,600,000 1,532,000 200,000
Michigan 3 444 6,800,000 6,466,000 851,000
Mississippi 3 400 14,050,000 10,467,000 1,196,000
Missouri 6 645 10,989,000 10,576,000 1,327,000
Montana 6 547 15,508,000 15,000,000 1,791,000
Nebraska 6 573 10,014,000 9,601,000 1,213,000
New Mexico 8 673 20,834,000 19,882,000 2,202,000
N. Carolina 1 168 2,950,000 2,847,000 362,000
Ohio 2 150 4,100,000 3,616,000 484,000
Oklahoma 1 112 1,300,000 1,189,000 170,000
S. Dakota 1 50 585,000 562,000 66,000
Tennessee 6 550 16,827,000 16,423,000 2,044,000
Texas 52 6,627 88,491,000 83,349,000 10,497,000
Washington 4 289 4,583,000 4,409,000 552,000
- -------------------------------------------------------------------------------------------------------------------------
TOTAL 175 20,051 $ 390,325,000 $ 361,896,000 $ 45,266,000
=========================================================================================================================
</TABLE>
(1) Included in the balances of the mortgages underlying the REMIC certificates
are $65,551,000 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.
The mortgage loans underlying the REMIC certificates generally have 25-year
amortization schedules with final maturities due from 2000 to 2028, unless
prepaid prior thereto. Contractual principal and interest distributions with
respect to the $98,670,000 amortized cost basis of REMIC certificates
(excluding unrealized losses on changes in estimated fair value of
$1,065,000) we retained are subordinated to distributions of interest and
principal with respect to the $279,234,000 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
20
<PAGE>
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, 1999, the REMIC certificates we held had an effective interest
rate of approximately 17.35% based on the expected future cash flows with no
unscheduled prepayments.
21
<PAGE>
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
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- ------ -------------------------------------------------------
<S> <C> <C>
Andre C. Dimitriadis 59 Chairman, Chief Executive Officer and Director
James J. Pieczynski 37 President, Chief Financial Officer, and Director
Christopher T. Ishikawa 36 Senior Vice President and Chief Investment Officer
Julia L. Kopta 50 Senior Vice President and General Counsel
</TABLE>
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 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 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.
Ms. Kopta has served as Senior Vice President and General Counsel since January
1, 2000. Prior to that, she served as Special Counsel to the Chief Executive
Officer of Coram Healthcare Corporation from September 1999 through November
1999. From October 1993 to October 1997, she served as Executive Vice President,
General Counsel and Corporate Secretary of Transitional Hospital Corporation.
22
<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.
<TABLE>
<CAPTION>
1999 1998
------------------------------- ----------------------------
HIGH LOW HIGH LOW
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
First Quarter $17.125 $10.5625 $21.9375 $18.9375
Second Quarter 13.9375 10.75 20.3125 18.00
Third Quarter 13.3125 10.75 19.00 16.25
Fourth Quarter 10.875 7.75 18.00 15.5625
</TABLE>
(b) As of December 31, 1999 we had approximately 872 stockholders of record of
our common stock.
(c) We declared total cash distributions as set forth below:
<TABLE>
<CAPTION>
1999 1998
----------------- --------------
<S> <C> <C>
First Quarter $ .39 $ .365
Second Quarter .39 .39
Third Quarter .39 .39
Fourth Quarter .39 .39
----------------- --------------
$ 1.56 $1.535
================= ==============
</TABLE>
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 on September 30, 1998, we
declared a stock dividend in the form of LTC Healthcare common stock
equal to $0.469 per share.
We intend to distribute to our 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% (90%
for years ending after December 31, 2000) of our "REIT taxable income."
23
<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>
1999 1998 1997 1996 1995
------------- ------------ ------------- ------------- -------------
OPERATING INFORMATION: (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues $ 87,662 $ 89,391 $ 73,434 $ 54,930 $ 35,569
Expenses:
Interest expense 21,836 22,267 23,795 20,604 9,407
Depreciation and amortization 13,483 12,561 9,132 6,298 3,072
Amortization of founders' stock - - 31 114 221
Provision for loan losses - 600 - - -
Minority interest 1,018 1,415 1,205 898 57
Impairment charge 14,939 - 1,866 - -
Operating and other expenses 5,863 5,084 4,393 4,479 2,772
------------- ------------ ------------- ------------- -------------
Total expenses 57,139 41,927 40,422 32,393 15,529
------------- ------------ ------------- ------------- -------------
Other income (loss) 1,304 3,129 2,751 6,173 (1,656)
------------- ------------ ------------- ------------- -------------
Net income 31,827 50,593 35,763 28,710 18,384
Preferred dividends (15,087) (12,896) (6,075) - -
------------- ------------ ------------- ------------- -------------
Net income available to common stockholders $ 16,740 $ 37,697 $ 29,688 $ 28,710 $ 18,384
============= ============ ============= ============= =============
PER SHARE INFORMATION:
Basic net income $ 0.61 $ 1.39 $ 1.26 $ 1.51 $ 1.02
============= ============ ============= ============= =============
Diluted net income $ 0.61 $ 1.39 $ 1.25 $ 1.44 $ 1.01
============= ============ ============= ============= =============
Distributions declared $ 1.56 $ 1.535 $ 1.435 $ 1.335 $ 1.21
============= ============ ============= ============= =============
BALANCE SHEET INFORMATION:
Real estate investments, net $ 683,736 $ 663,996 $ 640,733 $ 488,134 $ 340,441
Total assets 721,811 689,814 656,664 500,538 357,378
Total debt 292,274 229,695 249,724 283,472 174,083
Total liabilities 303,300 237,900 259,378 299,207 185,458
Minority interest 9,894 10,514 11,159 10,528 1,098
Total stockholders' equity 408,617 441,400 386,127 190,803 170,822
OTHER INFORMATION:
Cash flows from operating activities $ 60,785 $ 61,885 $ 43,230 $ 33,789 $ 24,197
Cash flows (used in) investing activities (48,156) (51,529) (150,800) (90,317) (111,422)
Cash flows provided by (used in) financing
activities (11,477) (13,827) 109,396 58,242 74,393
Funds from operations $ 45,162 $ 47,559 $ 38,735 $ 28,793 $ 23,944
Basic funds from operations per share $ 1.65 $ 1.76 $ 1.65 $ 1.52 $ 1.33
Diluted funds from operations per share $ 1.64 $ 1.71 $ 1.57 $ 1.44 $ 1.29
</TABLE>
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING RESULTS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues for the year ended December 31, 1999 were $87,662,000 compared to
$89,391,000 for the same period in 1998. The net decrease in revenues resulted
from decreases in interest from mortgage loans and notes receivable of
$3,524,000 and interest and other income of $1,410,000 which was offset by
increases in rental income of $2,552,000 and interest income from REMIC
certificates of $653,000.
Rental income increased $7,478,000 as a result of property acquisitions and the
conversion of mortgage loans into owned properties. "Same-store" rents decreased
$1,144,000 due to the transitional impact of the change in operators for certain
skilled nursing facilities. The decrease in rental income due to the change of
operators was somewhat mitigated by the receipt of contingent rents and rental
increases as provided for in the lease agreements. Also reducing the net
increase in rental income were decreases of $3,301,000 related to the
contribution of properties to LTC Healthcare in September 1998 and $481,000
resulting from the disposition of properties. Interest income from mortgage
loans and notes receivable decreased due to the sale of mortgage loans in
connection with a REMIC securitization that was completed in May 1998 and the
conversion of mortgage loans into owned properties. The decrease in interest
income from mortgage loans and notes receivable was partially offset by interest
income on the unsecured line of credit provided to LTC Healthcare. Partially
reducing the decrease in interest income from mortgage loans was an increase in
interest income from REMIC certificates from the retention of certificates
originated in the May 1998 securitization. Interest and other income also
decreased due to a reduction in commitment fees.
During 1999, the Company performed a comprehensive evaluation of its real estate
investment portfolio. As a result of recent adverse changes in the long-term
care industry, the Company identified certain investments in skilled nursing
facilities that it determined to be impaired. During the fourth quarter of 1999,
the Company recorded an impairment charge of $14,939,000 See "Item 8. FINANCIAL
STATEMENTS- NOTE 5. IMPAIRMENT CHARGE." Excluding the impairment charge, total
expenses as a percent of total revenues were 48% in 1999 compared to 47% in
1998. Depreciation and amortization increased as a result of a larger average
investment base in owned properties in 1999 as compared to 1998. The increase in
general and administrative expenses is due to the reorganization of the
Company's legal department and the settlement of an employee related dispute.
During the year ended December 31, 1999, the Company repurchased an aggregate of
$21,590,000 face amount of its convertible subordinated debentures at a discount
on the open market. A gain of $1,304,000 on the repurchase is included in other
non-operating income. Other non-operating 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.
On January 1, 1999, in accordance with recently issued accounting standards, the
Company reclassified its investment in REMIC certificates from trading
securities to available-for-sale and held-to-maturity securities. As a result of
the change in accounting for REMIC certificates, the Company no longer
recognizes unrealized gains or losses on changes in their fair value in current
period earnings.
Preferred dividends increased as a result of dividends on the Series C
Convertible Preferred Stock which was issued in September 1998.
25
<PAGE>
Net income available to common shareholders decreased to $16,740,000 for the
year ended December 31, 1999 from $37,697,000 for the same period in 1998.
Excluding the impairment charge and the gain on the repurchase of convertible
subordinated debentures recorded in 1999 and the gain on the sale of real estate
investments and the unrealized loss on REMIC Certificates recorded in 1998, net
income available to common shareholders was $30,375,000 for the year ended
December 31, 1999 compared to $34,568,000 for the year ended December 31, 1998.
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.
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. See "Item 8. FINANCIAL STATEMENTS- NOTE 5. IMPAIRMENT CHARGE."
Excluding the impairment charge, 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).
26
<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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company's real estate investment portfolio (before
accumulated depreciation and allowance for doubtful accounts) consisted of
$494,913,000 invested primarily in owned long-term care facilities, mortgage
loans of approximately $132,443,000 and subordinated REMIC certificates of
approximately $97,605,000 with a weighted average effective yield of 17.35%. At
December 31, 1999, the outstanding certificate principal balance and the
weighted average pass-through rate for the senior REMIC certificates (all held
by outside third parties) was $279,234,000 and 7.21%.
During the year ended December 31, 1999, the Company had net cash provided by
operations of $60,785,000. In addition, the Company obtained a $25,000,000 term
loan and had net borrowings of $35,000,000 under its unsecured revolving credit
facility. During 1999, the Company obtained non-recourse mortgage financing of
$18,485,000 from a third-party lender. The mortgage loan is secured by 10
assisted living facilities, bears interest at 8.81% and matures in December
2009. Proceeds from the mortgage loan were used to repay outstanding borrowings
under the unsecured revolving credit facility.
During the year ended December 31, 1999, the Company invested $6,678,000 in
mortgage loans secured by three assisted living facilities ("ALFs") and advanced
$1,890,000 for renovation and expansion under a mortgage loan previously
provided on an educational facility. During 1999, the Company acquired seven
skilled nursing facilities, three assisted living residences and one
rehabilitation hospital for a gross purchase price of $36,453,000 and invested
approximately $8,797,000 in the expansion and improvement of existing
properties. Mortgage loans with outstanding principal balances totaling
$47,554,000 that were secured by 15 long-term care facilities and one
educational facility were converted into owned properties. Five of the skilled
nursing facilities acquired during 1999 were acquired subject to the assumption
of existing non-recourse mortgage debt of $10,595,000 that bears interest at a
weighted average rate of 11.4% and two of the skilled nursing facilities and the
rehabilitation hospital were acquired with non-recourse mortgage financing of
$6,500,000 from a third-party lender that bears interest at the prime rate of
interest.
During the year ended December 31, 1999, the Company purchased $4,195,000
face amount of Assisted Living Concepts, Inc. ("ALC") 5.625% convertible
subordinated debentures and $15,645,000 face amount of ALC 6.0% convertible
subordinated debentures for an aggregate purchase price of $13,097,000. The
ALC convertible subordinated debentures have a weighted average cash yield of
8.3% and a weighted average effective yield of 19.1%.
During the year ended December 31, 1999, the Company repurchased and retired
649,800 shares of common stock for an aggregate purchase price of approximately
$7,039,000. On September 30, 1999, $10,000,000 in outstanding principal amount
of 8.25% convertible subordinated debentures matured and was repaid. During the
year ended December 31, 1999, the Company repurchased an aggregate of
$21,590,000 face amount of its convertible subordinated debentures on the open
market for an aggregate purchase price of $19,992,000.
During the same period, the Company declared and paid cash dividends on its
Series A Preferred Stock, Series B Preferred Stock and Series C Preferred
Stock totaling $7,314,000, $4,500,000 and $3,273,000, respectively. In
addition, the Company paid quarterly cash dividends on its common stock
totaling $42,626,000.
27
<PAGE>
As of December 31, 1999, borrowing capacity of $35,000,000 was available under
the Company's $170,000,000 unsecured revolving credit facility which matures in
October 2000. The revolving credit facility had pricing of LIBOR plus 1.25% at
December 31, 1999. After giving effect to borrowing base requirements for
outstanding bank borrowings, the Company had $324,752,000 of available
unencumbered real estate investments at December 31, 1999. Available
unencumbered real estate investments consisted of $183,316,000 in owned
properties (before accumulated depreciation), $43,831,000 of mortgage loans
(before allowance for doubtful accounts) and $97,605,000 of REMIC certificates.
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
facilities, assisted living facilities and schools. In addition, the Company
will monitor its 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.
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).
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
28
<PAGE>
(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 and its current borrowing capacity are
sufficient to provide for payment of its operating costs and provide funds
for distribution to its stockholders. Difficult capital market conditions in
the health care industry have limited the Company's access to traditional
forms of growth capital. As a result of the tight capital markets for the
health care industry, the Company has reduced its investment activity in 1999
and intends to continue to limit its investment activity in 2000. At December
31, 1999, the Company had $160,000,000 outstanding under unsecured credit
agreements that mature in October 2000 and convertible subordinated
debentures maturing in 2001 totaling $22,234,000. The Company expects to
refinance the borrowings outstanding under its unsecured credit agreements
and utilize cash from operations and additional borrowings under the
refinanced unsecured credit agreements to repay the convertible subordinated
debentures at maturity. 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 rates upon refinancing, the interest
expense relating to the refinanced indebtedness would increase adversely
affecting our financial condition and results of operations.
