================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1998 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission file number: 1-11314 LTC PROPERTIES, INC. (Exact name of Registrant as specified in its charter) MARYLAND 71-0720518 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 Esplanade Drive, Suite 1860 Oxnard, California 93030 (Address of principal executive offices) Registrant's telephone number, including area code: (805) 981-8655 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of Stock which registered -------------- ------------------------- Common stock, $.01 Par Value New York Stock Exchange 9.50% Series A Cumulative Preferred Stock, $.01 Par Value New York Stock Exchange 9.00% Series B Cumulative Preferred Stock, $.01 Par Value New York Stock Exchange 8.50% Convertible Subordinated Debentures due 2001 New York Stock Exchange 7.75% Convertible Subordinated Debentures due 2002 New York Stock Exchange 8.25% Convertible Subordinated Debentures due 2001 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendment to this Form 10-K. |X| The aggregate market value of voting stock held by non-affiliates of the Company is approximately $303,587,000 as of March 19, 1999. 27,407,096 (Number of shares of common stock outstanding as of March 19, 1999) Part III is incorporated by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held on May 25, 1999. ================================================================================
Item 1. BUSINESS General LTC Properties, Inc., a health care real estate investment trust (a "REIT"), was organized on May 12, 1992 in the State of Maryland and commenced operations on August 25, 1992. We invest primarily in long-term care and other health care related facilities through mortgage loans, facility lease transactions and other investments. During 1998, we began making investments in the education industry by investing in private and charter schools from pre-school through eighth grade. Our primary objective is to provide current income for distribution to stockholders through real estate investments in long-term care facilities and other health care related facilities managed by experienced operators providing quality care. To meet this objective, we attempt to invest in properties that provide opportunity for additional returns to our stockholders and diversify our investment portfolio by geographic location, operator and form of investment. In accordance with "plain English" guidelines provided by the Securities and Exchange Commission, whenever we refer to "our company" or to "us," or use the terms "we" or "our," we are referring to LTC Properties, Inc. and its subsidiaries. We were organized to qualify, and intend to continue to qualify, as a REIT. So long as we qualify, with limited exceptions, we may deduct distributions to our stockholders from our taxable income. We have made distributions, and intend to continue to make distributions to our stockholders, in order to eliminate any federal tax liability. At December 31, 1998, we had a gross investment portfolio (adjusted to include mortgage loans to third parties underlying our investment in REMIC certificates) of $918,085,000. Our investments consisted of $636,774,000 in 274 skilled nursing facilities with 31,276 beds, $254,861,000 in 90 assisted living facilities with 4,301 units and $26,450,000 in six schools. The properties in our portfolio are operated by 74 healthcare providers and two education providers in 36 states. Owned Properties. During 1998, we acquired seven skilled nursing facilities with a total of 816 beds, 23 assisted living residences with a total of 1,500 units and five schools for a gross purchase price of $161,001,000 (includes the conversion of construction loans of $7,301,000) and invested approximately $3,624,000 in the expansion and improvement of existing properties. We also sold three skilled nursing facilities in which we had an initial investment of $7,654,000 for gross proceeds of $16,706,000. Our long-term facilities are leased to operators pursuant to long-term operating leases that generally have an initial term of 10 to 12 years and provide for increases in the rent based upon specified rent increases, increases in revenues over defined base periods, or increases based on consumer price indices. Each lease is a triple net lease that requires the lessee to pay all taxes, insurance, maintenance and other costs of the facilities. Mortgage Loans. As part of our strategy of making long-term investments in properties used in the provision of long-term health care services, we provide mortgage financing on such properties based on our established investment underwriting criteria. (See "Investment and Other Policies" in this Section.) We also provide construction loans that by their terms convert into purchase/lease transactions or permanent financing mortgage loans upon completion of construction. During 1998, we originated mortgage loans of $47,452,000, net of construction loans of $5,467,000 that converted to permanent mortgage financing, secured by six skilled nursing facilities with 762 beds, 11 assisted living facilities with 471 units and one school. We maintain a long-term investment interest in mortgages we originate either through the direct retention of the mortgages or through the retention of REMIC certificates originated in our securitizations. We are a 2
REIT and, as such, make our investments with the intent to hold them for long-term purposes. However, we may securitize a portion of our mortgage loan portfolio when a securitization provides us with the best available form of capital to fund additional long-term investments. In addition, we believe that the REMIC certificates we retain from our securitizations provide our stockholders with a more diverse real estate investment while maintaining the returns we desire. REMIC Certificates. We complete a securitization by transferring mortgage loans to a newly created Real Estate Mortgage Investment Conduit ("REMIC") which, in turn, issues mortgage pass-through certificates aggregating approximately the same amount. A portion of the REMIC certificates are sold to third parties and a portion of the REMIC certificates are retained by us. The REMIC certificates we retain are subordinated in right of payment to the REMIC certificates sold to third parties. A portion of the REMIC certificates we retain are interest-only certificates which have no principal amount and entitle us to receive cash flows designated as interest. In 1998, we completed the securitization of approximately $129,300,000 of mortgage loans and $26,400,000 face amount ($20,700,000 carrying value) of subordinated REMIC certificates retained from a securitization we completed in 1993. In the securitization, we sold approximately $121,400,000 face amount of senior certificates at a weighted average pass-through rate of 6.3% and retained $34,300,000 face amount of subordinated certificates along with the interest only certificates. The subordinated and interest only certificates we retained had an aggregate fair value of approximately $41,400,000 at the time of the securitization and a weighted average effective yield of 18.9%. Prior to 1997, we securitized mortgage loans with an aggregate outstanding principal of approximately $354,827,000. At December 31, 1998, we had investments in REMIC certificates with an estimated fair value of $100,595,000. Financing and Other Transactions. During 1998, we issued 2,000,000 shares of 8.5% Series C Convertible Preferred Stock in a private placement at $19.25 per share for net proceeds of $37,605.000. The Series C Preferred Stock is convertible into 2,000,000 shares of our common stock, has a liquidation value of $19.25 per share and has an annual coupon of 8.5% payable quarterly. We have a $170,000,000 Senior Unsecured Revolving Line of Credit that expires on October 3, 2000. As of December 31, 1998, borrowings of $100,000,000 bearing interest at LIBOR plus 1.25% were outstanding under the revolving credit facility. Subsequent to December 31, 1998, we obtained a $25,000,000 term loan that bears interest at LIBOR plus 1.25% and matures on October 2, 2000. Distribution of LTC Healthcare, Inc. During 1998, we acquired 4,002 shares of LTC Healthcare non-voting common stock for $2,001,000 in cash. We also contributed equity securities with a book value of $788,000, 13 real estate properties with a net book value of $61,462,000 that were encumbered by mortgage debt of $29,263,000 and a minority interest liability of $3,461,000 on seven of the properties, and other related assets and liabilities with a book value of $93,000 in exchange for an additional 36,000 shares of LTC Healthcare non-voting common stock and borrowings by LTC Healthcare under an unsecured line of credit provided by the Company of $21,396,000. Subsequent to the contribution of the above assets and liabilities to LTC Healthcare, they obtained mortgage financing of $17,400,000 from a third-party lender on four of the unencumbered properties. LTC Healthcare utilized proceeds from the mortgage debt and cash on hand to repay borrowings of $17,668,000 under the unsecured line of credit. On September 30, 1998, the 40,002 shares of LTC Healthcare non-voting common stock we held were converted into 3,335,882 shares of LTC Healthcare voting common stock. Concurrently, we completed the spin-off of all LTC Healthcare voting common stock through a taxable dividend distribution to the holders our common stock, Cumulative Convertible Series C Preferred Stock and convertible subordinated debentures. One share of LTC Healthcare common stock was distributed to each holder of LTC common stock, Series C Preferred Stock and convertible subordinated debentures for each ten shares of our common stock owned or that would have been issued upon conversion of the convertible subordinated 3
debentures and Series C Preferred Stock. Upon completion of the distribution, LTC Healthcare began operating as a separate public company. Investment and Other Policies Objectives and Policies. We currently invest primarily in income-producing long-term care facilities. Our investments consist of: o mortgage loans secured by long-term care facilities; o fee ownership of long-term care facilities which are leased to operators; or o participation in such investments indirectly through investments in partnerships, joint ventures or other entities that themselves make direct investments in such loans or facilities. In evaluating potential investments, we consider such factors as: o type of property; o the location; o construction quality, condition and design of the property; o the property's current and anticipated cash flow and its adequacy to meet operational needs and lease obligations or debt service obligations; o the quality and reputation of the property's operator; o the growth, tax and regulatory environments of the communities in which the properties are located; o the occupancy and demand for similar facilities in the area surrounding the property, and o the Medicaid reimbursement policies and plans of the state in which the property is located. We place primary emphasis on investing in long-term care facilities that have low investment per bed/unit ratios and do not have to rely on the provision of ancillary services to cover debt service or lease obligations. In addition, with respect to skilled nursing facilities, we attempt to invest in facilities that do not have to rely on a high percentage of private pay patients. We seek to invest in facilities that are located in suburban and rural areas of states with improving reimbursement climates. Prior to every investment, we conduct a facility site review to assess the general physical condition of the facility, the potential of additional sub-acute services and the quality of care the operator provides. In addition, we review the environmental reports, state survey and financial statements of the facility before the investment is made. We prefer to invest in a facility that has a significant market presence in its community and where state licensing procedures limit the entry of competing facilities. Historically, the majority of our investments consisted of mortgage loans secured by skilled nursing facilities. Due to our belief that assisted living facilities are an increasingly important sector in the long-term care market, the majority of our investments in recent years has consisted of direct ownership of assisted living facilities. We believe that assisted living facilities represent a lower cost long-term care alternative for senior adults than skilled nursing facilities. We invest primarily in assisted living facilities that attract the moderate-income private pay patients in smaller communities, preferably in states that have adopted Medicaid waiver programs or are in the process of adopting or reviewing their policies and reimbursement program to provide funding for assisted living residences. We believe that locating residences in a state with a favorable regulatory reimbursement climate should provide a stable source of residents eligible for Medicaid reimbursement to the extent private-pay residents are not available, and should provide alternative sources of income for residents when their private funds are depleted and they become Medicaid eligible. 4
The only limitations regarding investments in any one type of property or joint venture are: o our Board of Directors has authorized us to invest up to 30% of our adjusted gross real estate investment portfolio (adjusted to include mortgage loans to third parties underlying the investment in REMIC certificates) in assisted living facilities, and o the terms of our existing revolving credit facility limit our investments in the education and child care industry to $75 million and limit our investments outside of health care real estate and the education and child care industry to $20 million. Borrowing Policies. We may incur additional indebtedness when, in the opinion of our Board of Directors, it is advisable. We may incur such indebtedness to make investments in additional long-term care facilities or to meet the distribution requirements imposed upon REITs under the Internal Revenue Code of 1986, as amended. For other short-term purposes, we may, from time to time, negotiate lines of credit, or arrange for other short-term borrowings from banks or otherwise. We may also arrange for long-term borrowings through public offerings or from institutional investors. In addition, we may incur mortgage indebtedness on real estate which we have acquired through purchase, foreclosure or otherwise. We may also obtain mortgage financing for unleveraged or underleveraged properties in which we have invested or may refinance properties acquired on a leveraged basis. There is no limitation on the number or amount of mortgages that may be placed on any one property, and we have no policy with respect to limitations on borrowing, whether secured or unsecured. Prohibited Investments and Activities. Our policies, which are subject to change by our Board of Directors without stockholder approval, impose certain prohibitions and restrictions on various of our investment practices or activities including prohibition against: o acquiring any real property unless the consideration paid for such real property is based on the fair market value of the property; o investing in any junior mortgage loan unless by appraisal or other method, the directors determine that (a) the capital invested in any such loan is adequately secured on the basis of the equity of the borrower in the property underlying such investment and the ability of the borrower to repay the mortgage loan; or (b) such loan is a financing device we enter into to establish the priority of our capital investment over the capital invested by others investing with us in a real estate project; o investing in commodities or commodity futures contracts (other than interest rate futures, when used solely for hedging purposes); o investing more than 1% of our total assets in contracts for sale of real estate unless such contracts are recordable in the chain of title; o holding equity investments in unimproved, non-income producing real property, except such properties as are currently undergoing development or are presently intended to be developed within one year, together with mortgage loans on such property (other than first mortgage development loans), aggregating to more than 10% of our assets. Competition We compete with other REITs, real estate partnerships, health care providers and other investors, including commercial banks, institutional banks and insurance companies, many of which will have greater financial resources and lower cost of funds than we do, in the acquisition, leasing and financing of long-term care 5
facilities. The operators compete on a local and regional basis with operators of facilities that provide comparable services. Operators compete for patients based on quality of care, reputation, physical appearance of facilities, services offered, family preferences, physician referrals, staff and price. Insurance We obtain title insurance with respect to each of our investments. We generally require: (i) with respect to each owned property, an American Land Title Association Extended Coverage Owner's Policy of Title Insurance with an insured amount equal to the purchase price, insuring that we hold fee simple title to the property subject only to those liens and encumbrances approved by us; and (ii) with respect to each mortgaged property, an American Land Title Association Extended Coverage Lender's Policy of Title Insurance with an insured amount equal to the loan amount, insuring our first-lien security interest in the property subject only to those liens and encumbrances approved by us. However, American Land Title Association Extended Coverage Policies of Title Insurance are not available in all states, in which event we require the broadest form of title coverage available in the particular jurisdiction. In addition, we require that our tenants (in the case of owned properties) and borrowers (in the case of mortgaged properties) maintain comprehensive liability insurance and casualty insurance with policy specifications and insured limits customarily carried for similar properties and cause their insurers to name us as an additional insured, loss payee and/or mortgagee, as appropriate depending on the particular type of policy. In the case of casualty insurance, the insured limits may not be less than the full replacement cost of the improvements constructed on the property, and coverage is typically provided in the form of an "all-risk" policy. However, there are certain types of losses that may either be uninsurable or not economically insurable. For example, we generally require our tenants and borrowers to carry flood insurance if the property is located within a flood plain area as designated by the applicable governmental authority, and earthquake insurance if the property is located in a state, such as California, where the risk of earthquake damage is high. Such flood and earthquake coverage is not always an insurable risk or may not be obtainable in amounts at least equal to the full replacement cost of the improvements constructed on the property. Accordingly, there is no assurance that adequate coverage exists with respect to each investment should there be serious flooding, seismic activities or other uninsurable casualty in the areas where the properties constituting our investments are located. Should an uninsured (or less than fully insured) loss occur, we could lose its investment in, and anticipated profits and cash flow from, a property. Employees We currently employ 21 persons. Government Financing and Regulation of Health Care General. Both the federal and state governments are significant sources of revenues for the operators of skilled nursing facilities who lease properties from us or who have borrowed money from us and used their properties as collateral for those borrowings. In addition, the skilled nursing facilities and our other tenants and borrowers who provide health care related services are often subject to extensive government regulation. Government Financing. Medicare is a federal program that provides certain health care benefits to beneficiaries who are 65 years of age or older, are disabled, or qualify for the End Stage Renal Disease program. Historically, Medicare covered the reasonable costs of certain post-hospital extended care services furnished by skilled nursing facilities, including capital-related costs, subject to limits on routine operating and capital-related costs. 6