29
<PAGE>
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.
The following table reconciles net income available to common stockholders to
FFO available to common stockholders (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------------ ---------- ---------
<S> <C> <C> <C>
Net income available to common stockholders $ 16,740 $ 37,697 $ 29,688
Real estate depreciation 13,483 12,561 9,104
Impairment charge on real estate investments 14,939 - -
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)
------------ ---------- ---------
FFO available to common stockholders $ 45,162 $ 47,559 $ 38,735
============ ========== =========
Diluted FFO available to common stockholders $ 51,582 $ 55,871 $ 47,533
============ ========== =========
Basic FFO per share $ 1.65 $ 1.76 $ 1.65
============ ========== =========
Diluted FFO per share $ 1.64 $ 1.71 $ 1.57
============ ========== =========
Shares for basic FFO per share 27,412 27,077 23,511
Shares for diluted FFO per share 31,548 32,762 30,281
</TABLE>
YEAR 2000
In prior years, we discussed the nature and progress of our plans to become Year
2000 ready. In late 1999, we completed the remediation and testing of our
systems. As a result of our planning and implementation efforts, we experienced
no significant disruptions in mission critical information technology and
non-information technology systems and we believe our systems successfully
responded to the Year 2000 date change. We are not aware of any significant
adverse effects on our operators computer systems or operations
30
<PAGE>
resulting from Year 2000 date change. We will continue to monitor our mission
critical computer applications and those of our operators throughout the year
2000 to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain information contained in this annual report includes statements that are
not purely historical and are "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including statements regarding our
expectations, beliefs, intentions or strategies regarding the future. All
statements other than historical facts contained in this annual report are
forward looking statements. These forward looking statements involve a number of
risks and uncertainties. All forward looking statements included in this press
release are based on information available to us on the date hereof, and we
assume no obligation to update such forward looking statements. Although we
believe that the assumptions and expectations reflected in such forward looking
statements are reasonable, no assurance can be given that such expectations will
prove to have been correct. The actual results achieved by us may differ
materially from any forward looking statements due to the risks and
uncertainties of such statements. Exhibit 99 to this annual report contains a
more comprehensive discussion of risks and uncertainties associated with our
business.
31
<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.
At December 31, 1999, based on the prevailing interest rates for comparable
loans and estimates made by management, the fair value of our mortgage loans
receivable was approximately $132.9 million. A 1% increase in such rates would
decrease the estimated fair value of our mortgage loans by approximately $6.1
million while a 1% decrease in such rates would increase their estimated fair
value by approximately $6.6 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, 1999 remain constant, a 1% increase in interest rates would
increase annual interest expense on our revolving line of credit by
approximately $1,600,000. Conversely, a 1% decrease in interest rates would
decrease annual interest expense on our revolving line of credit by $1,600,000.
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 changes. 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.
32
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors ........................................................................ 34
Consolidated Balance Sheets as of December 31, 1999 and 1998 .......................................... 35
Consolidated Statements of Income and Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997 ................................................................... 36
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.............................................................. 37
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.................................................................... 38
Notes to Consolidated Financial Statements ............................................................ 39
</TABLE>
33
<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, 1999 and 1998 and the related
consolidated statements of income and comprehensive income, stockholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1999. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LTC Properties,
Inc. at December 31, 1999 and 1998, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic financial statements taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
January 21, 2000
34
<PAGE>
LTC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1999 1998
--------------- -----------------
<S> <C> <C>
ASSETS
Real Estate Investments:
Buildings and improvements, net of accumulated depreciation and
amortization: 1999 - $39,975; 1998 - $26,972 $427,235 $366,891
Land 27,703 16,796
Mortgage loans receivable held for sale, net of allowance for doubtful accounts:
1999 - $1,250; 1998 - $1,250 131,193 179,714
REMIC Certificates at estimated fair value 97,605 100,595
--------------- -----------------
Real estate investments, net 683,736 663,996
Other Assets:
Cash and cash equivalents 2,655 1,503
Debt issue costs, net 1,699 2,040
Interest receivable 4,050 3,350
Prepaid expenses and other assets 9,144 2,397
Marketable debt securities 14,190 -
Note receivable from LTC Healthcare, Inc. 6,337 16,528
--------------- -----------------
38,075 25,818
--------------- -----------------
Total assets $721,811 $689,814
=============== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Convertible subordinated debentures $24,642 $56,667
Bank borrowings 160,000 100,000
Mortgage loans payable 90,536 55,432
Bonds payable and capital lease obligations 17,096 17,596
Accrued interest 2,794 3,135
Accrued expenses and other liabilities 7,247 4,085
Distributions payable 985 985
--------------- -----------------
Total liabilities 303,300 237,900
Minority interest 9,894 10,514
Commitments - -
Stockholders' equity:
Preferred stock $0.01 par value; 10,000,000 shares authorized;
shares issued and outstanding: 1999 - 7,080,000; 1998 - 7,080,000 165,500 165,500
Common stock $0.01 par value; 40,000,000 shares authorized; shares issued
and outstanding: 1999 - 27,035,854; 1998 - 27,660,712 270 277
Capital in excess of par value 304,527 311,113
Cumulative net income 190,097 158,270
Notes receivable from stockholders (10,258) (11,200)
Accumulated comprehensive loss (1,246) -
Cumulative distributions (240,273) (182,560)
---------------- ------------------
Total stockholders' equity 408,617 441,400
--------------- -----------------
Total liabilities and stockholders' equity $721,811 $689,814
=============== =================
</TABLE>
See accompanying notes
35
<PAGE>
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
--------------- -------------- ---------------
<S> <C> <C> <C>
Revenues:
Rental income $45,086 $42,534 $30,802
Interest income from mortgage loans and notes
receivable 19,506 23,030 25,942
Interest income from REMIC Certificates 17,598 16,945 14,189
Interest and other revenue 5,472 6,882 2,501
--------------- -------------- ---------------
Total revenues 87,662 89,391 73,434
--------------- -------------- ---------------
Expenses:
Interest expense 21,836 22,267 23,795
Depreciation and amortization 13,483 12,561 9,163
Provision for loan losses - 600 -
Minority interest 1,018 1,415 1,205
Impairment charge 14,939 - 1,866
Operating and other expenses 5,863 5,084 4,393
--------------- -------------- ---------------
Total expenses 57,139 41,927 40,422
--------------- -------------- ---------------
Operating income 30,523 47,464 33,012
Other income, net 1,304 3,129 2,751
--------------- -------------- ---------------
Net income 31,827 50,593 35,763
Preferred dividends 15,087 12,896 6,075
--------------- -------------- ---------------
Net income available to common stockholders $16,740 $37,697 $29,688
=============== ============== ===============
Net Income Per Common Share:
Basic net income per common share $0.61 $1.39 $1.26
=============== ============== ===============
Diluted net income per common share $0.61 $1.39 $1.25
=============== ============== ===============
Comprehensive Income:
Net income available to common stockholders $16,740 $37,697 $29,688
Unrealized loss on available-for-sale
equity securities (1,246) - -
--------------- -------------- ---------------
Total comprehensive income $15,494 $37,697 $29,688
=============== ============== ===============
</TABLE>
See accompanying notes
36
<PAGE>
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
SHARES NOTES
---------------------- CAPITAL IN RECEIVABLE
PREFERRED COMMON PREFERRED COMMON EXCESS OF CUMULATIVE FROM CUMULATIVE
STOCK STOCK STOCK STOCK PAR VALUE NET INCOME STOCKHOLDERS DISTRIBUTION
--------------------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 cash 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 cash distributions
($1.535 per share) - - - - - - - (41,837)
Common stock distributions
($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)
===================== ========================================================================
Payments on stockholder notes - - - - - - 942 -
Conversion of debentures - 25 - - 430 - - -
Repurchase of common stock - (650) - (7) (7,032) - - -
Conversion of partnership units - - - - 16 - - -
Net income - - - - - 31,827 - -
Preferred stock dividends - - - - - - - (15,087)
Common stock cash distributions
($1.56 per share) - - - - - - - (42,626)
--------------------- ------------------------------------------------------------------------
Balance - December 31, 1999 7,080 27,036 $165,500 $ 270 $ 304,527 $ 190,097 $ (10,258) $ (240,273)
===================== ========================================================================
<CAPTION>
ACCUMULATED
COMPREHENSIVE
LOSS
--------------
<S> <C>
Balance at December 31, 1996 $ -
==============
Balance at December 31, 1997 -
==============
Balance at December 31, 1998 -
==============
Unrealized loss on
available-for-sale
securities (1,246)
--------------
Balance at December 31, 1999 $ (1,246)
==============
</TABLE>
See accompanying notes
37
<PAGE>
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997
----------------- ---------------- ---------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 31,827 $ 50,593 $ 35,763
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 13,483 12,561 9,163
Unrealized holding (gain)/loss on estimated fair value of REMIC
Certificates - 6,797 (57)
Gain on sale of real estate investments - (9,926) (2,799)
Gain on disposition of other assets - - (1,015)
Gain on repurchase of convertible subordinated debentures (1,304) - -
Expense related to vesting of restricted stock - 1,491 1,120
Non-cash impairment charge 14,939 - 1,866
Other non-cash charges 1,627 2,220 1,832
(Increase) decrease in interest receivable (296) 512 (1,204)
(Increase) in prepaid, other assets and allowance (410) (122) (1,249)
(Decrease) in accrued interest (341) (1,118) (1,562)
Increase (decrease) in accrued expenses and other liabilities 1,260 (1,123) 1,372
----------------- ---------------- ---------------
Net cash provided by operating activities 60,785 61,885 43,230
INVESTING ACTIVITIES:
Investment in real estate mortgages (8,568) (47,452) (107,487)
Acquisition of real estate properties, net (34,655) (142,668) (114,891)
Proceeds from sale of real estate properties, net - 16,706 29,004
Proceeds from sale of REMIC Certificates, net - 108,613 11,811
Principal payments on mortgage loans receivable 6,729 10,758 24,977
Investment in debt securities (13,097) - -
Investment in LTC Healthcare, Inc. - (2,001) -
Advances to LTC Healthcare, Inc. (13,336) (12,800) -
Repayment of advances to LTC Healthcare, Inc. 23,527 17,668 -
Return of investment in unconsolidated affiliates - - 5,000
Proceeds from sale of investments, net - - 1,015
Other (8,756) (353) (229)
----------------- ---------------- ---------------
Net cash used in investing activities (48,156) (51,529) (150,800)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net - - 35,065
Proceeds from issuance of preferred stock, net - 37,605 121,600
Debt issue costs (1,129) - (1,877)
Distributions paid (57,713) (54,520) (46,407)
Bank borrowings 147,500 276,000 445,032
Repayment of bank borrowings (87,500) (263,500) (436,932)
Mortgage loan borrowings 24,985 - -
Principal payments on mortgage loans, notes payable and capital leases (976) (5,077) (5,869)
Redemption of convertible subordinated debentures (29,992) - -
Repurchase of common stock (7,039) (3,345) -
Other 387 (990) (1,216)
----------------- ---------------- ---------------
Net cash provided by (used in) financing activities (11,477) (13,827) 109,396
----------------- ---------------- ---------------
Increase (decrease) in cash and cash equivalents 1,152 (3,471) 1,826
Cash and cash equivalents, beginning of year 1,503 4,974 3,148
----------------- ---------------- ---------------
Cash and cash equivalents, end of year $ 2,655 $ 1,503 $ 4,974
================= ================ ===============
Supplemental disclosure of cash flow information:
Interest paid $ 21,011 $ 22,478 $ 23,985
</TABLE>
See accompanying notes
38
<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.
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.
SECURITIZATION TRANSACTIONS. 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 Real Estate Mortgage Investment Conduit
("REMIC"), a qualifying special-purpose entity, 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.
A securitization is completed in a two-step process. First, a wholly owned
special-purpose bankruptcy remote corporation (the "REMIC Corp.") is formed and
selected mortgage loans 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
39
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Statement of Financial Accounting Standards ("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 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 REMIC 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.
DESCRIPTION OF THE REMIC CERTIFICATES. REMIC Certificates represent
beneficial ownership interests in the REMIC Trust and can be grouped into
three categories; senior, subordinated and subordinated interest-only
("I/O"). The REMIC Certificates sold to third-party investors are the senior
certificates and those retained by the Company 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.
On January 1, 1999, the Company adopted SFAS No. 134 "ACCOUNTING FOR
MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF MORTGAGE LOANS
HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE". Upon adoption of SFAS No. 134,
the Company, based on its ability and intent to hold its investments in REMIC
Certificates, transferred its I/O REMIC Certificates and certificates with an
investment rating of "BB" or higher from the trading category to the
available-for-sale category and its certificates with an investment rating of
"B" or lower to the held-to-maturity category. The transfer was recorded at fair
value on the date of the transfer.
40
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MORTGAGE LOANS RECEIVABLE. 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. 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.
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 when the stated conditions
upon which contingent rent is based occur.
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.
41
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Earnings and profits, which determine the
taxability of dividends to stockholders, differ from net 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, mortgage loans receivable and operating leases,
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 I/O REMIC Certificates. In addition to the risk from
credit losses, the I/O REMIC 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 REMIC Certificates, thus, reducing their
effective yield. The I/O REMIC 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.
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.
42
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 SFAS No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES". In June 1999, the FASB issued SFAS No. 137 "DEFERRAL OF EFFECTIVE
DATE OF FASB STATEMENT 133" which defers the effective date for SFAS No. 133 to
all quarters of all fiscal years beginning after June 15, 2000. 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.
3. MAJOR OPERATORS
In October 1999, Sun Healthcare Group, Inc. ("Sun") filed for reorganization
under Chapter 11 of the Bankruptcy Code. Prior to Sun's filing for bankruptcy
protection, the Company initiated negotiations with Sun that resulted in the
restructuring and reduction of its investment in properties operated by Sun.
During 1999, Sun was replaced as the operator of 18 properties. In addition,
mortgage loans on two facilities leased to Sun were repaid by the borrower.
The Company further reduced its investment in properties operated by Sun by
terminating the lease on two properties, converting a mortgage loan to an
owned property consenting to the acquisition of one property for the amount
of the debt that was outstanding by LTC Healthcare and acquiring five
properties for the amount of debt that was outstanding. Eight properties
have, in turn, been leased to LTC Healthcare, Inc. As a result, at December
31, 1999, Sun operated 41 facilities representing approximately 12% ($111.6
million) of the Company's gross real estate investment portfolio. The
facilities operated by Sun at December 31, 1999 consisted of approximately
$61.2 million of direct investments to Sun and approximately $50.4 million of
investments in facilities owned by independent parties that lease the
property to Sun or contract with Sun to manage the property. Sun is currently
operating its business as a debtor-in-possession subject to the jurisdiction
of the Bankruptcy Court.
Other than Sun, no long-term care provider operated over 10% of the Company's
adjusted gross real estate investment portfolio. Sun is a publicly traded
company, and as such is subject to the filing requirements of the Securities and
Exchange Commission. The Company's financial position and its ability to make
distributions may be adversely affected by financial difficulties experienced by
Sun, or any of its 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 the Company's
borrowers when it expires.
43
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
1999 1998 1997
---------------- ------------- --------------
<S> <C> <C> <C>
Non-cash investing and financing transactions:
Exchange of mortgage loans for REMIC Certificates $ - $ 129,300 $ -
Exchange of previously issued REMIC Certificates for
REMIC Certificates - 20,700
Conversion of debentures into common stock 435 35,046 44,005
Assumption of mortgage loans payable relating
acquisitions of real estate properties 10,595 11,224 3,026
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 47,554 7,301 9,348
Minority interest - 3,432 647
</TABLE>
5. IMPAIRMENT CHARGE
During 1999, the Company performed a comprehensive evaluation of its real estate
investment portfolio. The long-term care industry has experienced significant
adverse changes which have resulted in continued operating losses by certain of
the Company's operators and in some instances the filing of bankruptcy
protection. As a result of the adverse changes in the long-term care industry,
the Company identified certain investments in skilled nursing facilities that it
determined to be impaired. These assets were determined to be impaired since the
expected future cash flows to be received from these investments are not
expected to recover the carrying values of the investments. During the fourth
quarter of 1999, the Company recorded an impairment charge of $14,939,000. The
impairment charge included the write down of the carrying value to the estimated
fair value of owned skilled nursing facilities of $7,428,000, mortgage loans
secured by skilled nursing facilities of $2,806,000, notes receivable of
$3,329,000 and other assets and the cost of foreclosure and lease terminations
of approximately $1,376,000. The fair values were based on current appraisals or
other third-party opinions of value and other estimates of fair value such as
estimated undiscounted future cash flows.
During 1998, the Company performed a comprehensive evaluation of its real estate
investment portfolio. Based on this review, no assets were deemed to be
impaired. 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.
6. REAL ESTATE INVESTMENTS
MORTGAGE LOANS. During 1999, the Company originated mortgage loans of $6,678,000
secured by three assisted living facilities with 106 beds and advanced
$1,890,000 for renovation and expansion under a mortgage loan previously
provided on an educational facility. Mortgage loans with outstanding principal
balances totaling $47,554,000 that were secured by 15 long-term care facilities
with 1,116 beds/units and one educational facility were converted into owned
properties. Prepayments totaling $5,178,000 on two mortgage loans originally
scheduled to mature in 2000 and 2006 and scheduled principal payments of
$1,551,000 were received.
44
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1999, the Company had 56 mortgage loans secured by first
mortgages on 54 skilled nursing facilities with a total of 5,982 beds, 11
assisted living residences with 659 units located in 23 states. At December 31,
1999, the mortgage loans had a interest rates ranging from 9.0% to 13.5% and
maturities ranging from 2000 to 2018. In addition, the loans contain certain
guarantees, provide for certain facility fees and generally have 25-year
amortization schedules. 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. At December 31, 1999 and 1998, the fair value of mortgage loans was
approximately $132,912,000 and $181,666,000, respectively. Scheduled principal
payments on mortgage loans are $4,508,000, $7,964,000, $1,794,000, $14,322,000,
$9,717,000 and $94,138,000 in 2000, 2001, 2002, 2003, 2004 and thereafter.
OWNED PROPERTIES AND LEASE COMMITMENTS. During 1999, in addition to the
$47,554,000 of mortgage loans that converted into owned properties, the Company
acquired seven skilled nursing facilities with a total of 804 beds, three
assisted living residences with a total of 169 units and one rehabilitation
hospital with 84 beds for a gross purchase price of $36,453,000 and invested
approximately $8,797,000 in the expansion and improvement of existing
properties.
With the exception of certain properties leased to LTC Healthare, Inc. under
month-to-month or one year leases, 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 repairs, capital and non-capital expenditures and other costs
necessary in the operations of the facilities. Contingent rent income for the
years ended December 31, 1999, 1998 and 1997 was not significant in relation to
contractual base rent income.
Depreciation expense on buildings and improvements, including facilities owned
under capital leases, was $13,237,000, $11,959,000 and $9,041,000 for the years
ended December 31, 1999, 1998 and 1997.
Future minimum base rents receivable under the remaining non-cancelable terms of
operating leases are: $44,751,000, $41,522,000, $41,452,000, $41,376,000,
$37,823,000 and $187,745,000 for the years ending December 31, 2000, 2001, 2002,
2003, 2004 and thereafter.
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 I/O REMIC Certificates. The
subordinated and I/O REMIC 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
45
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$108,613,000 from the above securitization were used to repay borrowings
outstanding under the Company's line of credit.
REMIC CERTIFICATES. The outstanding principal balance and the weighted-average
pass through rate for the senior certificates (held by third parties) and the
carrying value of the subordinated certificates (held by the Company) as of
December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
------------------------------------------ --------------------------------------------
Subordinated Subordinated
Senior Certificates Certificates Senior Certificates Certificates
---------------------- ---------------- --------------------- ----------------
Principal Rate Carrying Value Principal Rate Carrying Value
------------- ------ ---------------- ------------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
1993-1 Pool $ 77,289,000 8.4% $ 5,191,000 $ 78,570,000 8.3% $ 6,351,000
1994-1 Pool 28,299,000 9.4% 37,810,000 37,495,000 9.2% 38,896,000
1996-1 Pool 82,916,000 7.5% 15,510,000 89,156,000 7.4% 16,088,000
1998-1 Pool 117,112,000 6.3% 39,094,000 120,394,000 6.3% 39,260,000
---------------- ----------------
$ 97,605,000 $100,595,000
================ ================
</TABLE>
Included in the total assets securing the 1998-1 Pool is a senior certificate
from the 1993-1 Pool with principal of $26,382,000 and an interest rate of
9.78%. 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 which is
recorded in other income, net in the accompanying income statement.
At December 31, 1999 and 1998, the aggregate effective yield of the subordinated
certificates, based on expected future cash flows with no unscheduled
prepayments, was 17.35% and 17.8%, respectively. Income on the subordinated
certificates was as follows for the years ended December 31, 1999, 1998 and
1997:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ----------------- ----------------
<S> <C> <C> <C>
1993-1 Pool $ 1,504,000 $ 2,656,000 $ 4,992,000
1994-1 Pool 4,943,000 4,898,000 4,650,000
1996-1 Pool 3,447,000 3,908,000 4,547,000
1998-1 Pool 7,704,000 5,483,000 -
----------------- ----------------- ----------------
$ 17,598,000 $ 16,945,000 $ 14,189,000
================= ================= ================
</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.
As of December 31, 1999, available-for-sale certificates were recorded at
their fair value of approximately $45,651,000. Unrealized holding losses on
available-for-sale certificates of $1,065,000 were included in comprehensive
income for the year ended December 31, 1999. At December 31, 1999
held-to-maturity certificates had a book value of $51,954,000 and a fair
value of $43,698,000. Prior to the adoption of SFAS No. 134, the Company
classified its investment in REMIC Certificates as trading securities and
recorded unrealized holding gains and losses as a component of other income,
net in the accompanying income statement. For the year ended December 31,
1998, the Company recorded an unrealized holding loss of $6,797,000 and for
the year ended December 31, 1997 the Company recorded an unrealized holding
gain of $57,000.
46
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LTC HEALTHCARE, INC.
During 1998, the Company acquired 4,002 shares of LTC Healthcare, Inc.
("Healthcare") non-voting common stock for $2,001,000 in cash. The Company also
contributed net assets with a book value of $21,619,000 in exchange for 36,000
additional shares of Healthcare non-voting common stock and a note receivable
from Healthcare. 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 and Convertible Subordinated Debentures. The Company
incurred costs of approximately $500,000 in connection with the distribution.
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 to the Company of approximately
$4,900,000 (unaudited). Upon completion of the distribution, Healthcare began
operating as a separate public company.
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
31,1999 and 1998 $6,337,000 and $16,528,000, respectively, was outstanding under
the line of credit. During 1999 and 1998, the Company recorded interest income
related to the unsecured line of credit of $1,514,000 and $711,000,
respectively. During 1999 and 1998, Healthcare reimbursed the Company $740,000
and $350,000, respectively for administrative and management advisory services
as provided for under the administrative services agreement. During 1999, the
Company acquired 100% of the stock of a company that owns two assisted living
facilities leased to a third-party operator from LTC Healthcare for a total
purchase price of $16,050,000. LTC Healthcare used the proceeds to repay
borrowings under the unsecured line of credit.
As of December 31,1999, 17 skilled nursing facilities with a gross carrying
value of $36,055,000 were leased to Healthcare. Also, as of December 31, 1999,
Healthcare had mortgage loans secured by eight skilled nursing facilities with
total outstanding principal of $30,424,000 and a weighted average interest rate
of 9.18% payable to the Company's REMIC pools. During 1999, the Company recorded
rental income of approximately $779,000 on properties leased to Healthcare. Two
of the skilled nursing facilities securing the mortgage loans payable to the
Company's REMIC pools are operated by Healthcare and the remaining six skilled
nursing facilities are leased to third party operators. Effective January 1,
2000, Healthcare will begin operating an additional 13 facilities with a gross
carrying value of $40,009,000 that are owned by the Company. Leases on 19 of the
facilities operated by Healthcare will expire in 2000 and the remaining 11 lease
expirations range from 2004 to 2013. The terms of these leases will be
renegotiated prior to their expiration; however, there can be no assurance that
the leases will be renewed or that if renewed, the annual base rents will remain
at the current level.
As of December 31, 1999 and 1998, the Company owned 239,900 and 299,900 shares,
respectively, of Healthcare common stock. At December 31 1999, the Company's
investment in Healthcare common stock is recorded at its fair value of $480,000
and $787,000, respectively, in the accompanying balance sheet. An unrealized
holding loss of $181,000 is included in comprehensive income for the year ended
December 31, 1999.
47
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. OTHER ASSETS
During 1999, the Company acquired $4,195,000 face amount of Assisted Living
Concepts, Inc. ("ALC") 5.625% convertible subordinated debentures due May
2003 and $15,645,000 face amount of ALC 6.0% convertible subordinated
debentures due November 2002 for an aggregate purchase price of $13,097,000.
As of December 31, 1999, our investment in ALC convertible debentures had a
weighted average cash yield of 8.3% and a weighted average effective yield of
19.1%. The Company accounts for its investment in ALC convertible
subordinated debentures at amortized cost as held-to-maturity securities. At
December 31, 1999, the Company's investment in ALC convertible subordinated
debentures had an amortized cost of $14,190,000 and a fair value of
$12,207,000.
During 1999, the Company provided one of its operators with a line of credit
secured by patient accounts receivable to fund working capital requirements.
The line of credit bears interest at the prime rate of interest plus 2% and
matures in February 2004. The Company performed a comprehensive evaluation of
the accounts receivable securing the line of credit and determined that
approximately $3,329,000 of the amounts advanced were not recoverable. See
Note. 5- Impairment Charge. At December 31, 1999, advances of $4,954,000 were
estimated to be recoverable.
During 1997, the Company acquired non-voting common stock of Home and
Community Care, Inc. ("HCI"), an owner, operator and developer of assisted
living residences, for $5,000,000. Subsequently, the Company received a
distribution of $5,000,000 representing a return of investment and ALC
acquired all of the outstanding common stock of HCI for which the Company
received gross proceeds of $2,000,000. During 1997, a net gain of $1,015,000
was recorded on the sale and is included in other income, net. During 1999
and 1998, the Company received additional payments of $623,000 and $698,000,
respectively for units under development by HCI at the date of the
acquisition.
9. DEBT OBLIGATIONS
BANK BORROWINGS. As of December 31, 1999 and 1998, $135,000,000 and
$100,000,000, respectively, was outstanding under the Company's $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. During the year ended December 31, 1999, pricing
under the Revolving Credit Facility was LIBOR plus 1.25%. 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. During 1999, the
Company obtained a $25,000,000 term loan that bears interest at LIBOR plus
1.25% and matures October 2, 2000.
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 was credited interest at three month LIBOR and paid interest at a
fixed rate of 4.74% on a notional amount of $50,000,000. The differential
paid or received on the interest rate swap was recognized as an adjustment to
interest expense. During 1999, the Company received $657,000 upon early
termination of the interest rate swap which is being amortized over the term
of the original swap agreement.
48
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONVERTIBLE SUBORDINATED DEBENTURES.
<TABLE>
<CAPTION>
Conversion Outstanding Principal at
Price per December 31,
Interest -----------------------------
Rate Maturity Share 1999 1998
- ------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
8.50% January 2001 $15.50 $11,849,000 $22,969,000
8.25% September 1999 $15.50 - 10,000,000
7.75% January 2002 $16.50 2,408,000 4,518,000
8.25% July 2001 $17.25 10,385,000 19,180,000
----------- -----------
$24,642,000 $56,667,000
=========== ===========
</TABLE>
On September 30, 1999, $10,000,000 outstanding principal amount of 8.25%
Convertible Subordinated Debentures matured and were repaid. During 1999, the
Company repurchased an aggregate of $21,590,000 face amount of its
convertible debentures on the open market for an aggregate purchase price of
$19,992,000. A gain of $1,304,000 on the repurchase of convertible debentures
is included in other income, net in the accompanying income statement. During
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 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.