Medicaid is a program of medical assistance, funded jointly by the federal government and the states for certain needy individuals and their dependents, and certain other eligible persons. Under Medicaid, the federal government provides grants to states that have medical assistance programs that are consistent with federal standards. Medicaid programs or the equivalent are currently in existence in all of the states in which we have nursing facility investments. While these programs differ in certain respects from state to state, they are all subject to certain federally imposed requirements, as a substantial portion of the funds available under these programs is provided by the federal government. Medicaid programs provide for payments to participating health care facilities on behalf of the indigent and certain other eligible persons. California and Texas provide for reimbursement at flat daily rates, as determined by the responsible state agency and depending on certain levels of care. In all other states, payments are based upon specific cost reimbursement formulas established by the applicable state. Up until July 1, 1998, Medicare and most state Medicaid programs utilized a cost-based reimbursement system for skilled nursing facilities which reimbursed these facilities for the reasonable direct and indirect allowable costs incurred in providing routine services plus, in certain states, a return on equity, subject to certain cost ceilings. These costs normally included allowances for administrative and general costs as well as the costs of property and equipment (depreciation and interest, fair rental allowance or rental expense). In certain states, cost-based reimbursement was typically subject to retrospective adjustment through cost report settlement, and for certain states, payments made to a facility on an interim basis that were subsequently determined to be less than or in excess of allowable costs could be adjusted through future payments to the affected facility and to other facilities owned by the same owner. State Medicaid reimbursement programs varied as to the methodology used to determine the level of allowable costs which were reimbursed to operators. o Prospective Payment System Beginning on July 1, 1998, the congressionally mandated prospective payment system was implemented for skilled nursing facilities. Under the prospective payment system, skilled nursing facilities are paid a case-mix adjusted federal per diem rate for Medicare-covered services provided by skilled nursing facilities. The per diem rate is calculated to cover routine service costs, ancillary costs and capital-related costs. The phased-in implementation of the prospective payment system for skilled nursing facilities began with the first cost-reporting period beginning in fiscal years starting on or after July 1, 1998. The prospective payment system is expected to be fully implemented over three such cost-reporting periods. The effect of the implementation of the prospective payment system on a particular skilled nursing facility will vary in relation to the amount of revenue derived from Medicare patients for each skilled nursing facility. Skilled nursing facilities may need to restructure their operations to accommodate the new Medicare prospective payment system reimbursement. In part because of the uncertainty as to the effect of the prospective payment system on skilled nursing facilities, in November 1998, Standard and Poor's, an international rating agency that provides credit analysis and information through the rating of financial instruments, placed many skilled nursing facility companies on a "credit watch" because of the potential negative impact of the implementation of the prospective payment system on the financial condition of skilled nursing facilities, including the ability to make interest and principal payments on outstanding borrowings. In early March 1999, Standard & Poor's lowered the ratings of several skilled nursing facility companies, including companies that operate skilled nursing facilities in which we invest, because of the impact of the implementation of the prospective payment system, particularly those companies with substantial debt. 7
o Balanced Budget Act of 1997 The Balanced Budget Act of 1997 signed by President Clinton on August 5, 1997 is expected to produce billions in net savings for the Federal government. In addition, the Balanced Budget Act repealed the Boren Amendment under which states were required to pay long-term care providers, including skilled nursing facilities, rates that are "reasonable and adequate to meet the cost which must be incurred by efficiently and economically operated facilities." As a result of the repeal of the Boren Amendment, states are now required by the Balanced Budget Act to: o use a public process for determining rates, o publish proposed and final rates, the methodologies underlying the rates, and justifications for the rates, and o give methodologies and justifications. During rate-setting procedures, states are required to take into account the situation of facilities that serve a disproportionate number of low-income patients with special needs. The Secretary of the Department of Health and Human Services is required to study and report to Congress within four years concerning the effect of state rate-setting methodologies on the access to and the quality of services provided to Medicaid beneficiaries. The Balanced Budget Act also provides the federal government with expanded enforcement powers to combat waste, fraud and abuse in delivery of health care services. Though applicable to payments for services furnished on or after October 1, 1997, the new requirements are not retroactive. Thus, states that have not proposed changes in their payment methods or standards, or changes in rates for items and services furnished on or after October 1, 1997, need not immediately implement a Balanced Budget Act public approval process. The Balanced Budget Act also created the Medicare+Choice program which provides a variety of options for individuals entitled to Medicare Part A and enrolled in Medicare Part B. The options include coordinated care plans (including provider-sponsored organization plans), private fee for service plans, and medical savings accounts plans. Medicare+Choice is effective as of January 1, 1999. It is not possible at this time to predict with any certainty the effect of Medicare+Choice on our tenants and borrowers. Both the Medicare and Medicaid programs contain specific requirements which must be adhered to at all times by health care facilities in order to qualify under the programs. The Medicare and Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy, intermediary determinations and governmental funding restrictions, all of which may materially increase or decrease program reimbursement to health care facilities. No assurance can be given as to whether the future funding of such programs will remain at levels comparable to the present levels. Anti-Fraud Laws and Regulations. There are various federal and state laws prohibiting fraud by health care providers, including criminal provisions which prohibit filing false claims or making false statements to receive payment or certification under Medicare and Medicaid, or failing to refund overpayments or improper payments. Violation of these federal provisions is a felony punishable by up to five years imprisonment and/or $25,000 fines. Civil provisions prohibit the knowing filing of a false claim or the knowing use of false statements to obtain payment. The penalties for such a violation are fines of not less than $5,000 nor more than $10,000, plus treble damages, for each claim filed. There are also laws which govern referrals and financial relationships. The federal Anti-Kickback Law prohibits, among other things, the offer, payment, solicitation or receipt of any form of remuneration in 8
return for, or to induce, the referral of Medicare and Medicaid patients. A wide array of relationships and arrangements, including ownership interests in a company by persons who refer or who are in a position to refer patients, as well as personal services agreements, have under certain circumstances, been alleged or been found to violate these provisions. In addition to the Anti-Kickback Statute, the federal government restricts certain financial relationships between physicians and other providers of health care services. State and federal governments are devoting increasing attention and resources to anti-fraud initiatives against health care providers. The Health Insurance Portability and Accountability Act of 1996 and the Balanced Budget Act expand the penalties for health care fraud, including broader provisions for the exclusion of providers from the Medicare and Medicaid programs. Further, under Operation Restore Trust, a major anti-fraud demonstration project, the Office of Inspector General of the U.S. Department of Health and Human Services, in cooperation with other federal and state agencies, has focused on the activities of skilled nursing facilities, home health agencies, hospices and durable medical equipment suppliers in certain states in which we have properties. Due to the success of Operation Restore Trust, the project has been expanded to numerous other states and to additional providers including providers of ancillary nursing home services. Based upon information we periodically receive from our operators over the terms of their respective leases and loans, we believe that the nursing facilities in which we have investments are in substantial compliance with the various regulatory requirements applicable to them, although there can be no assurance that the operators are in substantial compliance or will remain in compliance in the future. Other Regulatory and Licensing Requirements. In addition to the requirements to be met by skilled nursing facilities for participation in the Medicare and Medicaid programs, skilled nursing facilities are subject to regulatory and licensing requirements of federal, state and local authorities. The operator of each skilled nursing facility is licensed annually by the board of health or other applicable agency in each state. In granting and renewing licenses, regulatory agencies consider, among other things, the physical buildings and equipment, the qualifications of the administrative personnel and nursing staff, the quality of care and continuing compliance with the laws and regulations relating to the operation of the facilities. State licensing of facilities is a prerequisite to certification under the Medicare and Medicaid programs. In the ordinary course of business, the operators receive notices of deficiencies for failure to comply with various regulatory requirements and take appropriate corrective and preventive actions. We believe that the nursing facilities in which we have investments are in compliance with the applicable licensing or other regulation although there can be no assurance that the operators are or will be in compliance at any time. We have increased our investments in assisted living facilities in recent years. Assisted living facilities are subject to certain state regulations and licensing requirements. To qualify as a state licensed facility, assisted living facilities must comply with regulations which address, among other things, staffing, physical design, required services and resident characteristics. Assisted living facilities are also subject to various local building codes and other ordinances, including fire safety codes. These requirements vary from state to state and are monitored to varying degrees by state agencies. Currently, assisted living facilities are not regulated as such by the federal government. State standards required for assisted living facility providers are less stringent than those required of other licensed health care operators. There can be no assurance that federal regulations governing the operation of assisted living facilities will not be implemented in the future or that existing state regulations will not be expanded. In addition, only certain states have adopted laws or regulations permitting individuals with higher acuity levels to remain in assisted living communities who may otherwise qualify for placement in a nursing facility. While only certain states presently provide for any Medicaid reimbursement for assisted living residences, several states are currently reviewing their policies and reimbursement programs to provide funding for 9
assisted living residences. There can be no assurance that such states will adopt the Medicaid waiver program. Uncertainty of Health Care Reform The health care industry is facing various challenges, including increased government and private payor pressure on health care providers to control costs. The pressure to control health care costs intensified during 1994 and 1995 as a result of the national health care reform debate and continues into 1999 as Congress attempted to slow the rate of growth of federal health care expenditures as part of its effort to balance the federal budget. The Balanced Budget Act enacted significant changes to the Medicare and Medicaid programs designed to "modernize" payment and health care delivery systems while achieving substantial budgetary savings. In seeking to limit Medicare reimbursement for long term care services, Congress established the prospective payment system for skilled nursing facility services to replace the cost-based reimbursement system. In addition, there are numerous initiatives at the federal and state levels for comprehensive reforms affecting the payment for and availability of health care services. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodology may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third party payors. In light of forthcoming regulations and continuing state Medicaid program reform, no assurance can be given that the implementation of such regulations and reform will not have a material adverse effect on our financial condition or results of operations. Taxation of our Company General. Our management believes that we have been organized and have operated in such a manner as to qualify for taxation as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 1992, and we intend to continue to operate in such a manner. No assurance can be given that we have operated or will be able to continue to operate in a manner so as to qualify or to remain so qualified. This summary is qualified in its entirety by the applicable Internal Revenue Code provisions, rules and regulations, and administrative and judicial interpretations. If we qualify for taxation as a REIT, we will generally not be subject to federal corporate income taxes on our net income that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" (i.e., at the corporate and stockholder levels) that generally results from investment in a corporation. However, we will continue to be subject to federal income tax under certain circumstances. Requirements for Qualification. The Internal Revenue Code defines a REIT as a corporation, trust or association: (1) which is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) which would be taxable, but for Sections 856 through 860 of the Internal Revenue Code, as a domestic corporation; 10
(4) which is neither a financial institution nor an insurance company subject to certain provisions of the Internal Revenue Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals (including specified entities); and (7) which meets certain other tests, described below, regarding the amount of its distributions and the nature of its income and assets. The Internal Revenue Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. Income Tests. There presently are two gross income requirements that we must satisfy to qualify as a REIT: o First, at least 75% of our gross income (excluding gross income from "prohibited transactions," as defined below) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property, including rents from real property, or from certain types of temporary investment income. o Second, at least 95% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from income that qualifies under the 75% test and all other dividends, interest and gain from the sale or other disposition of stock or securities. A "prohibited transaction" is a sale or other disposition of property (other than foreclosure property) held for sale to customers in the ordinary course of business. Any gain realized from a prohibited transaction is subject to a 100% penalty tax. Asset Tests. We, at the close of each quarter of our taxable year, must also satisfy three tests relating to the nature of our assets. o First, at least 75% of the value of our total assets must be represented by real estate assets (including stock or debt instruments held for not more than one year purchased with the proceeds of a stock offering or long-term (at least five years) public debt offering of our company), cash, cash items and government securities. o Second, not more than 25% of our total assets may be represented by securities other than those in the 75% asset class. o Third, of the investments included in the 25% asset class, the value of any one issuer's securities owned by us may not exceed 5% of the value of our total assets and we may not own more than 10% of any one issuer's outstanding voting securities. Ownership of a Partnership Interest or Stock in a Corporation. We own interests in various partnerships. In the case of a REIT that is a partner in a partnership, Treasury regulations provide that for purposes of the REIT income and asset tests the REIT will be deemed to own its proportionate share of the assets of the partnership, and will be deemed to be entitled to the income of the partnership attributable to such share. The ownership of an interest in a partnership by a REIT may involve special tax risks, including 11
the challenge by the Internal Revenue Service of the allocations of income and expense items of the partnership, which would affect the computation of taxable income of the REIT, and the status of the partnership as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes. We also own interests in a number of subsidiaries which are intended to be treated as qualified real estate investment trust subsidiaries. The Internal Revenue Code provides that such subsidiaries will be ignored for federal income tax purposes and all assets, liabilities and items of income, deduction and credit of such subsidiaries will be treated as assets, liabilities and such items of our company. We further own 100% of the nonvoting preferred stock in one subsidiary, LTC Development Company, Inc., which represents approximately 99% of the economic value of all classes of stock of LTC Development. LTC Development does not qualify for treatment as a qualified REIT subsidiary. If any partnership or qualified real estate investment trust subsidiary in which we own an interest were treated as a regular corporation (and not as a partnership or qualified real estate investment trust subsidiary) for federal income tax purposes, we would likely fail to satisfy the REIT asset test prohibiting a REIT from owning greater than 10% of the voting power of the stock of any issuer, as described above, and would therefore fail to qualify as a REIT. We believe that each of the partnerships and subsidiaries in which we own an interest (except LTC Development) will be treated for tax purposes as a partnership or qualified real estate investment trust subsidiary, respectively, although no assurance can be given that the Internal Revenue Service will not successfully challenge the status of any such organization. President Clinton's fiscal year 2000 budget proposal contains a provision which would amend the Internal Revenue Code to prohibit REITs from owning stock of a corporation (other than a qualified real estate investment trust subsidiary) possessing greater than 10% of the voting power or value of all classes of stock of such corporation. This proposal would be effective with respect to stock acquired on or after the date of the first Congressional committee action with respect to the proposal. In addition, to the extent that a REIT's ownership of stock in a subsidiary corporation is exempt from this proposal by virtue of the proposal's effective date, such "grandfathered" status would terminate if such subsidiary corporation (1) engaged in a trade or business in which it was not engaged on the date of the first Congressional committee action on the proposal, or (2) acquired substantial new assets on or after such date. In the event that such grandfathered status were so terminated with respect to LTC Development, and we did not dispose of our interest in LTC Development, we would fail the third asset test discussed above and therefore fail to qualify as a REIT. REMIC. A regular or residual interest in a REMIC will be treated as a real estate asset for purposes of the REIT asset tests, and income derived with respect to such interest will be treated as interest on an obligation secured by a mortgage on real property, assuming that at least 95% of the assets of the REMIC are real estate assets. If less than 95% of the assets of the REMIC are real estate assets, only a proportionate share of the assets of and income derived from the REMIC will be treated as qualifying under the REIT asset and income tests. We believe that our REMIC interests fully qualify for purposes of the REIT income and asset tests. Annual Distribution Requirements. In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders annually in an amount at least equal to (1) the sum of: (A) 95% of our "real estate investment trust taxable income" (computed without regard to the dividends paid deduction and our net capital gain); and 12