As of December 31, 1999, the convertible subordinated debentures outstanding
were convertible into 1,512,420 shares of common stock. Based on quoted
market prices the fair value of the debentures approximated $21,907,000 and
$58,388,000 at December 31, 1999 and 1998, respectively.
MORTGAGE LOANS PAYABLE. During 1999, the Company acquired five skilled
nursing facilities that were subject to non-recourse mortgage loans of
approximately $10,595,000. These mortgage loans have a current weighted
average interest rate of 11.4%, have maturities ranging from November 2003 to
January 2005 and are payable to the 1994-1 and 1996-1 REMIC pools. Two
skilled nursing facilities and the rehabilitation hospital acquired in 1999
were acquired with non-recourse mortgage financing of $6,500,000 provided by
a third-party lender that bears interest at the prime rate of interest and
matures in December 2002. During 1999, the Company obtained non-recourse
mortgage financing of $18,485,000 from a third-party lender. The mortgage
loan is secured by 10 assisted living facilities, bears interest at 8.81% and
matures in December 2009. Proceeds from the mortgage loan were used to repay
outstanding borrowings under the Revolving Credit Facility.
Mortgage loans and weighted average interest rates for loans payable to
REMIC's formed by the Company were:
<TABLE>
<CAPTION>
December 31, 1999 Rate December 31, 1998 Rate
----------------- ------ ----------------- ------
<S> <C> <C> <C> <C>
1993-1 Pool $ 22,107,000 12.0% $ 22,283,000 12.0%
1994-1 Pool 6,042,000 11.5 2,992,000 11.4
1996-1 Pool 23,672,000 10.3 16,312,000 9.8
1998-1 Pool 13,730,000 9.3 13,845,000 9.3
------------ ------------
$ 65,551,000 $ 55,432,000
============ ============
</TABLE>
As of December 31, 1999 and 1998, the aggregate carrying value of real estate
properties securing the Company's mortgage loans payable was $128,636,000 and
$84,676,000, respectively.
49
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BONDS PAYABLE AND CAPITAL LEASES. At December 31, 1999 and 1998, the Company
had outstanding principal of $7,815,000 and $8,065,000, respectively 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, 1999, the weighted average interest rate, including letter of credit
fees, on the outstanding bonds was 6.0%. At December 31, 1999 and 1998, the
Company had outstanding principal of $4,162,000 and $4,191,000, respectively
on a multi-unit housing tax-exempt revenue bond that bears interest at 10.9%
and matures in 2025.
At December 31, 1999 and 1998, the Company had outstanding principal of
$5,119,000 and $5,340,000, 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.
As of December 31, 1999 and 1998, the aggregate carrying value of real estate
properties securing the Company's bonds payable and capital leases was
$25,719,000.
SCHEDULED PRINCIPAL PAYMENTS. Total scheduled principal payments for the
mortgage loans payable, bonds payable and capital lease obligations as of
December 31, 1999 were $1,637,000, $1,506,000, $9,385,000, $17,163,000,
$5,254,000 and $72,687,000 in 2000, 2001, 2002, 2003, 2004 and thereafter.
10. 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.
REPURCHASE OF COMMON STOCK. During 1999 and 1998 the Company repurchased and
retired 649,800 and 200,000 shares of common stock, respectively, for an
aggregate purchase price of $7,039,000 and $3,345,000, respectively.
Subsequent to December 31, 1999, the Company repurchased and retired an
additional 996,600 (unaudited) shares of common stock for an aggregate
purchase price of $7,917,000 (unaudited).
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
50
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. Total shares available for grant under the Plans as of December 31,
1999, 1998 and 1997 were 507,040, 507,000 and 31,000, respectively. All
options outstanding as of December 31, 1999 vest over three years from the
original date of grant. Unexercised options expire seven years after the date
of vesting.
Nonqualified stock option activity for the years ended December 31, 1999,
1998 and 1997 was as follows:
<TABLE>
<CAPTION>
Shares Weighted Average Price
----------------------------------- ----------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Outstanding, January 1 23,000 169,500 873,300 $14.86 $11.21 $11.30
Granted - - 15,000 $ - $ - $17.00
Exercised - (146,500) (717,800) $ - $10.64 $11.44
Canceled - - (1,000) $ - $ - $12.00
-------- -------- --------
Outstanding, December 31 23,000 23,000 169,500 $14.86 $14.86 $11.21
======== ======== ========
Exercisable, December 31 18,000 12,000 31,500 $14.26 $13.83 $11.21
======== ======== ========
</TABLE>
Restricted stock activity for the years ended December 31, 1999, 1998 and 1997
was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Outstanding, January 1 393,000 382,000 160,000
Granted 448,800 24,000 313,000
Vested (128,560) (13,000) (91,000)
Canceled (448,840) - -
--------- ---------- ----------
Outstanding, December 31 264,400 393,000 382,000
========= ========== ==========
Compensation Expense $ - $1,492,000 $1,640,000
========= ========== ==========
</TABLE>
In March 1999, all outstanding shares of restricted stock were cancelled.
Subsequently, restricted stock awards aggregating 448,800 shares with a
weighted average fair value on the date of grant of $11.50 per share were
granted to employees and non-employee directors. Each grantee will vest
shares equal to 10% of their total grant per year if the Company meets
certain financial objectives and the grantee remains employed by the Company.
If, in any given year, the Company does not meet the stated financial
objectives then the shares scheduled to vest in that year will not vest and
the vesting period will be extended by one year. 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. During 1999, certain recipients of
restricted stock awarded in 1999 immediately vested in a portion of such
shares. Compensation expense related to the vested shares approximated
compensation expense recognized in prior years on the unvested shares that
were cancelled in 1999. Future compensation expense will be recognized over
the service period at the market price per share on the date of vesting.
As of December 31, 1999, 1998 and 1997, there were 18,000, 18,000 and 31,000
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, the weighted average
51
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expected life assumption was three years, the weighted average volatility was
.16 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. There was
no material pro-forma effect on net income or earnings per share for the year
ended December 31, 1999, 1998 and 1997. The weighted average exercise price
of the options was $15.65, $15.65 and $14.99 and the weighted average
remaining contractual life was 5.9, 6.9 and 7.6 years as of December 31,
1999, 1998 and 1997, 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 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 originally
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 shares, respectively, of the
Company's common stock under the loan program. At December 31, 1999 and 1998,
loans totaling $10,258,000 and $11,200,000 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 $6,691,000 at December 31, 1999.
11. DISTRIBUTIONS
The Company must distribute at least 95% (90% for years ending after December
31, 2000) 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 1999 and 1997 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.
The Federal income tax classification of the per share common stock
distributions are as follows (unaudited):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Ordinary income $1.185 $1.355 $1.293
Non-taxable distribution 0.375 0.397 0.037
Section 1250 capital gain - 0.051 0.030
Long term capital gain - 0.201 0.075
------------- ------------- -------------
Total $1.560 $2.004 $1.435
============= ============= =============
</TABLE>
On February 9, 2000, the Company declared a dividend of $0.29 per share on
its common stock for the quarter ended March 31, 2000.
52
<PAGE>
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. NET INCOME PER SHARE
Basic and diluted net income per share were as follows (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net income $31,827 $50,593 $35,763
Preferred dividends (15,087) (12,896) (6,075)
------------- ------------- -------------
Net income for basic net income per share 16,740 37,697 29,688
7.75% debentures due 2002 - 516 -
8.5% debentures due 2000 - 684 -
8.25% debentures due 1999 - 860 -
Other dilutive securities - 192 32
------------- ------------- -------------
Net income for diluted net income per share $16,740 $39,949 $29,720
============= ============= =============
Shares for basic net income per share 27,412 27,077 23,511
Stock options - 11 277
7.75% debentures due 2002 - 417 -
8.5% debentures due 2000 - 497 -
8.25% debentures due 1999 - 645 -
Other dilutive securities - 176 75
------------- ------------- -------------
Shares for diluted net income per share 27,412 28,823 23,863
============= ============= =============
Basic net income per share $0.61 $1.39 $1.26
============= ============= =============
Diluted net income per share $0.61 $1.39 $1.25
============= ============= =============
</TABLE>
The conversion of subordinated debentures and stock options were
anti-dilutive in 1999 and 1997.
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter ended
--------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
1999
- ----
Revenues $22,204 $22,766 $21,959 $20,733
Net income available to
common stockholders 8,768 9,112 8,174 (9,314)(1)
Basic net income per share 0.32 0.33 0.30 (0.34)
Diluted net income per share 0.32 0.33 0.30 (0.34)
Dividends per share 0.39 0.39 0.39 0.39
1998
- ----
Revenues $21,219 $22,579 $23,251 $22,342
Net income 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
</TABLE>
(1) Includes an impairment charge of $14.9 million. See Note 5. Impairment
Charge.
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 22, 2000, to be filed
pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 22, 2000, to be filed
pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 22, 2000, to be filed
pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy statement
for the Annual Meeting of Stockholders to be held May 22, 2000, to be filed
pursuant to Regulation 14A.
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K.
(a) Financial 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.
54
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
(ITEM 14(a))
<TABLE>
<S> <C>
VII. Valuation and Qualifying Accounts ............... 56
XI. Real Estate and Accumulated Depreciation ........ 57
XII. Mortgage Loans on Real Estate ................... 62
</TABLE>
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.
55
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE VII
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Balance at Beginning of
Period Charge to Operations Balance at End of Period
--------------------------- ----------------------- -------------------------
<S> <C> <C> <C>
Allowance for Doubtful Accounts:
1999 $1,250 $ - $1,250
1998 $1,000 $ 250 $1,250
1997 $1,000 $ - $1,000
</TABLE>
56
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at which
Initial Cost to Carried
Company at December 31, 1999
------------------ Costs ----------------------------
Building Capitalized Building Construction/
and After and Accum. Renovation Acquisition
Encumbrance Land Improvements Acquisition Land Improvements Total(1) Deprec.(2) Date Date
------------- ------------------------------ ---------------------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Skilled
Nursing
Facilities:
Demopolis, AL $10,445 (3) $ 71 $ 2,141 $ - $ 71 $ 2,141 $ 2,212 337 1972 Jun-95
Fort Payne, AL - (3) 37 3,588 - 37 3,588 3,625 609 1967/73 Jun-95
Jackson, AL - (3) 64 2,620 - 64 2,620 2,684 402 1964 Jun-95
Madison, AL - (3) 30 2,328 - 30 2,328 2,358 383 1964/74 Jun-95
Phoenix, AL - (3) 59 2,123 - 59 2,123 2,182 359 1969 Jun-95
Bradenton, FL - 330 2,720 - 330 2,720 3,050 581 1989 Sep-93
Clearwater, FL - 454 2,903 - 454 2,903 3,357 736 1965/93 Sep-93
Crestview, FL - 140 2,306 - 140 2,306 2,446 438 1988 Jun-94
San Destin, FL - 175 3,875 - 175 3,875 4,050 673 1986 Feb-95
Gulf Breeze, FL - 600 6,020 - 600 6,020 6,620 1,140 1984 Jun-94
Lecanto, FL - 351 2,665 2,247 351 4,912 5,263 903 1988 Sep-93
Pensacola, FL - 190 4,295 - 190 4,295 4,485 826 1972 Jun-94
Pensacola, FL - 230 4,663 - 230 4,663 4,893 884 1991 Jun-94
Starke, FL - 113 4,783 - 113 4,783 4,896 902 1989 Jun-94
Chicago
Heights, IL - 221 6,406 - 221 6,406 6,627 1,200 1988 Sep-94
Rusk, TX - 34 2,399 - 34 2,399 2,433 574 1969 Mar-94
Chesapeake, VA - 656 3,201 - 656 3,201 3,857 618 1977 Oct-95
Richmond, VA - 354 3,711 - 354 3,711 4,065 565 1970/75/80 Oct-95
Tappahannock,
VA - (15) 209 1,928 - 209 1,928 2,137 582 1977/78 Oct-95
Toppanish, WA 2,574 (4) 132 2,654 - 132 2,654 2,786 439 1960/70 Jun-95
Vancouver, WA - (4) 60 3,031 - 60 3,031 3,091 518 1952/94 Jun-95
Jefferson, IA 10,360 (5) 36 1,933 191 36 2,124 2,160 256 1968/72 Jan-96
Houston, TX 7,041 (9) 202 4,458 402 202 4,860 5,062 632 1961 Jun-96
Houston, TX 6,690 (10) 361 3,773 193 361 3,966 4,327 532 1964/68 Jun-96
Montgomery, AL 3,820 (6) 144 5,426 - 144 5,426 5,570 735 1967/74 Jan-96
Carroll, IA (5) 60 1,020 31 60 1,051 1,111 141 1969 Jan-96
Houston, TX (9) 202 4,458 398 202 4,856 5,058 559 1967 Jun-96
Woodbury, TN - 100 2,900 - 100 2,900 3,000 382 1972/75/90 May-96
Whiteright, TX 1,103 100 2,923 - 100 2,923 3,023 428 1962/64/65 Jan-96
Granger, IA (5) 93 1,325 36 93 1,361 1,454 184 1979 Jan-96
Bedford, TX (5) 345 3,195 289 345 3,484 3,829 457 1960 Jan-96
Midland, TX 2,004 32 2,285 - 32 2,285 2,317 331 1973 Feb-96
Tiptonville, TN - 100 2,450 - 100 2,450 2,550 349 1975 May-96
Gardendale, AL - 84 6,316 - 84 6,316 6,400 748 1976/84 May-96
Polk City, IA (5) 88 1,351 - 88 1,351 1,439 180 1976 Jan-96
Atmore, AL (6) 23 2,985 - 23 2,985 3,008 394 1967/74 Jan-96
Mesa, AZ 4,425 305 6,909 1,696 305 8,605 8,910 904 1975/96 Jun-96
Houston, TX - (10) 572 5,965 789 572 6,754 7,326 930 1967 Jun-96
Roberta, GA - 100 2,400 - 100 2,400 2,500 328 1964 May-96
Norwalk, IA (5) 45 1,035 - 45 1,035 1,080 142 1975 Jan-96
Altoona, IA (5) 102 2,312 - 102 2,312 2,414 302 1973 Jan-96
Los Angeles, CA - 100 2,475 - 100 2,475 2,575 275 1963 Jan-97
</TABLE>
57
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at which
Initial Cost to Carried
Company at December 31, 1999
------------------ Costs ----------------------------
Building Capitalized Building Construction/
and After and Accum. Renovation Acquisition
Encumbrance Land Improvements Acquisition Land Improvements Total(1) Deprec.(2) Date Date
------------ -------------------------------- ---------------------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sacramento, CA - 220 2,929 - 220 2,929 3,149 325 1968 Feb-97
Coffeyville, KS - (15) - - - - - - - 1962 May-97
Salina, KS - 100 1,153 397 100 1,550 1,650 567 1985 May-97
South Haven,KS - (15) - - - - - - - 1969 May-97
Portland, OR - 100 1,925 458 100 2,383 2,483 215 1956/74 Jun-97
Nacogdoches, TX - 100 1,738 - 100 1,738 1,838 143 1973 Oct-97
Cushing, TX - 100 1,679 - 100 1,679 1,779 137 1973/84 Oct-97
Mesa, AZ 2,958 420 4,258 32 420 4,290 4,710 272 1972 Oct-97
Wells, TX 2,247 (7) 100 1,649 7 100 1,656 1,756 120 1980 Jan-98
Corrigan, TX (7) 100 1,649 7 100 1,656 1,756 120 1985 Jan-98
Groesbeck, TX 1,313 100 1,649 7 100 1,656 1,756 120 1972 Jan-98
Tampa, FL - 100 6,402 42 100 6,444 6,544 364 1970 Jun-98
Jonesboro, GA 2,690 150 2,573 3 150 2,576 2,726 25 1970 Sep-99
Griffin, GA 4,799 (11) 500 2,900 3 500 2,903 3,403 28 1969 Sep-99
Atlanta, GA - (11) 175 1,282 - 175 1,282 1,457 16 1968 Sep-99
Des Moines, IA - (15) 100 2,111 - 100 2,111 2,211 48 1972 Sep-99
Olathe, KS - 520 1,872 - 520 1,872 2,392 17 1968 Sep-99
Fayetteville,NC - (15) 109 1,212 - 109 1,212 1,321 20 1983/84/90 Sep-99
Crawfordville, FL - (15) 522 1,815 866 522 2,681 3,203 42 1974 Sep-99
Venice, FL - (15) 236 2,286 822 236 3,108 3,344 44 1969/72 Sep-99
Sumner, IL 975 100 877 - 100 877 977 8 1968 Oct-99
Topeka, KS - (15) - 800 - - 800 800 - 1957 Oct-99
Carlinville, IL - 100 1,084 - 100 1,084 1,184 9 1965 Oct-99
Fort Worth, TX 2,108 100 1,534 - 100 1,534 1,634 13 1974 Dec-99
Jessup, GA 6,500 (14) 425 75 - 425 75 500 - 1953 Dec-99
Fort Valley, GA - (14) 90 910 - 90 910 1,000 - 1965 Dec-99
Gardner, KS - (14) 4,270 937 - 4,270 937 5,207 - 1961/74 Dec-99
------ ----------------------------- --------------------------- ------
Skilled
Nursing
Facilities 72,052 16,541 185,553 8,916 16,541 194,469 211,010 25,511
------ ----------------------------- --------------------------- ------
Assisted
Living
Residences:
Dodge City, KS 1,505 88 1,663 - 88 1,663 1,751 200 1995 Dec-95
Great Bend, KS 1,262 87 1,563 17 87 1,580 1,667 189 1995 Dec-95
McPherson, KS 1,093 75 1,575 - 75 1,575 1,650 189 1994 Dec-95
Salina, KS 1,258 72 1,578 - 72 1,578 1,650 189 1994 Dec-95
Longview, TX - 38 1,568 - 38 1,568 1,606 181 1995 Oct-95
Marshall, TX - 38 1,568 450 38 2,018 2,056 214 1995 Oct-95
Walla Walla, WA 7,815 (8) 100 1,940 - 100 1,940 2,040 200 1996 Apr-96
Greenville, TX - 42 1,565 - 42 1,565 1,607 173 1995 Jan-96
Camas, WA - (8) 100 2,175 - 100 2,175 2,275 212 1996 May-96
Grandview, WA - (8) 100 1,940 - 100 1,940 2,040 204 1996 Mar-96
Vancouver, WA - (8) 100 2,785 - 100 2,785 2,885 271 1996 Jun-96
Athens, TX - 96 1,512 - 96 1,512 1,608 167 1995 Jan-96
Lufkin, TX - 100 1,950 - 100 1,950 2,050 201 1996 Apr-96
</TABLE>
58
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at which
Initial Cost to Carried
Company at December 31, 1999
------------------ Costs ----------------------------
Building Capitalized Building Construction/
and After and Accum. Renovation Acquisition
Encumbrance Land Improvements Acquisition Land Improvements Total(1) Deprec.(2) Date Date
----------- ------------------------------ ---------------------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kennewick. WA (8) 100 1,940 - 100 1,940 2,040 209 1996 Feb-96
Gardendale, AL - 16 1,234 - 16 1,234 1,250 146 1988 May-96
Jacksonville,
TX - 100 1,900 - 100 1,900 2,000 203 1996 Mar-96
Kelso, WA - 100 2,500 - 100 2,500 2,600 213 1996 Nov-96
Battleground,
WA - 100 2,500 - 100 2,500 2,600 208 1996 Nov-96
Hayden, ID - 100 2,450 243 100 2,693 2,793 218 1996 Dec-96
Klamath Falls,
OR - 100 2,300 - 100 2,300 2,400 192 1996 Dec-96
Newport, OR - 100 2,050 - 100 2,050 2,150 168 1996 Dec-96
Tyler, TX 11,535 (13) 100 1,800 - 100 1,800 1,900 149 1996 Dec-96
Wichita Falls,
TX - 100 1,850 - 100 1,850 1,950 153 1996 Dec-96
Ada, OK - 100 1,650 - 100 1,650 1,750 138 1996 Dec-96
Nampa, ID - 100 2,240 23 100 2,263 2,363 183 1997 Jan-97
Tulsa, OK - (13) 200 1,650 - 200 1,650 1,850 131 1997 Feb-97
Durant, OK - 100 1,769 - 100 1,769 1,869 131 1997 Apr-97
San Antonio, TX - (13) 100 1,900 - 100 1,900 2,000 140 1997 May-97
Troy,OH - 100 2,435 306 100 2,741 2,841 186 1997 May-97
Waco, TX - 100 2,235 - 100 2,235 2,335 157 1997 Jun-97
Tulsa, OK - (13) 100 2,395 - 100 2,395 2,495 167 1997 Jun-97
San Antonio, TX - (13) 100 2,055 - 100 2,055 2,155 145 1997 Jun-97
Norfolk, NE - 100 2,123 - 100 2,123 2,223 145 1997 Jun-97
Wahoo, NE - 100 2,318 - 100 2,318 2,418 152 1997 Jul-97
York, NE - 100 2,318 - 100 2,318 2,418 152 1997 Aug-97
Hoquiam, WA - 100 2,500 - 100 2,500 2,600 163 1997 Aug-97
Tiffin, OH - 100 2,435 - 100 2,435 2,535 159 1997 Aug-97
Millville, NJ - 100 2,825 - 100 2,825 2,925 182 1997 Aug-97
Fremont,OH - 100 2,435 - 100 2,435 2,535 159 1997 Aug-97
Lake Havasu, AZ - 100 2,420 - 100 2,420 2,520 158 1997 Aug-97
Greeley, CO - 100 2,310 270 100 2,580 2,680 162 1997 Aug-97
Springfield, OH - 100 2,035 270 100 2,305 2,405 141 1997 Aug-97
Watauga, TX - 100 1,667 - 100 1,667 1,767 109 1996 Aug-97
Bullhead Ctiy,
AZ - 100 2,500 - 100 2,500 2,600 157 1997 Aug-97
Arvada, CO 6,950 (12) 100 2,810 276 100 3,086 3,186 189 1997 Aug-97
Edmond, OK (13) 100 1,365 526 100 1,891 1,991 114 1996 Aug-97
Wetherford, OK - 100 1,668 592 100 2,260 2,360 135 1996 Aug-97
Eugene, OR - 100 2,600 - 100 2,600 2,700 163 1997 Sep-97
Caldwell, ID - 100 2,200 - 100 2,200 2,300 140 1997 Sep-97
Burley, ID - 100 2,200 - 100 2,200 2,300 140 1997 Sep-97
Wheelersburg,
OH - 100 2,435 - 100 2,435 2,535 148 1997 Sep-97
Loveland, CO - (12) 100 2,865 270 100 3,135 3,235 183 1997 Sep-97
Wichita
Falls,TX - 100 2,750 - 100 2,750 2,850 172 1997 Sep-97
Beatrice, NE - 100 2,173 - 100 2,173 2,273 128 1997 Oct-97
Madison, IN - 100 2,435 - 100 2,435 2,535 143 1997 Oct-97
Newark, OH - 100 2,435 - 100 2,435 2,535 143 1997 Oct-97
</TABLE>
59
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
<TABLE>
<CAPTION>
Gross Amount at which
Initial Cost to Carried
Company at December 31, 1999
------------------ Costs ----------------------------
Building Capitalized Building Construction/
and After and Accum. Renovation Acquisition
Encumbrance Land Improvements Acquisition Land Improvements Total(1) Deprec.(2) Date Date
------------ --------------------------------- ---------------------------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Elkhart, IN - 100 2,435 - 100 2,435 2,535 132 1997 Dec-97
Newport
Richey, FL - 100 5,845 60 100 5,905 6,005 345 1986/95 Jan-98
Fremont, CA - 100 3,080 212 100 3,292 3,392 150 1998 Mar-98
Eugene, OR - 100 8,100 31 100 8,131 8,231 364 1998 Mar-98
RioRancho, NM - 100 8,300 32 100 8,332 8,432 372 1998 Mar-98
Ft. Meyers, FL - 100 2,728 9 100 2,737 2,837 129 1998 Mar-98
Tallahassee, FL - (13) 100 3,075 - 100 3,075 3,175 136 1998 Apr-98
Niceville, FL - 100 2,680 - 100 2,680 2,780 108 1998 Jun-98
Longmont, CO - (12) 100 2,640 - 100 2,640 2,740 106 1998 Jun-98
Shelby, NC - 100 2,805 - 100 2,805 2,905 113 1998 Jun-98
Spring Hill, FL - 100 2,650 - 100 2,650 2,750 107 1998 Jun-98
Portland, OR 4,162 100 7,622 - 100 7,622 7,722 293 1986 Jun-98
Tuscon, AZ - 100 8,700 - 100 8,700 8,800 334 1998 Jun-98
Denison, IA - 100 2,713 - 100 2,713 2,813 109 1998 Jun-98
Roseville, CA - 100 7,300 - 100 7,300 7,400 281 1998 Jun-98
Cheyenne, WY - 100 5,290 - 100 5,290 5,390 206 1998 Jun-98
Casper, WY - 100 3,610 - 100 3,610 3,710 143 1998 Jun-98
Laramie, WY - 100 3,610 - 100 3,610 3,710 134 1998 Jul-98
Ft. Collins, CO - 100 2,961 - 100 2,961 3,061 79 1998 Mar-99
Greenwood, SC - 100 2,638 - 100 2,638 2,738 70 1998 Mar-99
Greenville, NC - 100 2,478 - 100 2,478 2,578 65 1998 Mar-99
Sumter, SC - 100 2,351 - 100 2,351 2,451 53 1998 Mar-99
Central, SC - 100 2,321 - 100 2,321 2,421 52 1998 Mar-99
Rocky Mount, NC - 100 2,494 - 100 2,494 2,594 54 1998 Mar-99
New Bern, NC - 100 2,428 - 100 2,428 2,528 43 1998 Mar-99
Goldsboro, NC - 100 2,386 - 100 2,386 2,486 41 1998 Mar-99
Ft. Collins, CO - 100 3,400 - 100 3,400 3,500 36 1999 Jul-99
Rocky River, OH - 760 6,963 - 760 6,963 7,723 56 1998 Oct-99
Erie, PA - 850 7,477 - 850 7,477 8,327 62 1998 Oct-99
----------- ------------------------------ ---------------------------- -------
Assisted
Living
Residences 35,580 9,662 239,137 3,587 9,662 242,724 252,386 13,637
----------- ------------------------------ ---------------------------- -------
Schools
Phoenix, AZ - 100 1,834 - 100 1,834 1,934 88 1980/97/98 May-98
Paradise
Valley, AZ - 100 2,728 27 100 2,755 2,855 137 1988/95 Jun-98
Egan, MN - 100 3,688 26 100 3,714 3,814 185 1987/97 Jun-98
Phoenix, AZ - 100 5,201 27 100 5,228 5,328 217 1998 Sep-98
Trenton, NJ - 100 6,000 2,086 100 8,086 8,186 200 1930/98 Dec-98
Scottsdale, AZ - 1,000 8,400 - 1,000 8,400 9,400 - 1999 Dec-99
--------------------------------- ------- ---------------------------- -------
Schools - 1,500 27,851 2,166 1,500 30,017 31,517 827
--------------------------------- ------- ---------------------------- -------
$ 107,632 $27,703 $ 452,541 $14,669 $27,703 $ 467,210 $494,913 $39,975
=========== ============================== ============================ =======
</TABLE>
60
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
(1) The aggregate cost for federal income tax purposes.
(2) Depreciation for building is calculated using a 35 year life for skilled
nursing facilities and 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.