(B) 95% of the net income, if any (after tax), from foreclosure property; minus (2) the excess of certain items of non-cash income over 5% of our real estate investment trust taxable income. These annual distributions must be paid in the taxable year to which they relate, or in the following taxable year if: o declared before we timely file our tax return for such year; o paid on or before the first regular dividend payment date after such declaration; and o we so elect and specify the dollar amount in our tax return. Amounts distributed must not be preferential; that is, every stockholder of the class of stock with respect to which a distribution is made must be treated the same as every other stockholder of that class, and no class of stock may be treated otherwise than in accordance with its dividend rights as a class. To the extent that we do not distribute all of our net long-term capital gain or distribute at least 95%, but less than 100%, of our "real estate investment trust taxable income," as adjusted, it will be subject to tax on such amounts at regular corporate tax rates. Furthermore, if we should fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates in the last three months of the calendar year, by the end of the following January) at least the sum of: (1) 85% of our real estate investment trust ordinary income for such year; (2) 95% of our real estate investment trust capital gain income for such year; and (3) any undistributed taxable income from prior periods; we would be subject to a 4% excise tax on the excess of such required distributions over the amounts actually distributed. Any real estate investment trust taxable income and net capital gain on which this excise tax is imposed for any year is treated as an amount distributed during that year for purposes of calculating such tax. Failure to Qualify. If we fail to qualify for taxation as a REIT in any taxable year, and certain relief provisions do not apply, we will be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to stockholders in any year in which we fail to qualify as a REIT will not be deductible by us, nor will any distributions be required to be made. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances we would be entitled to the statutory relief. Failure to qualify for even one year could substantially reduce distributions to stockholders and could result in our incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes. In addition, President Clinton's fiscal year 2000 budget proposal includes a provision which, if enacted in its present form, would result in the immediate taxation of all gain inherent in a C corporation's assets upon an election by such corporation to become a REIT in taxable years beginning after January 1, 2000, and thus could effectively preclude us from re-electing to be taxed as a REIT following a loss of its REIT status. 13
State and local taxation. We may be subject to state or local taxation in various state or local jurisdictions, including those in which we transact business or reside. The state and local tax treatment of our company may not conform to the federal income tax consequences discussed above. Statement Regarding Forward Looking Disclosure Certain information contained in this annual report includes forward looking statements, which can be identified by the use of forward looking terminology such as "may", "will", "expect", "should" or comparable terms or negatives of those terms. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include (without limitation) the following: the effect of economic and market conditions and changes in interest rates, government policy relating to the health care industry including changes in reimbursement levels under the Medicare and Medicaid programs, changes in reimbursement by other third party payors, the financial strength of the operators of the Company's facilities as it affects the continuing ability of such operators to meet their obligations to the Company under the terms of the Company's agreements with its borrowers and operators, the amount and the timing of additional investments, access to capital markets and changes in tax laws and regulations affecting real estate investment trusts. Exhibit 99 to this annual report contains a more comprehensive discussion of risks and uncertainties associated with our business. Item 2. PROPERTIES Investment Portfolio At December 31, 1998, our real estate investment portfolio consisted of investments in 274 skilled nursing facilities with 31,276 beds, 90 assisted living facilities with 4,301 units and six schools in 36 states. We had approximately $410,659,000 (before accumulated depreciation of $26,972,000) invested in facilities we own and lease to operators, approximately $180,964,000 invested in mortgage loans (before allowance for doubtful accounts of $1,250,000), and approximately $100,595,000, at estimated fair value, invested in REMIC certificates. Skilled nursing facilities provide restorative, rehabilitative and nursing care for people not requiring the more extensive and sophisticated treatment available at acute care hospitals. Many skilled nursing facilities provide ancillary services that include occupational, speech, physical, respiratory and IV therapies, as well as provide sub-acute care services which are paid either by the patient, the patient's family, or through federal Medicare or state Medicaid programs. Assisted living facilities serve elderly persons who require assistance with activities of daily living, but do not require the constant supervision skilled nursing facilities provide. Services are usually available 24-hours a day and include personal supervision and assistance with eating, bathing, grooming and administering medication. The facilities provide a combination of housing, supportive services, personalized assistance and health care designed to respond to individual needs. The schools in our real estate investment portfolio are charter and private schools. Charter schools provide an alternative to the traditional public school. Charter schools are generally autonomous entities authorized by the state or locality to conduct operations independent from the surrounding public school district. Laws vary by state, but generally charters are granted by state boards of education either directly or in conjunction with local school districts or public universities. Operators are granted charters to establish and operate schools based on the goals and objectives set forth in the charter. Upon receipt of a charter, schools receive an annuity from the state for each student enrolled. Unlike public or charter schools, private schools receive a majority of their revenues from the students' parents. 14
Owned Properties. At December 31, 1998, we owned 54 skilled nursing facilities with a total of 6,535 beds, 74 assisted living facilities with a total of 3,402 units and five schools in 24 states, representing a net investment of approximately $383,687,000. The properties are leased pursuant to non-cancelable leases generally with an initial term of 10 to 12 years. Many of the leases contain renewal options and some contain options that permit the operators to purchase the facilities. The following table sets forth certain information regarding our owned properties as of December 31, 1998: <TABLE> <CAPTION> No. of No. of No. of No. of Beds Purchase Current Annual Location SNFs ALFs Schools /Units(3) Encumbrances Lease Term (4) Price Rent Payments - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Alabama 8 1 912 $ 14,392,000 72 $ 29,288,000 $ 3,441,000 Arizona 2 3 3 597 7,452,000 129 37,581,000 3,950,000 California 2 2 346 137 16,516,000 1,601,000 Colorado 4 184 122 11,841,000 1,173,000 Florida 10 5 1,682 103 63,121,000 6,412,000 Georgia 1 100 115 2,500,000 261,000 Idaho 4 148 128 9,756,000 977,000 Illinois 1 148 73 6,627,000 747,000 Indiana 2 78 140 5,070,000 487,000 Iowa 6 1 483 10,431,000 31 12,214,000 1,369,000 Kansas 3 4 290 5,339,000 108 8,917,000 872,000 Minnesota 1 - 178 3,788,000 379,000 Nebraska 4 156 128 9,332,000 959,000 New Jersey 1 1 39 180 9,025,000 931,000 New Mexico 1 109 172 8,432,000 745,000 N. Carolina 1 42 122 2,905,000 278,000 Ohio 6 237 132 15,386,000 1,553,000 Oklahoma 6 221 106 12,315,000 1,193,000 Oregon 1 5 432 4,191,000 127 25,620,000 2,531,000 Tennessee 2 224 115 5,550,000 580,000 Texas 13 13 2,386 20,564,000 87 66,093,000 7,435,000 Virginia 3 443 82 11,013,000 1,273,000 Washington 2 8 497 10,659,000 174 24,959,000 2,529,000 Wyoming 3 183 168 12,810,000 1,115,000 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL 54 74 5 9,937 $73,028,000(1) $ 410,659,000(2) $ 42,791,000 =================================================================================================================================== </TABLE> (1) Consists of: i) $55,432,000 of non-recourse mortgages payable by the Company secured by 27 skilled nursing facilities containing a total of 3,265 beds, ii) $8,065,000 of tax-exempt bonds secured by 5 assisted living facilities in Washington with 184 units, iii) $5,340,000 of capital lease obligations on 4 assisted living facilities in Kansas with 134 units, and iv) $4,191,000 of multi-unit housing tax-exempt revenue bonds on one skilled nursing facility in Oregon with 112 units. (2) Of the total purchase price, $178,762,000 relates to investments in 54 skilled nursing facilities with 6,535 beds, $211,947,000 relates to investments in 74 assisted living facilities with 3,402 units and $19,950,000 relates to investments in five schools. (3) Number of beds/units applies to skilled nursing facilities and assisted living residences only. (4) Weighted average remaining months in lease term. The leases provide for a fixed minimum base rent during the initial and renewal periods. Most of the leases provide for annual fixed rent increases or increases based on consumer price indices over the term of the lease. In addition, certain of the Company's leases provide for additional rent through revenue participation (as defined in the lease agreement) in incremental revenues generated by the facilities, over a defined base period, effective at various times during the term of the lease. Each lease is a triple net lease which requires the lessee to pay additional charges including all taxes, insurance, assessments, maintenance and repair (capital and non-capital expenditures), and other costs necessary in the operation of the facility. At December 31, 1998, three of our controlled partnerships owned five skilled nursing facilities that were leased to Sensitive Care, Inc., a Ft. Worth, Texas-based skilled nursing operator. In January 1999, the state of 15
Texas took control of the operations at these five facilities and placed a trustee to oversee resident care. Subsequent to the actions by the state of Texas, we entered into leases on the five properties with BMW Healthcare, Inc., another Texas-based skilled nursing operator. These leases commenced on March 1, 1999 and will continue for 10 years as long as the state of Texas issues licenses to BMW Healthcare to operate these facilities. Prior to licensure, BMW Healthcare is operating the properties under trustee supervision. Mortgage Loans. At December 31, 1998, the Company had 71 mortgage loans secured by first mortgages on 63 skilled nursing facilities with a total of 7,034 beds, 16 assisted living residences with 899 units and one school located in 23 states. At December 31, 1998, the mortgage loans had a weighted average interest rate of 10.89%, generally have 25-year amortization schedules, have balloon payments due from 1999 to 2018 and provide for certain facility fees. The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points. The following table sets forth certain information regarding our mortgage loans as of December 31, 1998: <TABLE> <CAPTION> No. of Average Current Annual No. of No. of No. of Beds Interest Months to Face Amount of Current Amount Debt Service Location SNFs ALFs Schools /Units Rate % Maturity Mortgage Loans of Mortgage Loans (1) - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Alabama 1 40 10.00 238 $ 500,000 $ 497,000 $ 58,000 Arizona 2 1 1 479 10.25-11.00 63 17,150,000 16,941,000 2,022,000 Arkansas 2 274 10.25-10.45 149 3,400,000 3,238,000 403,000 California 6 886 9.78-12.75 148 13,076,000 12,799,000 1,612,000 Colorado 5 1 476 8.91-12.52 85 12,440,000 12,270,000 1,399,000 Florida 6 2 908 9.90-12.05 116 25,929,000 25,485,000 3,069,000 Georgia 4 1 445 10.00-11.18 97 11,450,000 11,329,000 1,340,000 Illinois 2 191 9.58-11.30 94 3,150,000 3,121,000 347,000 Iowa 5 590 11.05-12.00 150 8,900,000 8,727,000 1,032,000 Kansas 2 197 10.16-12.13 160 3,600,000 3,560,000 433,000 Mississippi 1 180 11.32 94 5,465,000 5,443,000 662,000 Missouri 2 264 8.88-11.13 129 4,301,000 4,470,000 547,000 Montana 1 34 11.00 181 2,346,000 2,345,000 268,000 Nebraska 3 135 10.23-11.00 117 8,979,000 8,957,000 1,017,000 Nevada 1 100 10.63 141 1,200,000 1,129,000 145,000 N. Carolina 2 4 369 8.91-10.90 89 14,384,000 14,280,000 1,383,000 Ohio 1 150 10.39 88 5,200,000 5,083,000 586,000 Oklahoma 1 161 11.15 152 1,300,000 1,250,000 163,000 S. Carolina 5 3 637 8.91-12.10 94 18,927,000 18,850,000 2,087,000 Tennessee 3 201 10.98 82 4,842,000 4,746,000 574,000 Texas 7 791 10.25-11.70 145 10,145,000 9,909,000 1,243,000 Washington 4 310 10.40-11.90 146 4,500,000 4,387,000 564,000 Wisconsin 1 115 11.00 221 2,200,000 2,148,000 272,000 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL 63 16 1 7,933 $ 183,384,000 $180,964,000(2) $ 21,226,000 =================================================================================================================================== </TABLE> (1) Includes principal and interest payments. (2) Of the total current principal balance, $131,550,000, $42,914,000 and $6,500,000 relates to investments in skilled nursing facilities, assisted living facilities and schools, respectively. In general, the mortgage loans may not be prepaid except in the event of the sale of the collateral facility to a third party that is not affiliated with the borrower, although partial prepayments (including the prepayment premium) are often permitted where a mortgage loan is secured by more than one facility upon a sale of one or more, but not all, of the collateral facilities to a third party which is not an affiliate of the borrower. The terms of the mortgage loans generally impose a premium upon prepayment of the loans depending upon the period in which the prepayment occurs, whether such prepayment was permitted or required, and certain other conditions such as upon the sale of the facility under pre-existing purchase option, destruction or condemnation, or other circumstances as approved by us. On certain loans, such prepayment amount is based upon a percentage of the then outstanding balance of the loan, usually declining ratably each year. For other loans, the prepayment 16
premium is based on a yield maintenance formula. In addition to a lien on the mortgaged property, the loans are generally secured by certain non-real estate assets of the facilities and contain certain other security provisions in the form of letters of credit, pledged collateral accounts, security deposits, cross-default and cross-collateralization features and certain guarantees. REMIC Certificates. At December 31, 1998, the estimated fair value of the REMIC certificate investments was $100,595,000 ($100,814,000, at amortized cost). The REMIC certificates we retain are subordinate in rank and right of payment to the REMIC certificates sold to third-party investors and as such would bear the first risk of loss in the event of an impairment to any of the underlying mortgages. The REMIC certificates are collateralized by four pools consisting of 117 first mortgage loans secured by 184 skilled nursing facilities with a total of 20,972 beds in 26 states. Each mortgage loan, all of which we originated, is evidenced by a promissory note and secured by a mortgage, deed of trust, or other similar instrument that creates a first mortgage lien on a fee simple estate in real property. The $381,894,000 current principal amount of mortgage loans represented by the REMIC certificates have a weighted average interest rate of approximately 11.03%, and scheduled maturities ranging from 1999 to 2028. The following table sets forth certain information regarding the mortgage loans securing the REMIC certificates as of December 31, 1998: Original Current Principal Principal Amount Number Amount of of Remaining Current of Number Remaining Mortgage Loans Annual Debt Location Facilities of Beds Mortgage Loans (1) Service - -------------------------------------------------------------------------------- Alabama 9 1,189 $ 22,526,000 $ 21,807,000 $ 2,771,000 Arizona 5 955 26,018,000 25,206,000 2,882,000 California 23 2,532 52,870,000 39,400,000 5,385,000 Colorado 1 177 2,000,000 1,964,000 235,000 Connecticut 4 499 10,656,000 10,299,000 1,316,000 Florida 7 945 32,310,000 31,371,000 3,713,000 Georgia 12 1,318 27,272,000 26,526,000 3,307,000 Illinois 6 679 12,426,000 11,928,000 1,508,000 Iowa 11 810 16,731,000 16,746,000 1,893,000 Kansas 1 66 1,200,000 1,172,000 143,000 Kentucky 1 67 726,000 702,000 89,000 Louisiana 1 127 1,600,000 1,557,000 199,000 Michigan 3 444 6,800,000 6,551,000 848,000 Mississippi 3 400 10,685,000 10,532,000 1,193,000 Missouri 6 645 10,989,000 10,663,000 1,325,000 Montana 6 543 15,508,000 15,130,000 1,778,000 Nebraska 6 570 10,014,000 9,692,000 1,206,000 New Mexico 8 673 20,833,000 20,182,000 2,196,000 N. Carolina 1 168 2,950,000 2,874,000 359,000 Ohio 3 243 7,000,000 6,504,000 823,000 Oklahoma 1 112 1,300,000 1,216,000 169,000 Oregon 2 168 1,610,000 1,595,000 165,000 S. Dakota 1 50 585,000 567,000 66,000 Tennessee 7 650 19,027,000 18,693,000 2,283,000 Texas 52 6,653 88,491,000 84,574,000 10,471,000 Washington 4 289 4,583,000 4,443,000 550,000 - -------------------------------------------------------------------------------- TOTAL 184 20,972 $406,710,000 $381,894,000 $46,873,000 ================================================================================ (1) Included in the balances of the mortgages underlying the REMIC certificates are $55,432,000 of non-recourse mortgages payable by our subsidiaries. We originated these mortgages which were subsequently transferred to the REMIC. The properties and the mortgage debt are reflected in our balance sheet. 17
The mortgage loans underlying the REMIC certificates generally have 25-year amortization schedules with final maturities due from 1999 to 2028, unless prepaid prior thereto. Contractual principal and interest distributions with respect to the $100,814,000 amortized cost basis of REMIC certificates (excluding unrealized losses on changes in estimated fair value of $219,000) we retained are subordinated to distributions of interest and principal with respect to the $299,215,000 of REMIC certificates held by third parties. Thus, based on the terms of the underlying mortgages and assuming no unscheduled prepayments occur, contractual principal reductions on the REMIC certificates we retained will commence in August 2003 with final maturity in April 2028. Distributions on any of the REMIC certificates will depend, in large part, on the amount and timing of payments, collections, delinquencies and defaults with respect to the mortgage loans represented by the REMIC certificates, including the exercise of certain purchase options under existing facility leases or the sale of the mortgaged properties. Each of the mortgage loans securing the REMIC certificates contain similar prepayment and security provisions as our mortgage loans. As part of the REMIC transactions discussed above, we serve as the sub-servicer and, in such capacity, are responsible for performing substantially all of the servicing duties relating to the mortgage loans represented by the REMIC certificates. We receive monthly fees equal to a fixed percentage of the then outstanding mortgage loan balance in the REMIC which, in management's opinion, represent currently prevailing terms for similar transactions. In addition, we will act as the special servicer to restructure any mortgage loans in the REMIC that default. At December 31, 1998, the REMIC certificates we held had an effective interest rate of approximately 17.76% based on the expected future cash flows with no unscheduled prepayments. Major Operators As of December 31, 1998, Sun Healthcare Group, Inc. operated 70 facilities representing 19% ($174.3 million) of our adjusted gross real estate investment portfolio (adjusted to include the mortgage loans to third parties underlying the investment in REMIC certificates). Our real estate investments that are operated by Sun Healthcare consists of $46.3 million of properties we own and lease directly to Sun Healthcare and $31.7 million of mortgage loans and mortgage loans underlying the REMIC certificates that are secured by properties owned directly by Sun Healthcare. The remaining $96.3 million consists of mortgage loans and mortgage loans underlying the REMIC certificates that are secured by properties that are owned by independent entities that either lease the properties to Sun Healthcare or have Sun Healthcare operate the property pursuant to a management agreement. Other than Sun Healthcare, no long-term care provider operated over 10% of our adjusted gross real estate investment portfolio. Sun Healthcare is a publicly traded company, and as such is subject to the filing requirements of the Securities and Exchange Commission. Our financial position and our ability to make distributions may be adversely affected by financial difficulties experienced by Sun Healthcare, or any of our other major operators, including bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with us or our borrowers when it expires. See "Exhibit 99 -Risk Factors" for a more comprehensive discussion of risks and uncertainties. 18
Item 3. LEGAL PROCEEDINGS From time to time, we are a party to various claims and lawsuits arising in the ordinary course of business which, in our opinion, are not singularly or in the aggregate material to our results of operations or financial condition. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 4a. EXECUTIVE OFFICERS Name Age Position - --------------------------- -------- Andre C. Dimitriadis 58 Chairman, Chief Executive Officer and Director James J. Pieczynski 36 President, Chief Financial Officer, and Director Christopher T. Ishikawa 35 Senior Vice President and Chief Investment Officer Raad K. Shawaf 33 Senior Vice President and General Counsel Mr. Dimitriadis founded LTC in 1992 and was employed by Beverly Enterprises, Inc., an owner/operator of long-term care facilities, retirement living facilities and pharmacies, from October 1989 to May 1992, where he served as Executive Vice President and Chief Financial Officer. Prior to that, he was employed by American Medical International, Inc., an owner/operator of hospitals, from 1985 to 1989, where he served as Executive Vice President - Finance, Chief Financial Officer and Director. Mr. Dimitriadis is a member of the board of Magellan Health Services. Mr. Pieczynski has served as President and Director since September 8, 1997 and Chief Financial Officer of LTC since May 1994. From May 1994 to September 1997, he also served as Senior Vice President of LTC. He joined LTC in December 1993 as Vice President and Treasurer. Prior to that, he was employed by American Medical International, Inc., an owner/operator of hospitals, from May 1990 to December 1993, where he served as Assistant Controller and Director of Development. Mr. Ishikawa has served as Senior Vice President and Chief Investment Officer since September 8, 1997. Prior to that, he served as Vice President and Treasurer of LTC since April 1995. Prior to joining LTC, he was employed by MetroBank from December 1991 to March 1995, where he served as First Vice President and Controller. From December 1989 to November 1991, he was employed by Mercantile National Bank where he served as Assistant Treasurer. Mr. Shawaf has served as Senior Vice President and General Counsel since March 1, 1999. Prior to that, he served as Vice President and Assistant General Counsel of LTC since September 1997. Prior to joining LTC, he was employed by Pamela J. Privett, A Professional Law Corporation, which served as outside General Counsel to LTC from June 1997 to September 1997. From November 1996 to June 1997, he was the sole owner of Raad K. Shawaf, Attorney At Law, a real estate law practice. From June 1993 to June 1996, he was an associate attorney at Stern, Neubauer, Greenwald & Pauly. 19
Item 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Our common stock is listed on the New York Stock Exchange. Set forth below are the high and low reported sale prices for our common stock as reported on the NYSE. 1998 1997 ----------------------- ------------------------- High Low High Low -------- -------- -------- ----------- First Quarter $21.9375 $18.9375 $ 18.625 $ 16.625 Second Quarter 20.3125 18.00 18.25 16.125 Third Quarter 19.00 16.25 19.3125 18.00 Fourth Quarter 18.00 15.5625 21.50 18.8125 (b) As of December 31, 1998, we had approximately 927 stockholders of record of our common stock. (c) We declared total cash distributions as set forth below: 1998 1997 --------- --------- First Quarter $ .365 $ .34 Second Quarter .39 .365 Third Quarter .39 .365 Fourth Quarter .39 .365 --------- --------- $ 1.535 $ 1.435 ========= ========= In addition, in connection with our distribution of our investment in LTC Healthcare common stock to our common stockholders, Series C preferred stockholders and convertible debenture holders, we declared a stock dividend in the form of LTC Healthcare common stock equal to $0.469 per share. We intend to distribute to its stockholders a majority of our funds from operations and, in any event, an amount at least sufficient to satisfy the distribution requirements of a REIT. Cash flows from operating activities available for distribution to stockholders will be derived primarily from interest and rental payments from its real estate investments. All distributions will be made subject to approval of the Board of Directors and will depend on the earnings of LTC, its financial condition and such other factors as the Board of Directors deem relevant. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Internal Revenue Code, we are required to make distributions to holders of our shares equal to at least 95% of our "REIT taxable income." 20
Item 6. SELECTED FINANCIAL INFORMATION The following table of selected financial information should be read in conjunction with LTC's financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K. <TABLE> <CAPTION> 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (In thousands, except per share amounts) <S> <C> <C> <C> <C> <C> Operating Information: Revenues $ 89,391 $ 73,434 $ 54,930 $ 35,569 $ 27,641 Expenses: Interest expense 22,267 23,795 20,604 9,407 6,563 Depreciation and amortization 12,561 9,132 6,298 3,072 1,781 Amortization of founders' stock -- 31 114 221 372 Provision for loan losses 600 -- -- -- 550 Minority interest 1,415 1,205 898 57 -- Operating and other expenses 5,084 4,393 4,479 2,772 3,037 --------- --------- --------- --------- --------- Total expenses 41,927 38,556 32,393 15,529 12,303 --------- --------- --------- --------- --------- Other income (loss) 3,129 885 6,173 (1,656) 667 --------- --------- --------- --------- --------- Income before cumulative effect of change in accounting 50,593 35,763 28,710 18,384 16,005 Cumulative effect of accounting change -- -- -- -- 1,205 --------- --------- --------- --------- --------- Net income 50,593 35,763 28,710 18,384 17,210 Preferred dividends (12,896) (6,075) -- -- -- --------- --------- --------- --------- --------- Net income available to common stockholders $ 37,697 $ 29,688 $ 28,710 $ 18,384 $ 17,210 ========= ========= ========= ========= ========= Per share Information: Basic net income before cumulative effect of accounting change $ 1.39 $ 1.26 $ 1.51 $ 1.02 $ 1.05 Cumulative effect of change in method of accounting for REMIC Certificates -- -- -- -- 0.08 --------- --------- --------- --------- --------- Basic net income $ 1.39 $ 1.26 $ 1.51 $ 1.02 $ 1.13 ========= ========= ========= ========= ========= Diluted net income $ 1.39 $ 1.25 $ 1.44 $ 1.01 $ 1.11 ========= ========= ========= ========= ========= Distributions declared (1) $ 1.535 $ 1.435 $ 1.335 $ 1.21 $ 1.10 ========= ========= ========= ========= ========= Balance Sheet Information: Real estate investments, net $ 663,996 $ 640,733 $ 488,134 $ 340,441 $ 220,025 Total assets 689,814 656,664 500,538 357,378 241,241 Total debt 229,695 249,724 283,472 174,083 55,835 Total liabilities 237,900 259,378 299,207 185,458 66,148 Minority interest 10,514 11,159 10,528 1,098 -- Total stockholders' equity 441,400 386,127 190,803 170,822 175,093 Other Information: Cash flows from operating activities $ 61,885 $ 43,230 $ 33,789 $ 24,197 $ 19,242 Cash flows (used in) investing activities (51,529) (150,800) (90,317) (111,422) (73,546) Cash flows provided by (used in) financing activities (13,827) 109,396 58,242 74,393 65,465 Funds from operations $ 47,559 $ 38,735 $ 28,793 $ 23,944 $ 17,078 Basic funds from operations per share $ 1.76 $ 1.65 $ 1.52 $ 1.33 $ 1.12 Diluted funds from operations per share $ 1.71 $ 1.57 $ 1.44 $ 1.29 $ 1.09 </TABLE> (1) Distributions may exceed current or accumulated net income. 21
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Results Year ended December 31, 1998 compared to year ended December 31, 1997 Revenues for the year ended December 31, 1998 increased $15,957,000 or 22% to $89,391,000 from $73,434,000 in 1997. The increase in revenues resulted from increased rental income of $11,732,000, increased interest income from REMIC certificates of $2,756,000 and an increase in interest and other income of $4,381,000. Partially offsetting the above increases was a decrease of approximately $2,912,000 in interest income on mortgage loans. Rental income increased $5,814,000 as a result of property acquisitions completed during 1997 and $7,941,000 due to property acquisitions completed during 1998. "Same-store" rents increased $955,000 due to the receipt of contingent rents and rental increases as provided for in the lease agreements. Partially offsetting the above increases in rental income was a decrease of $2,978,000 resulting from the sale of properties. During May 1998, the Company completed its fourth securitization transaction resulting in an increase in interest income from REMIC certificates and a decrease in interest income on mortgage loans. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources." Increased interest and other income for 1998 resulted primarily from interest income on notes receivable from stockholders and increased commitment fees. Total expenses for the year ended December 31, 1998 decreased to 47% of net revenues compared to 53% in 1997. The decrease was primarily due to a decrease in total interest expense as a result of the conversion of subordinated debentures. Depreciation and amortization increased due the larger investment base of owned properties in 1998 versus 1997. During 1998, a $600,000 provision for loan losses was recorded for two loans that are currently on non-accrual status. The increase in operating and other expenses is due to increased salaries and benefits attributable to an increase in the number of full time employees. Other income for the year ended December 31, 1998 includes a gain of approximately $9,926,000 on the sale of three skilled nursing facilities. Offsetting the increase in other income attributable to the gain on the sale of real estate was a decrease in the estimated fair value of REMIC certificates that resulted in an unrealized loss of $6,797,000 during the current period as compared to the prior period's unrealized gain of $57,000. During the year ended December 31, 1998, the Company declared cash dividends of $41,837,000 ($1.535 per share) and a stock dividend in the form of LTC Healthcare common stock of $10,724,000 (fair value of $0.469 per share, unaudited) on its common stock and dividends on its preferred stock totaling $12,896,000. The dividends on the preferred stock represent the regular annual dividend of $2.375 per share on the Series A Cumulative Preferred Stock and $2.25 per share on the Series B Cumulative Preferred Stock and a partial dividend on its Series C Convertible Preferred Stock (issued in September 1998). Dividends declared during the year ended December 31, 1997 represent a partial dividend for the month of March 1997 and the regular monthly dividend for the remainder of the year on the Series A Cumulative Preferred Stock (issued in March 1997) and a partial dividend for the month of December 1997 on the Series B Cumulative Preferred Stock (issued in December 1997). 22
As a result of the changes in revenues and expenses discussed above, net income available to common stockholders increased $8,009,000 to $37,697,000 for the year ended December 31, 1998 from $29,688,000 in 1997. Year ended December 31, 1997 compared to the year ended December 31, 1996 Revenues for the year ended December 31, 1997 increased by $18,504,000 or 34% to $73,434,000 from $54,930,000. The increase in revenues resulted primarily from increased rental income of $10,273,000 and increased mortgage interest income of $8,444,000. Rental income increased $5,932,000 as a result of property acquisitions of $118,564,000 during 1997 and $4,530,000 as a result of a full year's rental revenue from facilities acquired during 1996. Same-store rental income increased $275,000 due to contingent rents and rental increases as provided for in the lease agreements. Partially offsetting the above increases in rental income was a decrease of $464,000 related to the sale of properties. The increase in mortgage interest income resulted from the higher mortgage investment base in 1997 as compared to 1996. Total expenses for the year ended December 31, 1997, were 53% of total revenues versus 59% for 1996. The decrease is due in large part to a reduction in interest expense as a percentage of total revenues. The reduction in interest expense is the result of the conversion of approximately $44,005,000 of convertible subordinated debentures into common stock, lower interest rates and the utilization of equity to fund financing activities during 1997. Depreciation expense decreased slightly to 30% of rental income in 1997 compared to 31% of rental income in 1996. Minority interest expense increased due to the inclusion of a full years expense for the six partnerships formed during 1996. During 1997, the estimated fair value of REMIC Certificates increased $57,000 compared to an increase of $6,173,000 in 1996 resulting in a significant decrease in other income. Also decreasing other income were charges of $1,120,000 recognized in connection with the accelerated vesting of 64,000 shares of restricted common stock and non-cash impairment charge of $1,866,000. Partially offsetting these decreases in other income were gains of $1,015,000 on the sale of the Company's investment in Home and Community Care, Inc. and $2,799,000 on the sale of real estate investments. During 1997, the Company declared dividends of $5,913,000 on its Series A Cumulative Preferred Stock issued in March 1997 and a partial dividend of $162,000 on its Series B Cumulative Preferred Stock issued in December 1997. As a result of the changes in revenues and expenses discussed above, net income available to common stockholders increased $978,000 to $29,688,000 in 1997 from $28,710,000 in 1996. Liquidity and Capital Resources As of December 31, 1998, the Company's real estate investment portfolio consisted of approximately $410,659,000 invested primarily in owned skilled nursing and assisted living facilities (before accumulated depreciation of $26,972,000), approximately $180,464,000 invested in mortgage loans (before allowance for doubtful accounts of $1,250,000) and approximately $100,595,000 (fair value) in REMIC Certificates. As of December 31, 1998, the outstanding certificate principal balance and the weighted average pass-through rate for the senior REMIC Certificates (all held by outside third parties) was $299,215,000 and 7.29%, respectively. The effective yield on the subordinated REMIC certificates held by the Company, based on expected future cash flows discounted to give effect to potential risks associated with prepayments and unanticipated credit losses was 17.76% at December 31, 1998. The Company's portfolio consists of 274 skilled nursing facilities, 90 assisted living facilities and six schools in 36 states. 23
As of December 31, 1998, $100,000,000 was outstanding under the Company's $170,000,000 Senior Unsecured Revolving Line of Credit which expires on October 3, 2000. The Revolving Credit Facility pricing varies between LIBOR plus 1.25% and LIBOR plus 1.5% depending on the Company's leverage ratio. Currently the pricing is LIBOR plus 1.25%. On March 8, 1999, the Company obtained a $25,000,000 term loan that bears interest at LIBOR plus 1.25% and matures on October 2, 2000. As of December 31, 1998 the Company had $581,323,000 of unencumbered real estate investments consisting of $300,264,000 in owned properties (before accumulated depreciation), $180,464,000 in mortgage loans (before allowance for doubtful accounts) and $100,595,000 in REMIC certificates. The Company believes that its current cash from operations available for distribution or reinvestment, its borrowing capacity (including borrowings against unencumbered real estate investments), and the Company's ability to access the capital markets are sufficient to provide for payment of its operating costs, provide funds for distribution to its stockholders and to fund additional investments. During the year ended December 31, 1998, the Company completed approximately $204,776,000 in new investments consisting of approximately $47,452,000 in mortgage loans and approximately $157,324,000 in owned properties. The Company financed its investments with proceeds from its recently completed securitization transaction as discussed below and the sale of real estate properties, the assumption of mortgage loans and bonds of $11,224,000 bearing interest at a weighted average rate of 11.6%, issuance of $3,432,000 in minority interests, short-term borrowings and cash on hand. During June 1998, the Company sold a skilled nursing facility that was acquired in 1992 for approximately $11,600,000 and in September 1998 sold two skilled nursing facilities that were acquired in 1994 for approximately $5,106,000. The Company's initial and net investment in these three facilities was approximately $7,654,000 and $6,332,000, respectively. In connection with the sale, proceeds of approximately $4,271,000 were used to repay an outstanding mortgage loan secured by one of the facilities. The mortgage loan was payable to the pool of mortgage loans securing the Company's investment in REMIC Certificates. The remaining proceeds were used to repay borrowings outstanding under the Company's line of credit. The Company recognized a gain of approximately $9,926,000 on the sale of these facilities. During May 1998, the Company completed a securitization of approximately $129,300,000 of mortgage loans with a weighted average interest rate of 10.2% and $26,400,000 face amount ($20,700,000 carrying value) of subordinated certificates, retained from a securitization completed in 1993, with an interest rate of 9.78% on the face value (15.16% on the amortized cost) (the "1998-1 Pool"). As part of the securitization, the Company sold approximately $121,400,000 face amount of senior certificates at a weighted average pass-through rate of 6.3% and retained $34,300,000 face amount of subordinated certificates along with the interest only certificates. The subordinated and interest only certificates retained by the Company had an aggregate fair value of approximately $41,400,000 at the time of the securitization and a weighted average effective yield of 18.9%. Included in the 1998-1 Pool were 40 mortgage loans, including mortgage loans of approximately $25,741,000 with a weighted average interest rate of approximately 8.7% provided to wholly owned subsidiaries and limited partnerships of the Company. Net proceeds of approximately $108,613,000 from the above securitization were used to repay borrowings outstanding under the Company's line of credit. On September 2, 1998, the Company issued 2,000,000 shares of 8.5% Series C Convertible Preferred Stock at $19.25 per share for net proceeds of $37,605,000. The Series C Preferred Stock is convertible into 2,000,000 shares of the Company's common stock, has a liquidation value of $19.25 per share and has an annual coupon of 8.5%, payable quarterly. During 1998, the Company repurchased and retired 200,000 shares of common stock for an aggregate purchase price of approximately $3,345,000. On February 3, 24