(11) Single note backed by two facilities in Georgia
(12) Single note backed by three facilities in Colorado
(13) Single note backed by one facility in Florida, three facilities in
Oklahoma, and three facilities in Texas
(14) Single note backed by one facility in Kansas and two facilities in Georgia
(15) An impairment charge totaling $7,662,000 was taken against 8 facilities.
Activity for the years ended December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Real Estate Accumulated
& Equipment Depreciation
----------- ------------
<S> <C> <C>
Balance at December 31, 1996 $ 223,578 $ 11,640
Additions 118,589 9,040
Conversion of mortgage
loans into owned properties 9,348 -
Impairment charge (1,400) -
Cost of real estate sold (31,245) (638)
---------- ----------
Balance at December 31, 1997 318,870 20,042
Additions 157,324 11,959
Conversion of mortgage
loans into owned properties 7,301
Cost of real estate sold (7,654) (1,309)
Cost of real estate in
spin-off (65,182) (3,720)
---------- ----------
Balance at December 31, 1998 410,659 26,972
Additions 44,362 13,237
Conversion of mortgage
loans into owned properties 47,554 -
Impairment charge (7,662) (234)
========== ==========
Balance at December 31, 1999 $ 494,913 $ 39,975
========== ==========
</TABLE>
61
<PAGE>
LTC PROPERTIES, INC.
SCHEDULE XII
MORTGAGE LOANS ON REAL ESTATE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION> Principal
Amount
of Loans
Carrying Subject to
Amount Current Delinquent
Final Face of Mortgages Monthly Principal
Number of Number of Interest Maturity Balloon Amount of December 31, Debt or
State Facilities Units/Beds Rate(1) Date Amount(2) Mortgages 1999 Service Interest
- ----- ---------- ---------- ----------- --------- --------- --------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SC 5 509 12.30% 2003 $ 11,119 $ 11,250 $ 10,895 $ 119 $ -
FL/TN 4 377 11.10% 2005 5,977 7,680 7,464 77 7,464
CO 2 230 11.50% 2007 5,412 6,000 5,897 61 -
MS 1 180 11.32% 2006 5,033 5,465 5,407 55 -
AZ 1 256 10.96% 2001 5,033 5,250 5,130 51 -
OH 1 150 10.49% 2006 4,579 5,200 5,031 49 -
FL 1 191 11.75% 2017 0 4,500 4,340 49 -
Various(4) 50 4,748 9.01%-13.5% 2000-2018 61,869 93,834 88,279 934 1,583
================= ==================== ========= ====== ======
65 6,641 $ 99,022 $ 139,179 $ 132,443 (3) $1,395 $9,047
================= ==================== ========= ====== ======
</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 any prior liens.
(4) Includes 56 first-lien mortgage loans as follows:
<TABLE>
<CAPTION>
No. of
Loans Original loan amounts:
---------- ---------------------
<S> <C>
27 $247 - $2,000
15 $2,001 - $3,000
6 $3,001 - $4,000
2 $4,001 - $5,000
4 $5,001 - $6,000
2 $6,001 - $11,250
</TABLE>
Activity for the years ended December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<S> <C>
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
New mortgage loans 6,678
Additional funding of existing loans 1,890
Conversion of notes to owned properties (47,554)
Impairment Charges (2,806)
Collections of principal (6,729)
=========
Balance at December 31, 1999 $ 132,443
=========
</TABLE>
62
<PAGE>
INDEX TO EXHIBITS
(ITEM 14(b))
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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 (incorporated by reference to Exhibit 4.5
to LTC Properties, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998)
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 (incorporated by reference to Exhibit 4.6
to LTC Properties, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998)
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 (incorporated by reference to Exhibit 4.7 to
LTC Properties, Inc.'s Annual Report on Form 10-K for the year
ended December 31, 1998)
10.1 Master Repurchase Agreement dated May 14, 1993 between LTC
Properties, Inc. and Goldman Sachs Mortgage Company (incorporated
by reference to Exhibit 10.5 to LTC Properties, Inc.'s Form
</TABLE>
63
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
(ITEM 14(b))
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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)
</TABLE>
64
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
(ITEM 14(b))
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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)
</TABLE>
65
<PAGE>
INDEX TO EXHIBITS (CONTINUED)
(ITEM 14(b))
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
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 (incorporated
by reference to Exhibit 10.28 to LTC Properties, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1998)
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 (incorporated by reference
to Exhibit 10.29 to LTC Properties, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1998)
10.30 Second Amended and Restated Employment Agreement between Andre C.
Dimitriadis and LTC Properties, Inc. dated March 26, 1999
(incorporated by reference to Exhibit 10.30 to LTC Properties,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1998)
10.31 Amended and Restated Employment Agreement between James J.
Pieczynski and LTC Properties, Inc. dated March 26, 1999
(incorporated by reference to Exhibit 10.31 to LTC Properties,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1998)
10.32 Amended and Restated Employment Agreement between Christopher T.
Ishikawa and LTC Properties, Inc. dated March 26, 1999
(incorporated by reference to Exhibit 10.32 to LTC Properties,
Inc.'s Annual Report on Form 10-K for the year ended December 31,
1998)
10.33 Employment Agreement between Julia L. Kopta and LTC Properties,
Inc. dated January 1, 2000
10.34 First Amendment to Credit Agreement dated May 15, 1998
10.35 Second Amendment to Credit Agreement dated October 21, 1998
10.36 Third Amendment to Credit Agreement dated December 23, 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, 1999
99.0 Risk Factors
</TABLE>
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the securities Exchange
Act of 1934, Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
LTC Properties, Inc.
Registrant
Dated: March 3, 2000 By: /s/ JAMES J. PIECZYNSKI
------------------------
JAMES J. PIECZYNSKI
President, Chief Financial Officer and Director
<TABLE>
<S> <C> <C>
/s/ ANDRE C. DIMITRIADIS Chairman of the Board, March 3, 2000
- ------------------------- Chief Executive Officer
ANDRE C. DIMITRIADIS and Director
/s/ JAMES J. PIECZYNSKI
- ------------------------- President, Chief Financial March 3, 2000
JAMES J. PIECZYNSKI Officer and Director
/s/ EDMUND C. KING Director March 3, 2000
- -------------------------
EDMUND C. KING
/s/ WENDY L. SIMPSON Director March 3, 2000
- -------------------------
WENDY L. SIMPSON
/s/ SAM YELLEN Director March 3, 2000
- --------------------------
SAM YELLEN
</TABLE>
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EXHIBIT 10.33
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
This Amended and Restated Employment Agreement (the "Agreement"),
effective as of January 1, 2000, is by and between LTC PROPERTIES, INC., a
corporation organized under the laws of the State of Maryland ("LTC" or the
"Company"), and JULIA L. KOPTA ("EXECUTIVE").
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, General Counsel and Corporate Secretary. 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 a Senior Vice President, General Counsel and Corporate
Secretary 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 her, with her consent, including serving with the consent or at the
request of the Chief Executive Officer as an officer or on the board of
directors of affiliated corporations. In addition, at the request of the Chief
Executive Officer, Executive shall serve as the General Counsel and Corporate
Secretary of LTC Healthcare, Inc., a Nevada corporation.
2. TERM OF AGREEMENT. The term of this Agreement shall commence as of
the date hereof and shall extend such that at each and every moment of time
hereafter the remaining term shall be one year.
3. ACCEPTANCE OF POSITION. Executive accepts the position of Senior
Vice President, General Counsel and Corporate Secretary of LTC, and agrees that
during the term of this Agreement she will faithfully perform her duties and,
except as expressly approved by the Board of Directors of LTC, will devote
substantially all of her business time to the business and affairs of LTC (and,
to the extent requested by the Chief Executive Officer, LTC Healthcare, Inc.),
and will not engage, for her 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 her 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.
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4. SALARY AND BENEFITS. During the term of this Agreement:
(1) 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
("Base Salary"), 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.
(2) 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.
(3) 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.
(4) LTC shall grant Executive 20,000 shares of restricted stock
pursuant to LTC's Amended and Restated 1992 Stock Option Plan, which
restrictions shall lapse in five consecutive installments beginning January 1,
2001.
(5) LTC shall reimburse Executive for $23,600 for her estimated
expenses incurred in connection with her relocation from Pennsylvania to
California and the LTC will have no further liability for said relocation
expenses.
(6) Concurrently with the execution hereof, the Company will be
ready to loan Executive $150,000. Such loan shall be unsecured and shall bear
interest at a rate equal to the lowest rate under which the Company may borrow
money under it credit arrangements. Such loan shall be due upon the sale of
Executive's residence in Pennsylvania.
5. CERTAIN TERMS DEFINED. For purposes of this Agreement:
(1) 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 set forth in Section 1 hereof
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 her duties;
2
<PAGE>
(2) 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 result 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;
(3) 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 for more than seventy-five (75) miles
from LTC's offices located at 300 Esplanade Drive, Suite 1860, Oxnard,
California;
(4) "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;
(5) "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;
(6) "Beneficial Owner" shall have the meaning given to such
term in Rule 13d-3 under the Exchange Act;
(7) A "Change in Control" occurs if:
(1) Any Person or related group of Persons (other
than Executive and her 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
(2) 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
3
<PAGE>
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
(3) 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
(4) A majority of the members of the Board of
Directors of the Company cease to be Continuing Directors;
(8) "Code" means the Internal Revenue Code of 1986, as
amended.
(9) "Continuing Director" 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.
(10) "Exchange Act" means the Exchange Act of 1934, as
amended.
(11) "Person" means any individual, corporation, partnership,
limited liability company, trust, association or other entity.
(12) "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.
(1) 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
her 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
4
<PAGE>
available "key man" life, disability or similar insurance relating to the death
or disability of Executive;
(2) 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 two times her Base Salary;
(3) 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 terminated 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;
(4) In the event that Executive's employment terminates by
reason of her death, all benefits provided in this Section 6 shall be paid to
her estate or as her executor shall direct, but payment may be deferred until
Executive's executor or personal representatives has been appointed and
qualified pursuant to the laws in effect in Executive's jurisdiction of
residence at the time of her death;
(5) 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;
(6) 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;
(7) Gross-Up.
(1) 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 a 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
5
<PAGE>
"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 payment 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.
(2) 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. 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.
(3) As a result of the uncertainty in the application of
Subsection 4999 of the Code at the time of the initial determination thereunder,
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 (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 rat necessary to avoid "unstated interest" under
Section 7872 of the Code) with interest payments to
6
<PAGE>
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 her
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 her 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 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 directors and officers insurance 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 attorney 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/her address set forth below its/her
signature hereto, or at such other address as may be designated with postage
prepaid, shall be deemed given when received.
11. CONSTRUCTION. In constructing 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
provisions. In construing this Agreement, the singular shall include the plural,
the masculine shall include the feminine and neuter genders as appropriate, and
no meaning in 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 Employment Agreement
dated as of the date hereof) 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 shall be effective as of the date
specified in the first paragraph of this Agreement.
LTC, PROPERTIES, INC., a Maryland corporation
Address: 300 Esplanade St., #1860 By: /s/ Andre Dimitriadis
Oxnard, CA 90303 -----------------------------------------
Chairman and Chief Executive Officer
By: /s/ Wendy Simpson
-----------------------------------------
Chairman of Compensation Committee
Address: /s/ Julia Kopta
--------------------------- -----------------------------------------
Executive
---------------------------
<PAGE>
EXHIBIT 10.34
FIRST AMENDMENT TO CREDIT AGREEMENT
This First Amendment to Credit Agreement (the "First Amendment")
dated as of May 15, 1998, is made by LTC PROPERTIES, INC., a Maryland
corporation (the "Borrower"), the financial institutions party hereto
(together with their respective successors and permitted assigns, the
"Lenders"), BANQUE NATIONALE DE PARIS, Los Angeles Branch ("BNP"), as
Syndication Agent, THE SUMITOMO BANK, LIMITED, Chicago Branch ("Sumitomo"),
as Documentation Agent and SANWA BANK CALIFORNIA ("Sanwa"), as Administrative
Agent (in such capacity, the "Agent"). The parties hereto agree as follows:
RECITALS
WHEREAS, the Borrower, the Lenders and the Agent have heretofore
entered into that certain U.S. $170,000,000 Credit Agreement dated as of October
3, 1997 (the "Credit Agreement");
WHEREAS, the Borrower has requested, among other things, amendments to
the Credit Agreement to enable it to capitalize a new company, LTC Healthcare,
Inc. ("LTC Healthcare"), and to distribute its equity investment in LTC
Healthcare to the Borrower's existing shareholders. (Capitalized terms used and
not otherwise defined herein shall have their respective meanings as set forth
in the Credit Agreement); and
WHEREAS, the Lenders have agreed, upon the terms and conditions set
forth herein, to such amendments to the Credit Agreement and the related
documents.
NOW, THEREFORE, in consideration of the foregoing, the Borrower, the
Lenders and the Agent hereby agree as follows:
SECTION 1. Section 3.1(i) of the Credit Agreement shall be amended by
inserting the following sentence as the second sentence of such Section:
"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."
SECTION 2. Section 7.2 of the Credit Agreement shall be amended by
inserting a new subsection (iii) to read as follows after subsection (ii):
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<PAGE>
"and (iii) to capitalize LTC Healthcare, Inc., in an aggregate amount
not to exceed $40,000,000, $20,000,000 of which shall be by an equity
contribution from the Borrower and $20,000,000 of which shall be by means of a
note payable to the Borrower bearing interest at a minimum of 9.5%."
SECTION 3. Section 8.1 of the Credit Agreement shall be amended by
deleting the word "and" at the end of subsection (x), deleting the period at the
end of subsection (xi) and inserting "; and" in substitution therefor and
inserting a new subsection (xii) after subsection (xi) to read as follows:
"(xii) Debt assumed or guaranteed by the Borrower relating to
outstanding bonds payable to the Oregon Department of Housing in an aggregate
principal amount not to exceed $4,210,000; provided that the terms of interest
and principal repayment thereon are not changed from those in effect as of May
1, 1998."
SECTION 4. Section 8.3 of the Credit Agreement shall be amended by
deleting the proviso at the end of such Section and inserting in substitution
therefor the following:
"; provided that the foregoing shall not be construed as prohibiting
(a) a transfer of assets from a Subsidiary to the Borrower, (b) the merger of a
Subsidiary into the Borrower or (c) a transfer of assets having an aggregate
fair market value not to exceed $20,000,000 by the Borrower to LTC Healthcare,
Inc."