1999, the Company announced a stock repurchase plan of up to $5,000,000 of common stock. As of March 19, 1999, the Company had repurchased and retired 316,800 shares of common stock for an aggregate purchase price of approximately $4,108,000 under this plan. On July 1, 1998, the Company redeemed the outstanding $90,000 principal amount of its 8.5% Convertible Subordinated Debentures due 2000 (the "8.5% Debentures") and the outstanding $20,000 principal amount of its 9.75% Convertible Subordinated Debentures due 2004 (the "9.75% Debentures"). Including conversions made in connection with the redemption of the 8.5% Debentures and the 9.75% Debentures, during the year ended December 31, 1998, holders of approximately $35,046,000 in principal amount of convertible subordinated debentures elected to convert the debentures into 2,283,213 shares of common stock at prices ranging from $15.00 to $17.25 per share. At December 31, 1998, the Company had $56,667,000 principal amount of convertible subordinated debentures outstanding which were convertible into 3,512,089 shares of common stock. During 1998, LTC acquired 4,002 shares of LTC Healthcare, Inc. ("Healthcare") non-voting common stock for $2,001,000 in cash. LTC also contributed equity securities with a book value of $788,000, 13 real estate properties with a net book value of $61,462,000 that were encumbered by mortgage debt of $29,263,000 and a minority interest liability of $3,461,000 on seven of the properties, and other related assets and liabilities with a book value of $93,000 in exchange for an additional 36,000 shares of Healthcare non-voting common stock and borrowings by Healthcare under the unsecured line of credit provided by the Company of $21,396,000. During 1998, the Company provided additional funding of $8,635,000 under the unsecured line of credit. Subsequent to the contribution of the above assets and liabilities by the Company to Healthcare, Healthcare obtained mortgage financing of $17,400,000 from a third-party lender on four of the unencumbered properties. Healthcare utilized proceeds from the mortgage debt and cash on hand to repay borrowings of $17,668,000 under the unsecured line of credit provided by the Company. On September 30, 1998, the 40,002 shares of Healthcare non-voting common stock held by the Company were converted into 3,335,882 shares of Healthcare voting common stock. Concurrently, the Company completed the spin-off of all Healthcare voting common stock through a taxable dividend distribution to the holders of Company common stock, Cumulative Convertible Series C Preferred Stock ("Series C Preferred Stock") and Convertible Subordinated Debentures (the "Debentures"). One share of Healthcare common stock was distributed to each holder of Company common stock, Series C Preferred Stock and Debentures for each ten shares of Company common stock owned and for each ten shares of Company common stock that would have been issued upon conversion of the Debentures and Series C Preferred Stock. The Company incurred costs of approximately $500,000 in connection with the distribution. Upon completion of the distribution, Healthcare began operating as a separate public company. For book purposes, no gain was recognized on the distribution of Healthcare common stock which had a net book value of approximately $10,724,000. The distribution was a taxable dividend distribution and accordingly, for tax purposes, the net assets were transferred at their net fair market value of approximately $15,650,000 ($4.69 per share of Healthcare common stock) which resulted in a taxable gain of approximately $4,900,000. The Company and Healthcare have entered into various agreements which, among other things, provide for a sharing of corporate overhead under an administrative services agreement. During the year ended December 31, 1998, the Company charged Healthcare an administrative services fee of approximately $350,000. In addition, the Company provided Healthcare with a $20.0 million unsecured line of credit that bears interest at 10% and matures in March 2008. As of December 31, 1998 approximately $16,528,000 was outstanding under the line of credit. The Company recorded interest income related to the unsecured line of credit of $711,000 for the year ended December 31, 1998. 25
During 1998 but subsequent to the spin-off, the Company acquired 299,900 shares of Healthcare common stock, representing approximately 9.0% of Healthcare's outstanding common stock, for an aggregate purchase price of approximately $659,000. On November 2, 1998, the Company entered into an interest rate swap agreement whereby the Company effectively fixed the interest rate on LIBOR based variable rate debt. Under this agreement, which expires in November 2000, the Company will be credited interest at three month LIBOR and will incur interest at a fixed rate of 4.74% on a notional amount of $50,000,000. The notional amounts of interest rate agreements are used to measure interest to be paid or received and do not represent the amount of exposure to credit loss. The Company expects its future income and ability to make distributions from cash flows from operations to depend on the collectibility of its mortgage loans receivable, REMIC Certificates and rents. The collection of these loans, certificates and rents will be dependent, in large part, upon the successful operation by the operators of the skilled nursing facilities, assisted living residences and schools owned by or pledged to the Company. The operating results of the facilities will depend on various factors over which the operators/owners may have no control. Those factors include, without limitation, the status of the economy, changes in supply of or demand for competing long-term care facilities, ability to control rising operating costs, and the potential for significant reforms in the long-term care industry. In addition, the Company's future growth in net income and cash flow may be adversely impacted by various proposals for changes in the governmental regulations and financing of the long-term care industry. The Company cannot presently predict what impact these proposals may have, if any. The Company believes that an adequate provision has been made for the possibility of loans proving uncollectible but will continually evaluate the status of the operations of the skilled nursing and assisted living facilities, the Company's borrowers and the underlying collateral for mortgage loans and will make future revisions to the provision, if considered necessary. The Company's investments, principally its investments in mortgage loans, REMIC Certificates, and owned properties, are subject to the possibility of loss of their carrying values as a result of changes in market prices, interest rates and inflationary expectations. The effects on interest rates may affect the Company's costs of financing its operations and the fair market value of its financial assets. The Company generally makes loans which have predetermined increases in interest rates and leases which have agreed upon annual increases. In as much as the Company initially funds its investments with its Revolving Credit Facility, the Company is at risk of net interest margin deterioration if medium and long-term rates were to increase between the time the Company originates the investment and replaces the short-term variable rate borrowings with a fixed rate financing. To help reduce the negative impact of changes in interest rates, the Company partially hedges, or locks in, its net interest rate spread on its investments with interest rate swaps, as previously described. The REMIC certificates retained by the Company are subordinate in rank and right of payment to the certificates sold to third-party investors and as such would, in most cases, bear the first risk of loss in the event of an impairment to any of the underlying mortgages. The returns on the Company's investment in REMIC certificates are subject to certain uncertainties and contingencies including, without limitation, the level of prepayments, estimated future credit losses, prevailing interest rates, and the timing and magnitude of credit losses on the underlying mortgages collateralizing the securities that are a result of the general condition of the real estate market or long-term care industry. As these uncertainties and contingencies are difficult to predict and are subject to future events that may alter management's estimations and assumptions, no assurance can be given that current yields will not vary significantly in future periods. To minimize the impact of prepayments, the mortgage loans underlying the REMIC certificates generally prohibit prepayment unless the property is sold to an unaffiliated third party (with respect to the borrower). 26
Certain of the REMIC certificates retained by the Company have designated certificate principal balances and a stated certificate interest "pass-through" rate. These REMIC certificates are subject to credit risk to the extent that there are estimated or realized credit losses on the underlying mortgages, and as such their effective yield would be negatively impacted by such losses. The Company also retains the interest-only (I/O) Certificates, which provide cash flow (interest-only) payments that result from the difference between the interest collected from the underlying mortgages and interest paid on all the outstanding pass-through rate certificates. In addition to the risk from credit losses, the I/O Certificates are also subject to prepayment risk, in that prepayments of the underlying mortgages reduce future interest payments of which a portion flows to the I/O Certificates, thus, reducing their effective yield. The Certificates' fair values are estimated, in part, based on a spread over the applicable U.S Treasury rate, and consequently, are inversely affected by increases or decreases in such interest rates. There is no active market in these securities from which to readily determine their value. The estimated fair values of both classes of Certificates are subject to change based on the estimate of future prepayments and credit losses, as well as fluctuations in interest rates and market risk. Although the Company is required to report its REMIC Certificate investments at fair value, many of the factors considered in estimating their fair value are difficult to predict and are beyond the control of the Company's management, consequently, changes in the reported fair values may vary widely and may not be indicative of amounts immediately realizable if the Company was forced to liquidate any of the Certificates. See "Exhibit 99 - -Risk Factors" for a more comprehensive discussion of risks and uncertainties. The Company believes that its current cash flow from operations available for distribution or reinvestment, its borrowing capacity and the Company's ability to access the capital markets are sufficient to provide for payment of its operating costs, fund investments and provide funds for distribution to its stockholders. In addition to its borrowing capacity, the Company is considering various other proposals for additional long-term financing to meet the needs of the Company. Funds From Operations The Company has adopted the definition of Funds From Operations ("FFO") prescribed by the National Association of Real Estate Investment Trusts ("NAREIT"). FFO is defined as net income applicable to common stockholders (computed in accordance with GAAP) excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real property and after adjustments for unconsolidated entities in which a REIT holds an interest. In addition, the Company excludes any unrealized gains or losses resulting from temporary changes in the estimated fair value of its REMIC Certificates from the computation of FFO. The Company believes that FFO is an important supplemental measure of operating performance. FFO should not be considered as an alternative to net income or any other GAAP measurement of performance as indicator of operating performance or as an alternative to cash flows from operations, investing or financing activities as a measure of liquidity. The Company believes that FFO is helpful in evaluating a real estate investment portfolio's overall performance considering the fact that historical cost accounting implicitly assumes that the value of real estate assets diminishes predictably over time. FFO provides an alternative measurement criteria, exclusive of certain non-cash charges included in GAAP income, by which to evaluate the performance of such investments. FFO, as used by the Company in accordance with the NAREIT definition may not be comparable to similarly entitled items reported by other REITs that have not adopted the NAREIT definition. 27
The following table reconciles net income available to common stockholders to FFO available to common stockholders (in thousands, except per share amounts): <TABLE> <CAPTION> 1998 1997 1996 -------- -------- -------- <S> <C> <C> <C> Net income available to common stockholders $ 37,697 $ 29,688 $ 28,710 Real estate depreciation 12,561 9,104 6,256 Real estate depreciation included in equity earnings 430 -- -- Gain on sale of real estate (9,926) -- -- Unrealized (gain) loss on REMIC Certificates 6,797 (57) (6,173) -------- -------- -------- FFO available to common stockholders $ 47,559 $ 38,735 $ 28,793 ======== ======== ======== Diluted FFO available to common stockholders $ 55,871 $ 47,533 $ 38,764 ======== ======== ======== Basic FFO per share $ 1.76 $ 1.65 $ 1.52 ======== ======== ======== Diluted FFO per share $ 1.71 $ 1.57 $ 1.44 ======== ======== ======== Shares for basic FFO per share 27,077 23,511 18,983 Shares for diluted FFO per share 32,762 30,281 26,828 </TABLE> Year 2000 Currently many computer programs assume the first two digits of a year are "19" and simply identify a year by the last two digits. It is widely anticipated that, beginning in the year 2000 when the first two digits of a year are "20" rather than "19", these computer programs will incorrectly identify the year (i.e. the year 2000 will be incorrectly identified as 1900). Such miscalculations could result in the disruption of operations that are reliant on these computer programs. Computer programs that identify a year by four digits are deemed to be year 2000 compliant. The statements in this section include year 2000 readiness disclosure within the meaning of the Year 2000 Information and Readiness Disclosure Act of 1998. Status of the Company's Information Technology Systems and Non-Information Technology Systems. Our primary use of information technology systems is its internal accounting and information management software (collectively the "Systems"). We have evaluated the Systems to assess whether they will function properly with respect to dates in the year 2000 and beyond. Systems that were determined to be non-compliant with the year 2000 and beyond will be upgraded or replaced. Implementation of year 2000 compliant Systems and upgrades to existing Systems are expected to be completed by mid-1999. The total cost associated with modifications required to become year 2000 compliant will not be material to our financial position, results of operations or liquidity. Due to our limited reliance on complex Systems, we believe the year 2000 issue, as it relates to its internal Systems, will not have a material adverse effect upon our financial position, results of operations or liquidity. We will also have year 2000 exposure in non-information technology areas as it relates to owned properties and our leased corporate offices. There is a risk that embedded chips in elevators, security systems, electrical systems and similar technology-driven devices may stop functioning on January 1, 2000. All of our owned properties are leased under triple-net leases and as such, the cost to repair any of these items will be paid by the lessee. While any disruption in services at our corporate offices due to failure of non-information technology systems may be inconvenient and disruptive to day-to-day activities, 28
it is not expected to have a material adverse effect on our financial position, results of operations or liquidity. Exposure to Third Party Year 2000 Issues. We depend upon the following third parties: o our tenants and borrowers for rents and cash flows; o our financial institutions for availability of working capital and capital markets financing; and o our transfer agent to maintain and track investor information. If our primary tenants or borrowers are not year 2000 compliant, or if they face disruptions in their cash flows due to year 2000 issues, we could face significant temporary disruptions in our cash flows after that date. These disruptions could be compounded if the commercial banks that process our cash receipts and disbursements are not year 2000 compliant. If there are significant disruptions to the capital markets as a result of year 2000 issues, our ability to access the capital markets to fund investments could be impaired. Neither we nor our lessees or mortgagors can be assured that the federal and state governments, upon which our lessees rely for Medicare and Medicaid revenue, will be in compliance in a timely manner. The General Accounting Office has reported that the Health Care Financing Administration, which runs Medicare, is behind schedule in taking steps to deal with the year 2000 issue and that it is highly unlikely that all of the Medicare systems will be compliant in time to ensure the delivery of uninterrupted benefits and services into the year 2000. The General Accounting Office has also reported that, based upon its survey of the states, the District of Columbia and three territories, less than 16% of the automated systems used by state and local government to administer Medicaid are reported to be year 2000 compliant. Due to the general uncertainty surrounding the readiness of third-party tenants and other third-parties, including the federal and state governments, with which our lessees do business, we are unable at this time to determine whether non-compliance with the year 2000 issue by third-parties will have a material impact on our financial position, results of operations or liquidity. Contingency Plan. In the event we experience a significant disruption in cash receipts due to the a delay in Medicare or Medicaid receipts by our tenants or due to other year 2000 non-compliance issues, we would seek additional liquidity from our lenders and slow our investment activity. Readers are cautioned that forward-looking statements contained in the above discussion regarding year 2000 compliance should be read in conjunction with the disclosure under the heading "-Statement Regarding Forward Looking Disclosure" set forth below. Statement Regarding Forward Looking Disclosure Certain information contained in this annual report includes forward looking statements, which can be identified by the use of forward looking terminology such as "may", "will", "expect", "should" or comparable terms or negatives of those terms. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include (without limitation) the following: the effect of economic and market conditions and changes in interest rates, government policy relating to the health care industry including changes in reimbursement levels under the Medicare and Medicaid programs, changes in reimbursement by other third party payors, the financial strength of the operators of the Company's facilities as it affects the continuing ability of such operators to meet their obligations to the Company under the terms of the Company's agreements with its borrowers and operators, the amount and the timing of additional investments, access to capital markets and changes in tax laws and regulations affecting real estate investment trusts. Exhibit 99 to this annual report contains a more comprehensive discussion of risks and uncertainties associated with our business. 29
Item 7a. Quantitative and Qualitative Disclosures About Market Risk Readers are cautioned that statements contained in this section "Quantitative and Qualitative Disclosures About Market Risk" are forward looking and should be read in conjunction with the disclosure under the heading "-Statement Regarding Forward Looking Disclosure" set forth above. We are exposed to market risks associated with changes in interest rates as they relate to our mortgage loans receivable, investments in REMIC certificates and debt. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control. To modify and manage the interest characteristics of our outstanding debt and limit the effects of interest rates on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks such as counter-party credit risk and legal enforceability of hedging contracts. We do not enter into any transactions for speculative or trading purposes. Our future earnings, cash flows and estimated fair values relating to financial instruments are dependent upon prevalent market rates of interest, such as LIBOR or term rates of U.S. Treasury Notes. Changes in interest rates generally impact the fair value, but not future earnings or cash flows, of mortgage loans receivable, our investment in REMIC certificates and fixed rate debt. For variable rate debt, such as our revolving line of credit, changes in interest rates generally do not impact the fair value, but do affect future earnings and cash flows. We have partially mitigated the impact of interest rate changes on our revolving line of credit with an interest rate swap agreement. At December 31, 1998, based on the prevailing interest rates for comparable loans and estimates made by management, the fair value of our mortgage loans receivable was approximately $181.7 million. A 1% increase in such rates would decrease the estimated fair value of our mortgage loans by approximately $7.5 million while a 1% decrease in such rates would increase their estimated fair value by approximately $8.2 million. A 1% increase or decrease in applicable interest rates would not have a material impact on the fair value of our investment in REMIC certificates or fixed rate debt. Assuming the borrowings outstanding under our revolving line of credit at December 31, 1998 remain constant and after giving effect to our interest rate swap agreement, a 1% increase in interest rates would increase annual interest expense on our revolving line of credit by approximately $500,000. Conversely, a 1% decrease in interest rates would decrease annual interest expense on our revolving line of credit by $500,000. These estimated impact of changes in interest rates discussed above are determined by considering the impact of the hypothetical interest rates on our borrowing costs, interest rate swap agreement, lending rates and current U.S. Treasury rates from which our financial instruments may be priced. We do not believe that future market rate risks related to our financial instruments will be material to our financial position or results of operations. These analyses do not consider the effects of industry specific events, changes in the real estate markets, or other overall economic activities that could increase or decrease the fair value of our financial instruments. If such events or changes were to occur, we would consider taking actions to mitigate and/or reduce any negative exposure to such chantes. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure. 30
Item 8. FINANCIAL STATEMENTS Page ---- Report of Independent Auditors ............................................ 32 Consolidated Balance Sheets as of December 31, 1998 and 1997 .............. 33 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 ....................................... 34 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 ................................. 35 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 ....................................... 36 Notes to Consolidated Financial Statements ................................ 37 31
REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders LTC Properties, Inc. We have audited the accompanying consolidated balance sheets of LTC Properties, Inc. as of December 31, 1998 and 1997 and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedules listed in the index at Item 14(a). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LTC Properties, Inc. at December 31, 1998 and 1997, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /s/ ERNST & YOUNG LLP Los Angeles, California January 19, 1999 32
LTC PROPERTIES, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts) <TABLE> <CAPTION> December 31, ---------------------- 1998 1997 --------- --------- <S> <C> <C> ASSETS Real Estate Investments: Buildings and improvements, net of accumulated depreciation and amortization: 1998 - $26,972; 1997 - $20,042 $ 366,891 $ 282,582 Land 16,796 16,246 Mortgage loans receivable held for sale, net of allowance for doubtful accounts: 1998 - $1,250; 1997 - $1,000 179,714 254,094 REMIC Certificates at estimated fair value 100,595 87,811 --------- --------- Real estate investments, net 663,996 640,733 Other Assets: Cash and cash equivalents 1,503 4,974 Debt issue costs, net 2,040 3,733 Interest receivable 3,350 3,862 Prepaid expenses and other assets 2,397 3,362 Note receivable from LTC Healthcare, Inc. 16,528 -- --------- --------- 25,818 15,931 --------- --------- Total assets $ 689,814 $ 656,664 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Convertible subordinated debentures due 1999 - 2002 $ 56,667 $ 91,823 Bank borrowings 100,000 87,500 Mortgage loans payable 55,432 56,785 Bonds payable and capital lease obligations 17,596 13,616 Accrued interest 3,135 4,453 Accrued expenses and other liabilities 4,085 4,429 Distributions payable 985 772 --------- --------- Total liabilities 237,900 259,378 Minority interest 10,514 11,159 Commitments -- -- Stockholders' equity: Preferred stock $0.01 par value; 10,000,000 shares authorized; shares issued and outstanding: 1998 - 7,080,000; 1997 - 5,080,000 165,500 127,000 Common stock $0.01 par value; 40,000,000 shares authorized; shares issued and outstanding: 1998 - 27,660,712; 1997 - 25,025,003 277 250 Capital in excess of par value 311,113 277,732 Cumulative net income 158,270 107,677 Notes receivable from stockholders (11,200) (9,429) Cumulative distributions (182,560) (117,103) --------- --------- Total stockholders' equity 441,400 386,127 --------- --------- Total liabilities and stockholders' equity $ 689,814 $ 656,664 ========= ========= </TABLE> See accompanying notes 33
LTC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share amounts) <TABLE> <CAPTION> Years ended December 31, ------------------------------- 1998 1997 1996 -------- -------- -------- <S> <C> <C> <C> Revenues: Rental income $ 42,534 $ 30,802 $ 20,529 Interest income from mortgage loans 23,030 25,942 17,498 Interest income from REMIC Certificates 16,945 14,189 14,383 Interest and other income 6,882 2,501 2,520 -------- -------- -------- Total revenues 89,391 73,434 54,930 -------- -------- -------- Expenses: Interest expense 22,267 23,795 20,604 Depreciation and amortization 12,561 9,163 6,412 Provision for loan losses 600 -- -- Minority interest 1,415 1,205 898 Operating and other expenses 5,084 4,393 4,479 -------- -------- -------- Total expenses 41,927 38,556 32,393 -------- -------- -------- Other income /(loss): Unrealized holding gain/(loss) on changes in estimated fair value of REMIC Certificates (6,797) 57 6,173 Gain on sales of real estate investments 9,926 -- -- Other income, net -- 828 -- -------- -------- -------- Total other income, net 3,129 885 6,173 -------- -------- -------- Net income 50,593 35,763 28,710 Preferred dividends 12,896 6,075 -- -------- -------- -------- Net income available to common stockholders $ 37,697 $ 29,688 $ 28,710 ======== ======== ======== Net Income Per Common Share: Basic net income per common share $ 1.39 $ 1.26 $ 1.51 ======== ======== ======== Diluted net income per common share $ 1.39 $ 1.25 $ 1.44 ======== ======== ======== </TABLE> See accompanying notes 34
LTC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except per share amounts) <TABLE> <CAPTION> Shares Notes ---------------------- Capital in Cumulative Receivable Preferred Common Preferred Common Excess of Net from Cumulative Stock Stock Stock Stock Par Value Income Stockholders Distributions ---------- --------- --------- --------- ---------- ---------- --------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance December 31, 1995 -- 18,297 $ -- $ 183 $ 178,453 $ 43,204 $ -- $ (51,018) Amortization of Founders' stock -- -- -- -- 114 -- -- -- Exercise of stock options -- 3 -- -- 39 -- -- -- Conversion of debentures -- 1,304 -- 13 18,521 -- -- -- Repurchase of common stock -- (120) -- (1) (1,830) -- -- -- Net income -- -- -- -- -- 28,710 -- -- Common stock distributions ($1.335 per share) -- -- -- -- -- -- -- (25,585) --------- --------- --------- --------- --------- --------- --------- --------- Balance-December 31, 1996 -- 19,484 -- 195 195,297 71,914 -- (76,603) --------- --------- --------- --------- --------- --------- --------- --------- Amortization of Founders' stock -- -- -- -- 31 -- -- -- Issuance of Series A Preferred Stock 3,080 -- 77,000 -- (3,200) -- -- -- Issuance of Series B Preferred Stock 2,000 -- 50,000 -- (2,200) -- -- -- Issuance of common stock -- 2,000 -- 20 35,045 -- -- -- Exercise of stock options -- 718 -- 7 8,205 -- (9,862) -- Payments on stockholder notes -- -- -- -- -- -- 433 -- Amortization of restricted stock -- 91 -- 1 1,639 -- -- -- Conversion of debentures -- 2,732 -- 27 42,915 -- -- -- Net income -- -- -- -- -- 35,763 -- -- Preferred stock dividends -- -- -- -- -- -- -- (6,075) Common stock distributions ($1.435 per share) -- -- -- -- -- -- -- (34,425) --------- --------- --------- --------- --------- --------- --------- --------- Balance - December 31, 1997 5,080 25,025 127,000 250 277,732 107,677 (9,429) (117,103) --------- --------- --------- --------- --------- --------- --------- --------- Issuance of Series C Preferred Stock 2,000 -- 38,500 -- (895) -- -- -- Exercise of stock options -- 147 -- 2 1,557 -- (2,313) -- Payments on stockholder notes -- -- -- -- -- -- 542 -- Conversion of debentures -- 2,283 -- 23 34,622 -- -- -- Repurchase of common stock -- (200) -- (2) (3,343) -- -- -- Issuance of restricted stock -- 406 -- 4 (4) -- -- -- Amortization of restricted stock -- -- -- -- 1,491 -- -- -- Conversion of partnership units -- -- -- -- (47) -- -- -- Net income -- -- -- -- -- 50,593 -- -- Preferred stock dividends -- -- -- -- -- -- -- (12,896) Common stock distributions - cash ($1.535 per share) -- -- -- -- -- -- -- (41,837) Common stock distributions - stock ($0.469 per share) -- -- -- -- -- -- -- (10,724) --------- --------- --------- --------- --------- --------- --------- --------- Balance - December 31, 1998 7,080 27,661 $ 165,500 277 $ 311,113 158,270 (11,200) $(182,560) ========= ========= ========= ========= ========= ========= ========= ========= </TABLE> See accompanying notes 35
LTC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) <TABLE> <CAPTION> Year ended December 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- <S> <C> <C> <C> OPERATING ACTIVITIES: Net income $ 50,593 $ 35,763 $ 28,710 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,561 9,163 6,412 Unrealized holding (gain)/loss on estimated fair value of REMIC Certificates 6,797 (57) (6,173) Gain on sale of real estate investments (9,926) (2,799) -- Gain on disposition of other assets -- (1,015) -- Expense related to vesting of restricted stock 1,491 1,120 -- Non-cash impairment charge -- 1,866 -- Other non-cash charges 2,220 1,832 1,883 (Increase) decrease in interest receivable 512 (1,204) (875) (Increase) in prepaid, other assets and allowance (122) (1,249) (99) Increase (decrease) in accrued interest (1,118) (1,562) 2,819 Increase (decrease) in accrued expenses and other liabilities (1,123) 1,372 1,112 --------- --------- --------- Net cash provided by operating activities 61,885 43,230 33,789 INVESTING ACTIVITIES: Investment in real estate mortgages (47,452) (107,487) (99,440) Acquisition of real estate properties, net (142,668) (114,891) (95,285) Proceeds from sale of real estate properties, net 16,706 29,004 7,589 Proceeds from sale of REMIC Certificates, net 108,613 11,811 86,674 Principal payments on mortgage loans receivable 10,758 24,977 2,272 Investment in LTC Healthcare, Inc. (2,001) -- -- Advances to LTC Healthcare, Inc. (12,800) -- -- Repayment of advances to LTC Healthcare, Inc. 17,668 -- -- Return of investment in unconsolidated affiliates -- 5,000 -- Proceeds from sale of investments, net -- 1,015 -- Restricted cash -- -- 8,300 Other (353) (229) (427) --------- --------- --------- Net cash used in investing activities (51,529) (150,800) (90,317) FINANCING ACTIVITIES: Proceeds from issuance of convertible debentures -- -- 60,000 Proceeds from issuance of common stock, net -- 35,065 39 Proceeds from issuance of preferred stock, net 37,605 121,600 -- Debt issue costs -- (1,877) (2,167) Distributions paid (54,520) (46,407) (24,670) Bank borrowings 276,000 445,032 219,000 Repayment of bank borrowings (263,500) (436,932) (188,070) Principal payments on mortgage loans, notes payable and capital lease obligations (5,077) (5,869) (3,893) Repurchase of common stock (3,345) -- (1,831) Other (990) (1,216) (166) --------- --------- --------- Net cash provided by financing activities (13,827) 109,396 58,242 --------- --------- --------- Increase (decrease) in cash and cash equivalents (3,471) 1,826 1,714 Cash and cash equivalents, beginning of year 4,974 3,148 1,434 --------- --------- --------- Cash and cash equivalents, end of year $ 1,503 $ 4,974 $ 3,148 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid $ 22,478 $ 23,985 $ 16,631 </TABLE> See accompanying notes 36
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company LTC Properties, Inc. (the "Company"), a Maryland corporation, commenced operations on August 25, 1992. The Company is a real estate investment trust ("REIT") that invests primarily in long-term care facilities through mortgage loans, facility lease transactions and other investments. As of December 31, 1998, the Company had investments in 274 skilled nursing facilities, 90 assisted living residences and 6 schools in 36 states. 2. Summary of Significant Accounting Policies Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its controlled partnerships. All intercompany accounts and transactions have been eliminated in consolidation. Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation. Use of Estimates. Preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash Equivalents. Cash equivalents consist of highly liquid investments with a maturity of three months or less and are stated at cost which approximates market. Land, Buildings and Improvements. Land, buildings and improvements are recorded at cost. Impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses the impairment of properties individually and impairment losses are calculated as the excess of the carrying amount of the real estate over its fair value. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets ranging from 7 years for equipment to 40 years for buildings. Mortgage Loans Receivable. The Company may securitize certain of the mortgage loans it originates in transactions accounted for as sales when a securitization provides the best available form of capital to fund additional long-term investments. Historically, the Company has sold its mortgage loans solely in connection with its REMIC securitizations and does not anticipate selling any mortgage loans other than in the course of completing future securitizations. However, since certain mortgage loans may be securitized in the future, direct investments in mortgage loans are classified as held for sale and carried at the lower of cost or market. If the mortgage loans aggregate cost basis exceeds their aggregate market value, a valuation allowance is established and the resulting amount is included in the determination of net income. Changes in the valuation allowance are included in current period earnings. In determining the estimated market value for mortgage loans, the Company considers estimated prices and yields, based in part on a spread over the applicable U.S. Treasury Note Rate, sought by qualified institutional buyers of the REMIC Certificates originated in the Company's securitizations. Investments in REMIC Certificates. Generally, the Company maintains a long-term investment interest in mortgage loans it securitizes through the retention of a portion of the resulting REMIC Certificates which are carried at fair value. Significant judgment is used in estimating the REMIC Certificates' fair value since no ready market exists. Management considers factors which affect the REMIC 37
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Certificates' projected cash flows including, but not limited to, actual and estimated prepayments, projected credit losses, if any, on the underlying mortgages, as well as general economic and regulatory factors affecting the long-term care industry and prevailing market interest rate conditions. Since many of these factors are difficult to predict and are beyond the control of management, changes in the reported fair values may vary widely and may not be indicative of amounts immediately realizable if the Company were forced to liquidate its investment in REMIC Certificates. Changes in the estimated fair value of REMIC Certificates are recorded as a separate component of earnings. Mortgage Servicing Rights. The Company sub-services mortgage loans that are collateral for REMIC Certificates issued in its securitization transactions for which it receives servicing fees, based on market rates for such services at the time the securitization is completed, equal to a fixed percentage of the outstanding principal on the collateral loans. A separate asset for servicing rights is not recognized since the servicing fees received only adequately compensate the Company for the cost of servicing the loans. The fair value of servicing rights for mortgage loans originated and retained by the Company are estimated based on the fees received for servicing mortgage loans that serve as collateral for REMIC Certificates. All costs to originate mortgage loans are allocated to the mortgage loans since the fair value of servicing rights only sufficiently covers the servicing costs. Interest Rate Contracts. Firm commitments subject the Company to interest rate risk to the extent that debt or other fixed rate financing will be used to finance the commitments. The Company may elect to enter into interest rate contracts to hedge such financing thereby reducing its exposure to interest rate risk. Interest rate contracts are designated as hedges of assets intended for securitization when the significant characteristics and expected terms of the securitization are identified and it is probable the securitization will occur. These contracts are entered into in notional amounts that generally correspond to the principal amount of the assets to be securitized. The Company effectively locks in its net interest margin on the securitization when the interest rate contract is entered into since changes in the market value of these contracts respond inversely to changes in the market value of the hedged assets. Gains or losses on interest rate contracts designated as hedges of assets to be securitized are deferred and recognized upon the completion of the securitization. The Company may also manage interest rate risk by entering into interest rate swap agreements whereby the Company effectively fixes the interest rate on variable rate debt. The differential between interest paid and received on interest rate swaps is recognized as an adjustment to interest expense. Revenue Recognition. Interest income on mortgage loans and REMIC Certificates is recognized using the effective interest method. Base rent under operating leases are accrued as earned over the terms of the leases. Contingent rental income, equal to a percentage of increased revenue over defined base period revenue of the long-term care facility operations, is recognized as earned. Federal Income Taxes. The Company qualifies as a REIT under the Internal Revenue Code of 1986, as amended and as such, no provision for Federal income taxes has been made. A REIT may deduct distributions to its stockholders from its taxable income. If at least 100% of a REIT's taxable income is distributed to its stockholders and it complies with other Internal Revenue Code requirements, a REIT generally is not subject to Federal income taxation. For Federal tax purposes, depreciation is generally calculated at a rate of 3.6% based on the assets' tax basis (which approximates cost) using the straight-line method over a period of 27.5 years. At Earnings and profits, which determine the taxability of dividends to stockholders, differ from net 38
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) income for financial statement purposes due to the treatment of certain interest income and expense items and depreciable lives and basis of assets under the Internal Revenue Code. Concentrations of Credit Risks. Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, REMIC Certificates, mortgage loans receivable, operating leases on owned properties and interest rate swaps. The Company's financial instruments, principally REMIC Certificates and mortgage loans receivable, are subject to the possibility of loss of carrying value as a result of the failure of other parties to perform according to their contractual obligations or changes in market prices which may make the instrument less valuable. The Company obtains various collateral and other protective rights, and continually monitors these rights, in order to reduce such possibilities of loss. In addition, the Company provides reserves for potential losses based upon management's periodic review of its portfolio. The Company's REMIC Certificates are subordinate in rank and right of payment to the certificates sold to third-party investors and as such, in most cases, would bear the first risk of loss in the event of an impairment to any of the underlying mortgages. The returns on the REMIC Certificates are subject to certain uncertainties and contingencies including, without limitation, the level of prepayment, prevailing interest rates and the timing and magnitude of credit losses on the mortgages underlying the securities that are a result of the general condition of the real estate market or long-term care industry. These uncertainties and contingencies are difficult to predict and are subject to future events that may alter management's estimations and assumptions therefore, no assurance can be given that current yields will not vary significantly in future periods. To minimize the impact of prepayments, the mortgage loans underlying the REMIC Certificates generally prohibit prepayment unless the property is sold to an unaffiliated third party (with respect to the borrower). Certain of the REMIC Certificates retained by the Company have designated certificate principal balances and a stated certificate interest "pass-through" rate. These REMIC Certificates are subject to credit risk to the extent that there are estimated or realized credit losses on the underlying mortgages, and as such their effective yield would be negatively impacted by such losses. The Company also retains the interest-only certificates ("I/O Certificates"), which provide cash flow payments that result from the difference between the interest collected from the underlying mortgages and interest paid on the outstanding pass-through rate certificates. In addition to the risk from credit losses, the I/O Certificates are also subject to prepayment risk, in that prepayments of the underlying mortgages reduce future interest payments of which a portion flows to the I/O Certificates, thus, reducing their effective yield. The I/O Certificates' fair values are estimated, in part, based on a spread over the applicable U.S Treasury rate, and consequently, are inversely affected by increases or decreases in such interest rates. There is no active market in these securities from which to readily determine their value. The estimated fair values of both classes of Certificates are subject to change based on the estimate of future prepayments and credit losses, as well as fluctuations in interest rates and market risk. As of December 31, 1998, Sun Healthcare Group, Inc. ("Sun") operated 70 facilities representing 19% ($174.3 million) of the Company's adjusted gross real estate investment portfolio (adjusted to include the mortgage loans to third parties underlying the investment in REMIC Certificates). Our real estate investments that are operated by Sun consists of $46.3 million of properties we own and lease directly to Sun Healthcare and $31.7 million of mortgage loans and mortgage loans underlying the REMIC certificates that are secured by 39