SECTION 5. The last sentence of Section 8.6 shall be deleted in its
entirety and the following shall be inserted in substitution therefor:
"Notwithstanding the foregoing, the Borrower may (i) 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 and (ii) capitalize LTC Healthcare, Inc. in
accordance with the provisions of Section 7.2(iii)."
SECTION 6. Section 8.8 of the Credit Agreement shall be amended by
deleting the word "and" at the end of subsection (viii), deleting the period at
the end of subsection (ix) and inserting" and" in substitution therefor and
inserting a new subsection ix) after subsection (ix) to read as follows:
"(x) Liens in existence as of May 1, 1998 on real estate, securing the
obligation to pay bonds assumed or guaranteed by the Borrower in an aggregate
principal amount not to exceed at any time $4,210,000."
SECTION 7. Section 8.9 of the Credit Agreement shall be amended by
deleting the word "and" at the end of subsection (ii) and inserting a comma in
substitution therefor, deleting the
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<PAGE>
period at the end of subsection (iii) and inserting a comma in substitution
therefor and inserting the following two new subsections after subsection (iii)
to read as follows:
", (iv) 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 and (v) the Borrower may make revolving loans to LTC Healthcare, Inc.
in an aggregate principal amount not to exceed $20,000,000."
SECTION 8. Section 8.10 of the Credit Agreement shall be amended by
deleting the word "and" at the end of subsection (xii), deleting the period at
the end of subsection (xiii) and inserting "; and" in substitution therefor and
inserting a new subsection (xiv) after subsection (xiii) to read as follows:
"(xiv) Investments by the Borrower in LTC Healthcare, Inc. not to
exceed at any time $40,000,000 in aggregate principal amount, which amount shall
be comprised only of (a) the loans made by the Borrower to LTC Healthcare, Inc.
pursuant to the provisions of Section 8.9(v) and (b) an Investment in an amount
not to exceed $20,000,000 which may only occur prior to the distribution
referenced in the last sentence of Section 8.11."
SECTION 9. Section 8.11 of the Credit Agreement shall be amended by
inserting the following sentence at the end of such Section:
"Notwithstanding the foregoing or any other provision of this
Agreement, the Borrower may distribute to its shareholders all of the Borrower's
equity interests in LTC Healthcare, Inc."
SECTION 10. This First Amendment shall become effective upon the
execution and delivery of each of the following documents:
(1) This First Amendment;
(2) Certified Board Resolutions of the Borrower;
(3) Confirming Certificate of the Borrower re Articles of
Incorporation, Bylaws and Incumbency Certificate;
(4) Certificate of the Borrower re Representations and
Warranties and No Default;
(5) Guarantors' Consent (in form and substance satisfactory to
the Agent); and
(6) pro forma covenant compliance certificates (in form and
substance satisfactory to the Agent) taking into account the
acquisition of a ll2-unit assisted living facility in Oregon
and the
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<PAGE>
capitalization and distribution of LTC Healthcare, Inc.
SECTION 11. This First Amendment may be executed in several
counterparts, each of which shall be an original and all of which shall
constitute but one and the same instrument.
SECTION 12. The Agent shall have received reimbursement of all costs
and expenses and payment of all fees incurred by the Agent in connection with
this First Amendment.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be duly executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
LTC PROPERTIES, INC.
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
SANWA BANK CALIFORNIA, as
Administrative Agent and Lender
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
BANQUE NATIONALE DE PARIS,
Los Angeles Branch,
as Syndication Agent and Lender
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
THE SUMITOMO BANK, LIMITED,
Chicago Branch
as Documentation Agent and Lender
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
-5-
<PAGE>
BANK OF MONTREAL,
as Lender
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
WELLS FARGO BANK, N.A.
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
NATIONSBANK OF TEXAS, N.A.
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
BANK HAPOALIM B.M.
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
BHF-BANK AKTIENGESELLSCHAFT
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
-6-
<PAGE>
BANK LEUMI TRUST COMPANY OF NEW
YORK
By:
----------------------------
Name:
---------------------------
Title:
--------------------------
-7-
<PAGE>
EXHIBIT 10.35
SECOND AMENDMENT TO CREDIT AGREEMENT
This Amendment, dated as of October 21, 1998, is entered into by LTC
PROPERTIES, INC., a Maryland corporation (the "BORROWER"), the financial
institutions party hereto (the "LENDERS"), BANQUE NATIONALE DE PARIS, acting
through its Los Angeles Branch, as Syndication Agent, and SANWA BANK
CALIFORNIA, as Administrative Agent (the "AGENT").
RECITALS
A. The parties hereto have entered into a Credit Agreement dated, as of
October 3, 1997, as amended by a First Amendment to Credit Agreement dated as of
May 15, 1998 (said Credit Agreement, as so amended, herein called the "CREDIT
AGREEMENT"). Terms defined in the Credit Agreement and not otherwise defined
herein have the same respective meanings when used herein, and the rules of
interpretation set forth in Section 1.2 of the Credit Agreement are incorporated
herein by reference.
B. The Borrower, the Lenders and the Agent wish to amend the Credit
Agreement to, among other things, revise certain of the covenants contained
therein. Accordingly, the Borrower, the Lenders and the Agent hereby agree as
set forth below.
SECTION 1. AMENDMENTS TO CREDIT AGREEMENT. Effective as of the date
first set forth above and subject to satisfaction of the conditions precedent
set forth in Section 2, the Credit Agreement is hereby amended as set forth
below.
(a) The definition of "Acquisition" in Section 1.1 of the
Credit Agreement is amended in full to read as follows:
"'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 percent-
<PAGE>
age of voting power) of the outstanding equity interests of a
partnership or other Person."
(b) Section 8.5 of the Credit Agreement is amended by (i)
deleting the word "acquisition" wherever it appears in such section and
substituting the word "Acquisition" and (ii) amending subsection (i) of such
section by adding "(or the assets to be acquired)" between the words "acquired"
and "are."
(c) The portion of Section 8.10 of the Credit Agreement
preceding subsection (i) of such section is amended by (i) adding ", and will
not permit any Subsidiary to, have or" between the words "not" and "purchase"
and (ii) adding "have or" between the words "or" and "make."
(d) Section 8.10(vii) of the Credit Agreement is amended in
full to read as follows:
"(vii) subsequent to the Closing Date, 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, (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 educational related line
of business."
(e) Section 8.10 of the Credit Agreement is amended by
deleting the word "and" at the end of subsection (xiii), deleting the period at
the end of subsection (xiv) and substituting "; and" therefor, and adding a new
subsection (xv) after subsection (xiv), to read as follows:
"(xv) 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 (1) such
purchases and loans shall not exceed an
-2-
<PAGE>
aggregate of $20,000,000 in respect of a single property and (2) the
aggregate amount of all such purchases, loans and Investments shall not
exceed $75,000,000."
(f) Section 8.12(i) of the Credit Agreement is amended in full
to read as follows:
"(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."
(g) Article 7 of the Credit Agreement is amended by adding a
new Section 7.14 at the end thereof, to read as follows:
"7.14 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."
SECTION 2. CONDITIONS TO EFFECTIVENESS. This Amendment shall become
effective as of the date first set forth above when the Agent has received all
of the following documents, each dated on or before the date hereof, in form and
substance satisfactory to the Agent and in the number of originals requested by
the Agent:
-3-
<PAGE>
(a) this Amendment, duly executed by the Borrower and the
Lenders;
(b) a consent to this Amendment, duly executed by the
Guarantors; and
(c) such other approvals, opinions, evidence and documents as
the Agent may reasonably request.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BORROWER. The Borrower
represents and warrants to the Lenders as set forth below.
(a) The execution, delivery and performance by the Borrower of
this Amendment and the Loan Documents, as amended hereby, to which it is or is
to be a party are within the Borrower's corporate powers, have been duly
authorized by all necessary corporate action and do not (i) contravene the
Borrower's charter documents or bylaws, (ii) contravene any Governmental Rule or
contractual restriction binding on or affecting the Borrower or (iii) result in
or require the creation or imposition of any Lien or preferential arrangement of
any nature (other than any created by the Loan Documents) upon or with respect
to any of the properties now owned or hereafter acquired by the Borrower.
(b) No Governmental Approval is required for the due
execution, delivery or performance by the Borrower of this Amendment or any of
the Loan Documents, as amended hereby, to which the Borrower is or is to be a
party.
(c) This Amendment and each of the Loan Documents, as amended
hereby, to which the Borrower is a party constitute legal, valid and binding
obligations of the Borrower enforceable against the Borrower in accordance with
their respective terms, except as the enforceability thereof may be limited by
bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or
other similar laws affecting creditors' rights generally.
(d) There have been no amendments or other changes to the
charter documents, bylaws or incumbency certificate of the Borrower from the
forms thereof delivered to the Lenders in October of 1997. The representations
and warranties contained in the Loan Documents are true in all material respects
as though made on and as of the effective date of this Amendment. No event has
occurred and is continuing, or would result from the effectiveness of this
Amendment, that constitutes a Default.
SECTION 4. REFERENCE TO AND EFFECT ON LOAN DOCUMENTS.
(a) On and after the effective date of this Amendment, each
reference in the Credit Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or any other expression of like
-4-
<PAGE>
import referring to the Credit Agreement, and each reference in the other Loan
Documents to "the Credit Agreement," "thereunder," "thereof," "therein" or any
other expression of like import referring to the Credit Agreement, shall mean
and be a reference to the Credit Agreement as amended by this Amendment.
(b) Except as specifically amended hereby, the Credit
Agreement and the other Loan Documents shall remain in full force and effect and
are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this
Amendment shall not, except as expressly provided herein, operate as a waiver of
any right, power or remedy of any Lender or the Agent under any of the Loan
Documents or constitute a waiver of any provision of any of the Loan Documents.
SECTION 5. COSTS, EXPENSES AND TAXES. The Borrower agrees to pay on
demand all costs and expenses of the Agent in connection with the preparation,
execution and delivery of this Amendment and the other instruments and documents
to be delivered hereunder, including the reasonable fees and out-of-pocket
expenses of counsel for the Agent with respect thereto and with respect to
advising the Agent as to its rights and responsibilities hereunder and
thereunder.
SECTION 6. EXECUTION IN COUNTERPARTS. This Amendment may be executed in
any number of counterparts and by the parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
SECTION 7. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA
APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THE STATE OF CALIFORNIA.
LTC PROPERTIES, INC.
By: /s/ Darrell D. Struck
-------------------------
Name: Darrell D. Struck
-------------------------
Title: VP & Treasurer
-------------------------
SANWA BANK CALIFORNIA,
as Administrative Agent and Lender
By: /s/ Dirk A. Price
-------------------------
Name: Dirk A. Price
-------------------------
Title: Vice President
-------------------------
-5-
<PAGE>
BANQUE NATIONALE DE PARIS,
Los Angeles Branch,
as Syndication Agent and Lender
By: /s/ Clive Bettles
-------------------------
Name: Clive Bettles
-------------------------
Title: Senior Vice President & Manager
-------------------------
By: /s/ Debbie Gohh
-------------------------
Name: Debbie Gohh
-------------------------
Title: Vice President
-------------------------
BANK OF MONTREAL
By: /s/ Kanu Modi
-------------------------
Name: Kanu Modi
-------------------------
Title: Director
-------------------------
KEY CORPORATE CAPITAL INC.
By: /s/ John E. Boulder
-------------------------
Name: John E. Boulder
-------------------------
Title: Vice President
-------------------------
WELLS FARGO BANK, N.A.
By:
-------------------------
Name:
-------------------------
Title:
-------------------------
NATIONSBANK, N.A.
By: /s/ Brad W. DeSpain
-------------------------
Name: Brad W. DeSpain
-------------------------
Title: Senior Vice President
-------------------------
-6-
<PAGE>
BANK HAPOALIM B.M.
By: /s/ Paul Watson
-------------------------
Name: Paul Watson
-------------------------
Title: Vice President
-------------------------
By: /s/ John A. Rice
-------------------------
Name: John A. Rice
-------------------------
Title: Vice President and Senior Lending
Officer
-------------------------
BHF-BANK AKTIENGESELLSCHAFT
By:
-------------------------
Name
-------------------------
Title:
-------------------------
By:
-------------------------
Name:
-------------------------
Title :
-------------------------
BANK LEUMI TRUST COMPANY OF NEW YORK
By: /s/ Gloria Bucher
-------------------------
Name: Gloria Bucher
-------------------------
Title: First Vice President
-------------------------
-7-
<PAGE>
EXHIBIT 10.36
December __, 1999
TO THE FINANCIAL INSTITUTIONS PARTIES TO
THE CREDIT AGREEMENT REFERRED TO BELOW
Re: Third Amendment to Credit Agreement
Ladies and Gentlemen:
We refer to the Credit Agreement dated as of October 3, 1997, as
amended by the First Amendment to Credit Agreement dated as of May 15, 1998 and
the Second Amendment to Credit Agreement dated as of October 21, 1998 (said
Credit Agreement, as so amended, herein called the "CREDIT AGREEMENT"), among
LTC Properties, Inc. (the "BORROWER"), the financial institutions parties
thereto (the "LENDERS"), Banque Nationale de Paris, acting through its Los
Angeles Branch, as Syndication Agent, and Sanwa Bank California, as
Administrative Agent (the "AGENT"). Terms defined in the Credit Agreement and
not otherwise defined herein have the same respective meanings when used herein,
and the rules of interpretation set forth in Section 1.2 of the Credit Agreement
are incorporated herein by reference.
1. Effective as of the date first set forth above but subject to
satisfaction of the conditions precedent set forth in paragraph 3, the Credit
Agreement is hereby amended as set forth below.
(a) The definition of "Distributions" in Section 1.1 of the
Credit Agreement is amended in full to read as follows:
"'DISTRIBUTION' means the payment of any dividend or other
distribution on or in respect of any shares of any class of capital
stock, any partnership interests or any membership interests 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 of any partnership
interests or membership units of any Person, directly or indirectly,
through a Subsidiary or otherwise; the return of equity capital by 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 units of any Person."