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) properties owned directly by Sun. The remaining $96.3 million consists of mortgage loans and mortgage loans underlying the REMIC certificates that are secured by properties that are owned by independent entities that either lease the properties to Sun or have Sun operate the property pursuant to a management agreement. Sun is a publicly traded company, and as such is subject to the filing requirements of the Securities and Exchange Commission. The financial position of the Company and its ability to make distributions may be adversely affected by financial difficulties experienced by Sun, or any other major operator of the Company, including bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with the Company or its borrowers as it expires. Net Income Per Share. Basic earnings per share is calculated using the weighted average shares of common stock outstanding during the period excluding common stock equivalents. Diluted earnings per share includes the effect of all dilutive common stock equivalents. Securitization Transactions. SFAS No. 125 provides specific criteria for determining whether a transfer of assets is a sale or a secured borrowing. To qualify as a sale, the following conditions must be met: 1) the transferred assets must be isolated from the transferor, 2) the transferee obtains the right free of any conditional constraints to pledge or exchange the assets, or the transferee is a qualifying special purpose entity of which the holders of the beneficial interests have the right free of any conditional constraints to pledge or exchange those interests, and 3) the transferor does not maintain effective control over the transferred assets. Management believes the structure of its securitization transactions meets the sales accounting standards established by SFAS No. 125. To the extent that recent or future interpretations of SFAS No. 125 would require modification to the structure of the securitization transactions, the Company would make the necessary modifications to allow future securitizations to be accounted for as sales. Transfers of mortgage loans to a Real Estate Mortgage Investment Conduit ("REMIC"), a qualifying special-purpose entity, are accounted for as a sale and any gain or loss is recorded in earnings. The gain or loss is equal to the excess or deficiency of the cash proceeds and fair market value of any subordinated certificates received when compared with the carrying value of the mortgages sold, net of any transaction costs incurred and any gains or losses associated with an underlying hedge. Subordinated certificates received by the Company are recorded at their fair value at the date of the transaction. The Company has no controlling interest in the REMIC since the majority of the beneficial ownership interests (in the form of REMIC Certificates) are sold to third-party investors. Consequently, the financial statements of the REMIC Trust are not consolidated with those of the Company for financial reporting purposes. Stock-Based Compensation. The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation" but continues to account for stock-based compensation using the intrinsic value method prescribed by APB Opinion No. 25, as permitted by SFAS No. 123. New Accounting Pronouncements. In 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" which is effective for fiscal years beginning after June 1999. SFAS No. 133 requires all derivatives to be recorded at fair value and establishes unique accounting for fair value hedges. Because of the Company's limited use of derivatives, management does not anticipate that the adoption of SFAS No. 133 will have a significant effect on the Company's financial position or results of operations. The FASB also issued SFAS No. 134, "Accounting for Mortgage-Backed 40
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Securities Retained after the Securitization of Mortgage Loans Held For Sale by a Mortgage Banking Entity" which is effective for the first fiscal quarter beginning after December 15, 1998. See Note.4 Real Estate Investments -REMIC Certificates for a discussion regarding the impact of the adoption of SFAS No. 134. 3. Supplemental Cash Flow Information <TABLE> <CAPTION> 1998 1997 1996 ------------------------------ <S> <C> <C> <C> Non-cash investing and financing transactions: Exchange of mortgage loans for REMIC Certificates $129,300 $ -- $ 80,962 Exchange of previously issued REMIC Certificates for REMIC Certificates 20,700 Issuance of mortgage loans payable for REMIC Certificates -- -- 31,525 Conversion of debentures into common stock 35,046 44,005 18,813 Assumption of mortgage loans payable relating to acquisitions of real estate properties 11,224 3,026 9,641 Distribution of investment in LTC Healthcare, Inc. 10,724 -- -- Note payable for investment in unconsolidated affiliate -- 5,000 -- Notes receivable related to exercise of stock options 2,313 9,862 -- Conversion of mortgage loans into owned properties 7,301 9,348 -- Minority interest 3,432 647 8,932 </TABLE> 4. Real Estate Investments The Company may invest 30% of its adjusted gross real estate investment portfolio (adjusted to include the mortgage loans to third parties underlying the $100,595,000 investment in REMIC Certificates) in assisted living residences. At December 31, 1998, aggregate investments in assisted living residences were $254,861,000 or 28% of its adjusted gross real estate investment portfolio. During 1998, the Company began making investments in the child-care and education industry consisting of investments in private and charter schools from pre-school through twelfth grade. The Company's existing line of credit was amended to permit the Company to invest up to $75 million in the child-care and education industry. As of December 31, 1998, the Company's total investment in the child-care and education industry was $26,450,000. Mortgage Loans. During 1998, the Company invested $47,452,000 in mortgage loans, net of conversion of construction loans on eight assisted living residences totaling $5,467,000 to permanent mortgage financing. The mortgage loans are secured by, among other things, 6 skilled nursing facilities with a total of 762 beds, 11 assisted living residences with a total of 471 units and one school. The loans contain certain guarantees, have initial interest rates of 8.9% to 11.0%, have stated maturities of 10 to 20 years, generally have 25-year amortization schedules, and provide for certain facility fees. Most of the loans provide for an annual increase in the interest rate of 10 to 25 basis points. For the year ended December 31,1998, sale/lease-back financing was provided on six assisted living facilities that were previously financed with construction loans of $7,301,000. In addition, prepayments totaling $9,099,000 were received on two loans originally scheduled to mature in 2004 and 2006 and scheduled principal payments totaling $1,659,000 were received. 41
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) At December 31, 1998, the investment in mortgage loans consisted of 71 mortgage loans secured by first mortgages on 63 skilled nursing facilities with 7,034 beds, 16 assisted living residences with 899 units and one school. The mortgage loans have a gross carrying amount of $180,964,000 and a weighted average interest rate of 10.9% at December 31, 1998. At December 31, 1998 and 1997, the fair value of mortgage loans was approximately $181,666,000 and $268,000,000, respectively. Scheduled principal payments on mortgage loans are $4,986,000, $3,932,000, $7,191,000, $2,103,000, $21,265,000 and $141,487,000 in 1999, 2000, 2001, 2002, 2003 and thereafter. Owned Properties and Lease Commitments. During 1998, the Company acquired seven skilled nursing facilities with a total of 816 beds, 23 assisted living residences with a total of 1,500 units and five schools for $153,700,000. Included in this amount were six assisted living residences with 260 units that were purchased for $9,877,000 net of the construction loans discussed above of $7,301,000. The Company also invested approximately $3,624,000 in the expansion and improvement of existing facilities. During 1998, the Company sold three skilled nursing facilities for aggregate gross proceeds of $16,706,000 and recognized a gain of $9,926,000. The total initial investment in these facilities was $7,654,000 and the total net investment was $6,332,000. Proceeds of $4,271,000 from the sale were used to repay an outstanding mortgage loan secured by one of the facilities that was payable to the pool of mortgage loans securing the Company's investment in REMIC Certificates. The remaining proceeds were used to repay borrowings outstanding under the line of credit. During 1997, the Company evaluated three skilled nursing facilities located in Kansas for impairment and as a result recorded a non-cash impairment charge of $1,866,000. Impairment was due to adverse changes in local market conditions resulting in current operating losses, anticipated future losses and inadequate cash flows. The impairment charge was determined based on undiscounted cash flows of each facility and is included as a component of other income, net. Owned facilities are leased pursuant to non-cancelable operating leases generally with an initial term of ten to twelve years. Many of the leases contain renewal options and some contain options that permit the operators to purchase the facilities. The leases provide for fixed minimum base rent during the initial and renewal periods. Most of the leases provide for annual fixed rent increases or increases based on increases in consumer price indices over the term of the lease. Certain of the leases provide for additional rent through revenue participation (as defined in the lease agreements) in incremental revenues generated by the facilities, over a defined base period, effective at various times during the term of the lease. Each lease is a triple net lease which requires the lessee to pay all taxes, insurance, maintenance and repair, capital and non-capital expenditures and other costs necessary in the operations of the facilities. Contingent rent income for the years ended December 31, 1998, 1997 and 1996 was immaterial. Depreciation expense on buildings and improvements, including facilities owned under capital leases, was $11,959,000, $9,041,000 and $6,214,000 for the years ended December 31, 1998, 1997 and 1996. Future minimum base rents receivable under the remaining non-cancelable terms of operating leases are: $43,199,000, $42,217,000, $41,048,000, $41,130,000, $41,057,000 and $199,553,000 for the years ending December 31, 1999, 2000, 2001, 2002 and 2003 and thereafter. REMIC Structure. The Company is a REIT and, as such, makes its investments with the intent to hold them for long-term purposes. However, mortgage loans may be transferred to a REMIC 42
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (securitization) when a securitization provides the Company with the best available form of capital to fund additional long-term investments. When contemplating a securitization, consideration is given to the Company's current and expected future interest rate posture and liquidity and leverage position, as well as overall economic and financial market trends. As of December 31, 1998 the Company has completed four securitization transactions. A securitization is completed in a two-step process. First, a wholly owned special-purpose bankruptcy remote corporation (the "REMIC Corp.") is formed. Mortgage loans selected for securitization are sold to the REMIC Corp. without recourse. Second, the REMIC Corp. transfers the loans to a trust (the "REMIC Trust") in exchange for commercial mortgage pass-through certificates (the "REMIC Certificates") which represent beneficial ownership interests in the REMIC Trust assets (the underlying mortgage loans). The REMIC Certificates include various levels of senior, subordinated, interest only and residual classes. The subordinated REMIC Certificates generally provide a level of credit enhancement to the senior REMIC Certificates. The senior and residual REMIC Certificates (which historically have represented between 66% and 81% of the total REMIC Certificates) are then sold to outside third-party investors through a private placement under Rule 144A of the Securities Act of 1933, as amended. The subordinated REMIC Certificates along with the cash proceeds from the sale of the senior REMIC Certificates are retained by the REMIC Corp. as consideration for the initial transfer of the mortgage loans to the REMIC Trust. Neither the Company nor the REMIC Corp. is obligated to purchase any of the REMIC Trust assets or assume any liabilities. Description of the REMIC Certificates. REMIC Certificates represent beneficial ownership interests in the REMIC Trust and can be grouped into four categories; senior, subordinated, subordinated interest-only ("I/O"). The REMIC Certificates sold to third-party investors are the senior certificates and the REMIC Certificates retained by the Company as part of the sale proceeds are the subordinated certificates. The senior and the subordinated certificates have stated principal balances and stated interest rates ("pass-through rates"). The I/O REMIC Certificates have no stated principal but are entitled to interest distributions. Interest distributions on the I/O REMIC Certificates are typically based on the spread between the monthly interest received by the REMIC Trust on the underlying mortgage collateral and the monthly pass-through interest paid by the REMIC Trust on the outstanding pass-through rate REMIC Certificates. After payment of the pass-through interest on the outstanding REMIC Certificates and interest distributions on the I/O Certificates, the REMIC Trust distributes the balance of the payments received on the underlying mortgages as a distribution of principal. Interest and principal distributions are made in order of REMIC Certificate seniority. As such, to the extent there are defaults or unrecoverable losses on the underlying mortgages resulting in reduced cash flows, the subordinated certificates held by the Company would in general bear the first risk of loss. As of December 31, 1998, none of the REMIC pools had experienced any realized losses nor had any of the Company's REMIC Certificate investments been determined to be permanently impaired. REMIC Transactions. In May 1998, the Company completed a securitization of approximately $129,300,000 of mortgage loans with a weighted average interest rate of 10.2% and $26,400,000 face amount ($20,700,000 carrying value) of subordinated certificates, retained from a securitization completed in 1993, with an interest rate of 9.78% on the face value (15.16% on the amortized cost) (the "1998-1 Pool"). In the securitization, the Company sold approximately $121,400,000 face amount of senior certificates at a weighted average pass-through rate of 6.3% and retained $34,300,000 face amount of subordinated certificates along with the interest only certificates. The 43
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) subordinated and interest only certificates retained by the Company had an aggregate fair value of approximately $41,400,000 at the time of the securitization and a weighted average effective yield of 18.9%. Included in the 1998-1 Pool were 40 mortgage loans, including mortgage loans of approximately $25,741,000 with a weighted average interest rate of approximately 8.7% provided to wholly owned subsidiaries and limited partnerships of the Company. Net proceeds of approximately $108,613,000 from the above securitization were used to repay borrowings outstanding under the Company's line of credit. In 1996, the Company securitized approximately $112,487,000 of mortgage loans (the "1996-1 Pool"). As part of the securitization, the Company sold approximately $90,552,000 of senior certificates at an effective interest rate of 7.19% and retained $21,935,000 face amount of subordinated certificates (including I/O Certificates). The net proceeds from the securitization were used to repay borrowings outstanding under the Company's lines of credit. The 1996-1 Pool consisted of 34 mortgage loans with an initial weighted average interest rate of 10.69%, including loans totaling $31,525,000 provided to wholly owned subsidiaries and limited partnerships of the Company. Concurrently with the closing of the securitization, an interest rate swap agreement entered into in May 1995 was terminated at a cost of approximately $1,500,000 and was included as a component of the transaction cost in the determination of the fair value of the assets received. During 1993 and 1994, the Company completed securitizations of approximately $242,340,000 of mortgage loans (the "1993-1 Pool" and the "1994-1 Pool", respectively). As part of these securitizations, the Company sold approximately $158,664,000 of senior certificates and retained approximately $83,676,000 face amount of subordinated certificates. REMIC Certificates. The outstanding principal balance and the weighted-average pass through rate for the senior certificates (held by third parties) and the estimated fair value of the subordinated certificates (held by the Company) as of December 31, 1998 and 1997 were as follows: <TABLE> <CAPTION> 1998 1997 -------------------------------------------- --------------------------------------- Subordinated Subordinated Senior Certificates Certificates Senior Certificates Certificates ----------------------- ------------- ---------------------- ------------ Principal Rate Fair Value Principal Rate Fair Value ----------- ---- ------------- ---------- ---- ------------ <S> <C> <C> <C> <C> <C> <C> 1993-1 Pool $ 78,570,000 8.3% $ 6,351,000 $ 52,829,000 7.6% $ 25,994,000 1994-1 Pool 37,495,000 9.2% 38,896,000 42,864,000 9.2% 38,242,000 1996-1 Pool 89,156,000 7.4% 16,088,000 96,048,000 7.4% 23,575,000 1998-1 Pool 120,394,000 6.3% 39,260,000 -- -- -- </TABLE> Included in the total assets securing the 1998-1 Pool is a senior certificate from the 1993-1 Pool with principal of $26,400,000 and an interest rate of 9.78% that was previously held by the Company. In June 1997, the Company sold $11,811,000 face amount of subordinated certificates from the 1996-1 Pool and recognized a gain of $1,231,000. The gain is recorded in other income, net. At December 31, 1998 and 1997, the aggregate effective yield of the subordinated certificates, based on expected future cash flows with no unscheduled prepayments, was 17.8% and 16.7%, respectively. 44