(b) Section 8.10(xv) of the Credit Agreement is amended by
deleting the amount "$75,000,000" therein and substituting the amount
"$37,500,000."
<PAGE>
December __, 1999
Page 2
(c) Section 8.11 of the Credit Agreement is amended in full to
read as follows:
"8.11 DIVIDENDS AND DISTRIBUTIONS. The Borrower will not, and
will not permit any of its Subsidiaries to, make any Distribution,
provided that (i) each Subsidiary that is a wholly owned Subsidiary of
the Borrower may make Distributions to its shareholder and (ii) the
Borrower may make Distributions in any fiscal year thereof in an
aggregate amount not to exceed 95% of its Cash Flow (minus its 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 any 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 thereof. 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. Notwithstanding the foregoing or
any other provision of this Agreement, the Borrower may (a) repurchase
(in addition to repurchases permitted above) up to an aggregate of
$5,000,000 of its capital stock in 1999 and/or 2000 and (b) distribute
to its shareholders all of the Borrower's equity interests in LTC
Healthcare, Inc."
2. The Borrower hereby represents and warrants for the benefit of the
Lenders and the Agent that (a) the representations and warranties contained in
the Loan Documents are correct in all material respects on and as of the date of
this letter amendment, before and after giving effect hereto, as if made on and
as of such date, and (b) no event has occurred and is continuing, or would
result from the effectiveness of this letter amendment, that constitutes a
Default.
3. If you agree to the terms and conditions set forth herein, please
evidence your agreement by executing and returning at least eleven counterparts
of this letter amendment to the Agent. This letter amendment shall become
effective as of the date first set forth above when and if (a) the Borrower and
the Lenders execute counterparts of this letter amendment and deliver them to
the Agent, (b) the Guarantors execute a consent to this letter amendment, in
form and substance satisfactory to the Agent, and deliver it to the Agent and
(c) the Borrower pays to the Agent for the account of certain of the Lenders any
fees that the Borrower has agreed to pay in connection herewith.
4. On and after the effective date of this letter amendment, each
reference in the Credit Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import referring to the Credit Agreement, and each
reference in the other Loan Documents to "the Credit Agreement," "thereunder,"
"thereof," "therein" or words of like import referring to the Credit Agreement,
shall mean and be a reference to the Credit Agreement as amended by this
-2-
<PAGE>
December 23, 1999
Page 3
letter amendment. The Credit Agreement, as amended by this letter amendment, is
and shall continue to be in full force and effect and is hereby ratified and
confirmed in all respects.
5. This letter amendment may be executed in any number of counterparts
and by any combination of the parties hereto in separate counterparts, each of
which counterparts shall be an original and all of which taken together shall
constitute one and the same letter amendment.
6. THIS LETTER AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA WITHOUT
REFERENCE TO THE CHOICE-OF-LAW PRINCIPLES THEREOF.
Very truly yours,
LTC PROPERTIES, INC.
By: /s/ James J. Pieczynski
------------------------------
Name: James J. Pieczynski
------------------------------
Title: President and Chief Financial Officer
------------------------------
Agreed as of the date first written above:
SANWA BANK CALIFORNIA, as
Administrative Agent and Lender
By: /s/ Dirk A. Price
----------------------
Name: Dirk A. Price
----------------------
Title: Vice President
----------------------
-3-
<PAGE>
December 23, 1999
Page 4
BANQUE NATIONALE DE PARIS,
Los Angeles Branch, as Syndication Agent
and Lender
By: /s/ Brian Dixon
----------------------
Name: Brian Dixon
----------------------
Title: Vice President
----------------------
By: /s/ Janice Ho
----------------------
Name: Janice Ho
----------------------
Title: Vice President
----------------------
BANK OF MONTREAL
By: /s/ Bruce A. Pietka
----------------------
Name: Bruce A. Pietka
----------------------
Title: Director
----------------------
KEY CORPORATE CAPITAL INC.
By: /s/ Jeffrey M. Tell
----------------------
Name: Jeffrey M. Tell
----------------------
Title: Key Corporate Capital Inc.
Healthcare Finance Division
----------------------
WELLS FARGO BANK, N.A.
By: /s/ Ronald K. Peters
----------------------
Name: Ronald K. Peters
----------------------
Title: Vice President
----------------------
-4-
<PAGE>
December 23, 1999
Page 5
BANK OF AMERICA, N.A. (as
successor to NationsBank, N.A.)
By:
----------------------
Name:
----------------------
Title:
----------------------
BANK HAPOALIM B.M.
By:
----------------------
Name:
----------------------
Title:
----------------------
By:
----------------------
Name:
----------------------
Title:
----------------------
BHF (USA) CAPITAL CORPORATION
By: /s/ Perry Forman
----------------------
Name: Perry Forman
----------------------
Title: Vice President
----------------------
By: /s/ Richard Cameron
----------------------
Name: Richard Cameron
----------------------
Title: Associate
----------------------
-5-
<PAGE>
December 23, 1999
Page 6
BANK LEUMI TRUST COMPANY OF NEW YORK
By: /s/ Joung Hee Hong
----------------------
Name: Joung Hee Hong
----------------------
Title: Vice President
----------------------
-6-
<PAGE>
LTC PROPERTIES, INC.
EXHIBIT 21.1
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
COMPANY STATE OF ORGANIZATION
- ------- ---------------------
<S> <C>
Education Property Investors, Inc. Nevada
Florida-LTC, Inc. Nevada
Illinois-LTC, In.c Delaware
Kansas-LTC Corporation Delaware
LTC-Gardner, Inc. Delaware
LTC-Dearfield, Inc. Nevada
LTC-DS, Inc. Delaware
LTC-K1, Inc. Delaware
LTC-K2, Inc. Delaware
LTC-K2, LP, Inc. Delaware
LTC-Fort Valley, Inc. 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-Griffin, Inc. Nevada
LTC-Jessup, Inc. Delaware
LTC-Jonesboro, Inc. Nevada
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
LTC REMIC Corporation Delaware
LTC REMIC IV Corporation Delaware
LTC-Richmond, Inc. Nevada
LTC-Sumner, Inc. Delaware
LTC-Tampa, Inc. Nevada
LTC-West, Inc. Nevada
L-Tex GP, Inc. Delaware
L-Tex L.P. Corporation Delaware
Missouri River Corporation Delaware
University Park Convalescent Center, Inc. Florida
Virginia-LTC, Inc. Nevada
Western Healthcare, Funding, Inc. Nevada
Texas-LTC Limited Partnership Texas
</TABLE>
<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 21, 2000 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, 1999.
/s/ ERNST & YOUNG LLP
Los Angeles, California
March 3, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,655
<SECURITIES> 97,605
<RECEIVABLES> 132,443
<ALLOWANCES> 1,250
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 494,913
<DEPRECIATION> 39,975
<TOTAL-ASSETS> 721,811
<CURRENT-LIABILITIES> 11,026
<BONDS> 11,977
0
165,500
<COMMON> 270
<OTHER-SE> 242,847
<TOTAL-LIABILITY-AND-EQUITY> 721,811
<SALES> 0
<TOTAL-REVENUES> 87,662
<CGS> 0
<TOTAL-COSTS> 57,139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,836
<INCOME-PRETAX> 31,827
<INCOME-TAX> 0
<INCOME-CONTINUING> 31,827
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,827
<EPS-BASIC> 0.61
<EPS-DILUTED> 0.61
</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
1
<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
general and professional liability insurance that covers us as well as the
borrower and/or lessee. Recently, the cost of such insurance has increased
substantially and some insurers have stopped offering such insurance for
nursing homes and acute care facilities. The increased cost of such insurance
could have a material adverse effect on the ability of the lessees and
operators to make lease or mortgage payments. In addition, certain risks may
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 or lessees 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,
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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.
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.
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.
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State and federal governments are devoting increasing attention and resources
to anti-fraud initiatives against health care providers. The Health Insurance
Portability and Accountability Act of 1996 and the Balanced Budget Act of
1997 expand the penalties for health care fraud, including broader provisions
for the exclusion of providers from the Medicare and Medicaid programs.
Further, under Operation Restore Trust, a major anti-fraud demonstration
project, the Office of Inspector General of the U.S. Department of Health and
Human Services, in cooperation with other federal and state agencies, has
focused on the activities of skilled nursing facilities, home health
agencies, hospices and durable medical equipment suppliers in certain states,
including 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
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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.
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
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regulations will not be expanded. In addition, only certain states have
adopted laws or regulations permitting individuals with higher acuity levels
to remain in assisted living communities who may otherwise qualify for
placement in a nursing facility. While only certain states presently provide
for any Medicaid reimbursement for assisted living residences, several states
are currently reviewing their policies and reimbursement programs to provide
funding for assisted living residences. There can be no assurance that such
states will adopt the Medicaid waiver program.
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, 1999, Sun Healthcare Group, Inc. operated 41 facilities
representing approximately 12% ($111.6 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. During 1999, Sun Healthcare filed for
reorganization under Chapter 11 of the Bankruptcy Code. Sun Healthcare is
currently operating its business as a debtor-in-possession subject to the
jurisdiction of the Bankruptcy Court. Sun Healthcare is a publicly traded
company, and as such is subject to the filing requirements of the Securities
and Exchange Commission. See "Item 1. Business- DIFFICULTIES EXPERIENCED BY
MAJOR OPERATORS- SUN HEALTHCARE GROUP, INC." in our Annual Report on Form
10-K for the year ended December 31, 1999 for a more comprehensive discussion
of Sun Healthcare and difficulties experienced by our other major operators.
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.
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
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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. See "Item 1. Business- DIFFICULTIES EXPERIENCED BY MAJOR
OPERATORS" in our Annual Report on Form 10-K for the year ended December 31,
1999 for a more comprehensive discussion of operators of our facilities who have
recently sought bankruptcy protection.
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 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. If a borrower seeks bankruptcy protection, the
Bankruptcy Court may impose an automatic stay which would preclude us from
enforcing foreclosure or other remedies against the borrower. 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
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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.
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. Difficult capital market conditions in the health care
industry have limited our access to traditional forms of growth capital. As a
result of the tight capital markets in the health care industry, we reduced
our investment activity in 1999 and intend to limit our investment activity
in 2000.
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:
- our partners, co-members or joint venturers might become bankrupt (in
which event we and any other remaining general partners, members or joint
venturers would generally remain liable for the liabilities of the
partnership, limited liability company or joint venture);
- our partners, co-members or joint venturers might at any time have
economic or other business interests or goals which are inconsistent with
our business interests or goals;
- our partners, co-members or joint venturers may be in a position to
take action contrary to our instructions, requests, policies or
objectives, including our policy with respect to maintaining our
qualification as a REIT; and
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- agreements governing joint ventures, limited liability companies and
partnerships often contain restrictions on the transfer of a joint
venturer's, member's or partner's interest or "buy-sell" or other
provisions which may result in a purchase or sale of the interest at a
disadvantageous time or on disadvantageous terms.
We will, however, generally seek to maintain sufficient control of our
partnerships, limited liability companies and joint ventures to permit us to
achieve our business objectives. Our organizational documents do not limit
the amount of available funds that we may invest in partnerships, limited
liability companies or joint ventures. The occurrence of one or more of the
events described above could have a direct and adverse impact on us.
WE COULD INCUR MORE DEBT
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, 1999, we had total debt outstanding of approximately
$292,274,000 including:
- approximately $135,000,000 outstanding under our senior unsecured $170
million revolving line of credit and $25,000,000 outstanding under a term
loan with a maturity date of October 3, 2000 and a current interest rate
of LIBOR plus 1.25%; o $24,642,000 aggregate principal amount of
convertible subordinated debentures with maturities in 2001 and 2002 and
a weighted average interest rate of 8.3%;
- $17,096,000 aggregate principal amount of capital leases and tax exempt
revenue bonds with various maturities through 2025 and a weighted average
interest rate of 7.7%;
- $90,536,000 aggregate principal amount of mortgage loans with various
maturities ranging from 2002 through 2006 and a weighted average interest
rate of 10.21%.
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.
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RISING INTEREST RATES COULD ADVERSELY AFFECT OUR CASH FLOW. As of December
31, 1999, we had $160,000,000 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.
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% (90% for years ending after December 31,
2000) of our REIT taxable income (determined without regard to the
dividends-paid deduction and by excluding any net 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
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investment or commercial banks and we will execute all transactions with
documentation consistent with accepted industry practice.
CONFLICTS OF INTEREST
SOME OF OUR EXECUTIVE OFFICERS AND BOARD MEMBERS ARE ALSO EXECUTIVE OFFICERS
AND BOARD MEMBERS OF A REAL ESTATE AND HEALTHCARE INVESTMENT COMPANY.
- 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");
- James J. Pieczynski, who is currently our President and Chief
Financial Officer serves in the same positions with LTC Healthcare;
- Christopher T. Ishikawa, who is currently our Senior Vice
President and Chief Investment Officer serves as Executive Vice President
and Chief Operating Officer with LTC Healthcare; and
- Julia L. Kopta, who is currently our Senior Vice President and
General Counsel 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. We have adopted procedures to be
followed by our Board of Directors and the Board of Directors of LTC
Healthcare to address potential conflicts. Such procedures include the
requirement that the persons serving as directors of both companies abstain
from voting as directors with respect to mattes that present a significant
conflict of interest between the companies.
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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 premium over the
then-prevailing market price for our common stock. To maintain our
qualification as a REIT for federal income tax purposes:
- 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.
- 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).
- 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
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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:
- the provision in our Bylaws requiring a two-thirds vote of
stockholders for any amendment of our Bylaws;
- 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;
- 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
- 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:
- the extent of investor interest in us;
- 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);
- our financial performance and that of our operators;
- the contents of analyst reports regarding us and the REIT
industry; and
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- 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.
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% (90% for taxable years beginning after
December 31, 2000) 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
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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.
WE ARE DEPENDENT ON OUR KEY PERSONNEL
We depend on the efforts of our executive officers, particularly Messrs.
Dimitriadis, Pieczynski and Ishikawa and Ms. Kopta. 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.
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