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Income on the subordinated certificates was as follows for the years ended December 31, 1998, 1997 and 1996: <TABLE> <CAPTION> 1998 1997 1996 ----------- ----------- ----------- <S> <C> <C> <C> 1993-1 Pool $ 2,656,000 $ 4,992,000 $ 5,603,000 1994-1 Pool 4,898,000 4,650,000 5,118,000 1996-1 Pool 3,908,000 4,547,000 3,662,000 1998-1 Pool 5,483,000 -- -- ----------- ----------- ----------- $16,945,000 $14,189,000 $14,383,000 ----------- ----------- ----------- </TABLE> As sub-servicer for all of the above REMIC pools, the Company is responsible for performing substantially all of the servicing duties relating to the mortgage loans underlying the REMIC Certificates and will act as the special servicer to restructure any mortgage loans that default. At December 31, 1998, payments on all of the mortgage loans underlying the REMIC Certificates were current. The Company will adopt SFAS No. 134 in the first quarter of 1999. Currently, under the provisions of SFAS No. 115, the Company is required to classify its investment in REMIC Certificates as trading securities, without regard to investment intent or the ability to hold such securities, which are accounted for at fair value with unrealized holding gains and losses recorded in earnings. SFAS No. 134 permits the transfer of mortgage-backed securities from the trading category to the available-for-sale or held-to-maturity categories based on the Company's ability and intent, as of the date of adoption of SFAS No. 134, to hold such investments. For the year ended December 31, 1998, the Company recorded an unrealized holding loss on its REMIC Certificates of $6,797,000. For the years ended December 31, 1997 and 1996, the Company recorded unrealized holding gains of $57,000 and $6,173,000, respectively, on its REMIC Certificates. Upon application of SFAS No. 134, based on the Company's intent and investment posture and the marketability of the subordinated certificates, the Company will transfer its investment in REMIC Certificates to the following categories at the current fair value: (i) certificates with an investment rating of "BB" or above and interest only certificates with no stated principal balance will be classified as available-for-sale securities, and (ii) certificates with an investment rating of "B" or lower and unrated will be classified as held-to-maturity securities. The transfer of REMIC Certificates rated "B" or lower to held-to-maturity at fair value will create a discount or premium that will be amortized as an adjustment to the current yield. The transfer of the "BB" rated and I/O certificates to available-for-sale, will have no effect other than unrealized holding gains and losses on changes in fair value will be reported as a separate component of stockholders' equity rather than in current period earnings. As of December 31, 1998, subordinated certificates that will be transferred into the available-for-sale category had a fair value of $49,248,000, amortized cost of $47,630,000 and a weighted average yield of approximately 25%. Held-to-maturity certificates will be accounted for at amortized cost and fair value disclosure will be provided. As of December 31, 1998, subordinated certificates that will be transferred into the held-to-maturity category had a fair value of $51,347,000, amortized cost of $53,205,000 and a weighted average yield of approximately 11%. After adoption of SFAS No. 134 on January 1,1999 the Company's available-for-sale REMIC Certificates and held-to-maturity REMIC Certificates will have an amortized cost equal to their fair value of $49,248,000 and $51,347,000, respectively and a weighted average yield of 23% and 12%, respectively. 45
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 5. Disposition of Other Assets LTC Healthcare, Inc. ("Healthcare"). During 1998, LTC acquired 4,002 shares of LTC Healthcare, Inc. ("Healthcare") non-voting common stock for $2,001,000 in cash. LTC also contributed equity securities with a book value of $788,000, 13 real estate properties with a net book value of $61,462,000 that were encumbered by mortgage debt of $29,263,000 and a minority interest liability of $3,461,000 on seven of the properties, and other related assets and liabilities with a book value of $93,000 in exchange for an additional 36,000 shares of Healthcare non-voting common stock and borrowings by Healthcare under the unsecured line of credit provided by the Company of $21,396,000. During 1998, the Company provided additional funding of $12,800,000 under the unsecured line of credit. Subsequent to the contribution of the above assets and liabilities by the Company to Healthcare, Healthcare obtained mortgage financing of $17,400,000 from a third-party lender on four of the unencumbered properties. Healthcare utilized proceeds from the mortgage debt and cash on hand to repay borrowings of $17,668,000 under the unsecured line of credit provided by the Company. On September 30, 1998, the 40,002 shares of Healthcare non-voting common stock held by the Company were converted into 3,335,882 shares of Healthcare voting common stock. Concurrently, the Company completed the spin-off of all Healthcare voting common stock through a taxable dividend distribution to the holders of Company common stock, Cumulative Convertible Series C Preferred Stock ("Series C Preferred Stock") and Convertible Subordinated Debentures (the "Debentures"). One share of Healthcare common stock was distributed to each holder of Company common stock, Series C Preferred Stock and Debentures for each ten shares of Company common stock owned and for each ten shares of Company common stock that would have been issued upon conversion of the Debentures and Series C Preferred Stock. The Company incurred costs of approximately $500,000 in connection with the distribution. Upon completion of the distribution, Healthcare began operating as a separate public company. For book purposes, no gain was recognized on the distribution of Healthcare common stock which had a net book value of approximately $10,724,000. The distribution was a taxable dividend distribution and accordingly, for tax purposes, the net assets were transferred at their net fair market value of approximately $15,650,000 ($4.69 per share of Healthcare common stock - unaudited) which resulted in a taxable gain of approximately $4,900,000 (unaudited). The Company and Healthcare have entered into various agreements which, among other things, provide for a sharing of corporate overhead under an administrative services agreement. During 1998, the Company charged Healthcare an administrative services fee of approximately $350,000. In addition, the Company provided Healthcare with a $20.0 million unsecured line of credit that bears interest at 10% and matures in March 2008. As of December 31,1998 approximately $16,528,000 was outstanding under the line of credit. During 1998, the Company recorded interest income related to the unsecured line of credit of $711,000. As of December 31, 1998, the Company acquired 299,900 shares of Healthcare common stock, representing approximately 9% of Healthcare's outstanding common stock, for an aggregate purchase price of $659,000. Home and Community Care, Inc. ("HCI"). During 1997, the Company acquired non-voting common stock of HCI, an owner, operator and developer of assisted living residences, for $5,000,000. 46
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Subsequently, the Company received a distribution of $5,000,000 representing a return of investment and Assisted Living Concepts, Inc. ("ALC") acquired all of the outstanding common stock of HCI for which the Company received gross proceeds of $2,000,000. Certain benefits were accelerated for officers who ended their employment with the Company to become employees of ALC. A net gain of $1,015,000 was recorded on the sale and is included in other income, net. During 1998, the Company received additional payments of $698,000 for units under development by HCI at the date of the acquisition. 6. Debt Obligations Bank Borrowings. During 1997, the Company refinanced all amounts outstanding under various bank financing agreements with a $170,000,000 Senior Unsecured Revolving Line of Credit (the "Revolving Credit Facility") which expires on October 3, 2000. The Revolving Credit Facility pricing varies between LIBOR plus 1.25% and LIBOR plus 1.5% depending on the Company's leverage ratio. At December 31, 1998, borrowings of $100,000,000 bearing interest at LIBOR plus 1.25% were outstanding under the Revolving Credit Facility. During 1998, the Revolving Credit Facility was amended to permit the Company to invest up to $75 million in the education and child-care industry. The Revolving Credit Facility contains financial covenants including, but not limited to, maximum leverage ratios, minimum debt service coverage ratios, cash flow coverage ratios and minimum consolidated tangible net worth. On November 2, 1998, the Company entered into an interest rate swap agreement whereby the Company effectively fixed the interest rate on LIBOR based variable rate debt. Under this agreement, which expires in November 2000, the Company will be credited interest at three month LIBOR and will incur interest at a fixed rate of 4.74% on a notional amount of $50,000,000. The notional amount of the interest rate swap is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap is recognized as an adjustment to interest expense. Convertible Subordinated Debentures. Conversion Outstanding Principal at Interest Price per December 31, Rate Maturity Share 1998 1997 - ---- -------------- ------ ---------- ---------- 9.75% June 2004 $10.00 $ -- $ 549,000 8.50% January 2000 $15.00 -- 19,476,000 8.50% January 2001 $15.50 22,969,000 30,048,000 8.25% September 1999 $15.50 10,000,000 10,000,000 7.75% January 2002 $16.50 4,518,000 9,765,000 8.25% July 2001 $17.25 19,180,000 21,985,000 ---------- ---------- $56,667,000 $91,823,000 ========== ========== On July 1, 1998, the Company redeemed the outstanding $90,000 principal amount of its 8.5% Convertible Subordinated Debentures due 2000 and $20,000 principal amount of its 9.75% Convertible Subordinated Debentures due 2004. The 8.5% debentures due 2001, the 8.25% debentures due 1999 and the 8.25% debentures due 2001 are not redeemable by the Company. The 7.75% debentures are not redeemable by the Company prior to January 1, 2001. During 1998, the 47
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) maturity for the 8.25% debentures originally scheduled to mature in January 1999 was extended to September 1999. As of December 31, 1998, the convertible subordinated debentures outstanding were convertible into 3,512,089 shares of common stock. Based on the quoted market price of the Company's common stock and the conversion price of the convertible debentures, the fair value of the debentures approximated $58,388,000 and $120,419,000 at December 31, 1998 and 1997, respectively. Mortgage Loans Payable. During 1998, the Company acquired five skilled nursing facilities that were subject to mortgage loans of approximately $7,018,000. These mortgage loans have a current weighted average interest rate of 12%, are due in September 2002 and are payable to a REMIC formed by the Company in 1993. The Company also provided non-recourse mortgage loans of approximately $11,826,000 to a wholly owned subsidiary and a newly formed limited partnership. In May 1998, the Company completed a securitization transaction that included loans provided to wholly owned subsidiaries and limited partnerships of the Company of approximately $25,741,000. Such loans included $11,826,000 of loans originated in 1998 and approximately $13,915,000 of loans originated in 1996. In 1998, in connection with the sale of a skilled nursing facility, a mortgage loan of $4,271,000 that was secured by the facility was repaid. See "Note 2. Real Estate Investments -Owned Properties." Mortgage loans totaling $29,263,000 that secured seven properties were included in the contribution of net assets to Healthcare. See "Note 5. Disposition of Other Assets -LTC Healthcare, Inc." Mortgage loans and weighted average interest rates for loans payable to REMIC's formed by the Company were: December 31, 1998 Rate December 31, 1997 Rate ----------------- ---- ----------------- ---- 1993-1 Pool $ 22,283,000 12.0% $ 18,826,000 12.0% 1994-1 Pool 2,992,000 11.4 3,021,000 11.3 1996-1 Pool 16,312,000 9.8 34,938,000 9.5 1998-1 Pool 13,845,000 9.3 -- -- ------------- ------------- $ 55,432,000 $ 56,785,000 ============= ============= Bonds Payable and Capital Leases. At December 31, 1998 and 1997, the Company had outstanding principal of $8,065,000 on multifamily tax-exempt revenue bonds. These bonds bear interest at a variable rate that is reset weekly and mature during 2015. For the year ended December 31, 1998, the weighted average interest rate, including letter of credit fees, on the outstanding bonds was 5.1%. In May 1998, the Company acquired a skilled nursing facility subject to a multi-unit housing tax-exempt revenue bond of approximately $4,206,000. As of December 31, 1998, principal of $4,191,000 was outstanding on the bond which bears interest at 10.9% and matures in 2025. At December 31, 1998 and 1997, the Company had outstanding principal of $5,340,000 and $5,551,000, respectively, under capital lease obligations. The capital leases are secured by four assisted living residences, have a weighted average interest rate of 7.6% and mature at various dates through 2013. Scheduled Principal Payments. Total scheduled principal payments for the mortgage loans payable, bonds payable and capital lease obligations as of December 31, 1998 were $1,219,000, $1,060,000, $1,156,000, $8,999,000, $14,781,000 and $45,813,000 in 1999, 2000, 2001, 2002, 2003 and thereafter. 48
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. Interest Rate Contracts As of December 31, 1997, the Company was party to a seven year forward interest rate swap agreement whereby the Company was credited interest at the six month LIBOR and incurred interest at a fixed rate of 6.655% on a notional amount of $60,000,000. The Company was also party to a Treasury lock agreement whereby the Company locked into a rate of 6.484% on the seven year Treasury Note Rate on a notional amount of $65,000,000. As of December 31, 1997, these agreements were accounted for as hedges and were entered into to minimize the Company's exposure to interest rate risk on mortgage loans that the Company anticipated to securitize. In May 1998, the interest rate swap and the Treasury lock agreements were terminated in connection with the completion of the securitization transaction and the Company made an aggregate payment of approximately $5,000,000 that was included in the cost of the recently completed securitization transaction. See "Note 2. Real Estate Investments -REMIC Certificates -REMIC Transactions." On November 2, 1998, the Company entered into an interest rate swap agreement whereby the Company effectively fixed the interest rate on LIBOR based variable rate debt. See "Note 6. Debt Obligations -Bank Borrowings." 8. Stockholders' Equity Issuance of Stock. On September 2, 1998, the Company issued 2,000,000 shares of 8.5% Series C Convertible Preferred Stock (the "Series C Preferred Stock") at $19.25 per share for net proceeds of $37,605,000. The Series C Preferred Stock is convertible into 2,000,000 shares of the Company's common stock, has a liquidation value of $19.25 per share and has an annual coupon of 8.5%, payable quarterly. During 1997, the Company completed public offerings for 2,000,000 shares of common stock resulting in aggregate net proceeds of $35,065,000. In addition, the Company issued 3,080,000 shares of 9.5% Series A Cumulative Preferred Stock ("Series A Preferred Stock") and 2,000,000 shares of 9.0% Series B Cumulative Preferred Stock ("Series B Preferred Stock") for net proceeds of $121,600,000. Dividends on the Series A Preferred Stock and Series B Preferred Stock are cumulative from the date of original issue and are payable monthly to stockholders of record on the first day of each month. Dividends on the Series A Preferred Stock and the Series B Preferred Stock accrue at 9.5% and 9.0% per annum, respectively, on the $25 liquidation preference per share (equivalent to a fixed annual amount of $2.375 and $2.25 per share, respectively). The Series A Preferred Stock is not redeemable prior to April 1, 2001 and the Series B Preferred Stock is not redeemable prior to January 1, 2002, except in certain circumstances relating to preservation of the Company's qualification as a REIT. The net proceeds from these offerings were used to repay short-term borrowings outstanding under the Company's lines of credit. Stock Based Compensation Plans. During 1998, the Company adopted and its stockholders approved the 1998 Equity Participation Plan under which 500,000 shares of common stock have been reserved for stock based compensation awards. The 1998 Equity Participation Plan and the Company's Restated 1992 Stock Option Plan under which 500,000 shares of common stock were reserved (collectively "the Plans") provide for the issuance of incentive and nonqualified stock options, restricted stock and other stock based awards to officers, employees, non-employee directors and consultants. The terms of awards granted under the Plans are set by the Company's compensation committee at its discretion however, in the case of incentive stock options, the term may not exceed ten years from the date of grant. As of 49
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) December 31, 1998, all grants of stock based compensation awards were made under the Company's Restated 1992 Stock Option Plan. Total shares available for grant under the Plans as of December 31, 1998, 1997 and 1996 were 507,000, 31,000 and 358,000, respectively. Nonqualified stock option activity for the years ended December 31, 1998, 1997 and 1996 was as follows: <TABLE> <CAPTION> Shares Weighted Average Price ----------------------------------------------- ---------------------------------- 1998 1997 1996 1998 1997 1996 --------------- --------------- --------------- ----------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> Outstanding, January 1 169,500 873,300 861,500 $11.21 $11.30 $11.23 Granted -- 15,000 18,000 $ - $17.00 $15.13 Exercised (146,500) (717,800) (3,200) $10.64 $11.44 $12.17 Canceled -- (1,000) (3,000) $ - $12.00 $12.25 -------------- -------------- -------------- Outstanding, December 31 23,000 169,500 873,300 $14.86 $11.21 $11.30 ============== ============== ============== Exercisable, December 31 12,000 31,500 436,466 $13.83 $11.21 $11.88 ============== ============== ============== </TABLE> All options outstanding as of December 31, 1998 vest over three years from the original date of grant. Unexercised options expire seven years after the date of vesting. Restricted stock activity for the years ended December 31, 1998, 1997 and 1996 was as follows: 1998 1997 1996 ----------- ----------- ----------- Outstanding, January 1 382,000 160,000 -- Granted 24,000 313,000 160,000 Vested (13,000) (91,000) -- Canceled -- -- -- ----------- ----------- ----------- Outstanding, December 31 393,000 382,000 160,000 =========== =========== =========== Compensation Expense $ 1,492,000 $ 1,640,000 $ -- =========== =========== =========== Outstanding shares of restricted stock under the 1996 grant vest equally over three years beginning January 1, 2000 and shares under the 1997 grant vest equally over four years beginning January 1, 2001. Dividends are payable on the restricted shares to the extent and on the same date as dividends are paid on all of the Company's common stock. As of December 31, 1998, 1997 and 1996, there were 18,000, 31,000 and 44,000 options outstanding, respectively, subject to the disclosure requirements of SFAS No. 123. The fair value of these options was estimated utilizing the Black-Scholes valuation model and assumptions as of each respective grant date. In determining the estimated fair values for the options granted in 1997 and 1996, the weighted average expected life assumption was three years for 1997 and seven years for 1996, the weighted average volatility was .16, and .15, respectively and the weighted average risk free interest rate was 6.6%. The weighted average fair value of the options granted was estimated to be $.67 and $.63 in 1997 and 1996, respectively. There was no material effect on net income or earnings per share for the years ended December 31, 1997 and 1996. The weighted average exercise price of the options was $15.65, $14.99 and $13.55 and the weighted average remaining contractual life was 6.9, 7.6 and 7.7 years as of December 31, 1998, 1997 and 1996, respectively. Notes Receivable from Stockholders. In 1997, the Board of Directors adopted a loan program designed to encourage executives, key employees, consultants and directors to acquire common stock 50
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) through the exercise of options. Under the program, the Company may make full recourse, secured loans to participants equal to the exercise price of vested options plus up to 50% of the taxable income resulting from the exercise of options. Such loans will bear interest at the then current Applicable Federal Rate and are payable in quarterly installments over nine years. For the first five years the principal due each quarter will be equal to 50% of the difference between the cash dividends received on the shares purchased and the quarterly interest due. In addition, 25% of cash bonuses and 50% of the dividends on restricted stock granted in 1997 received by the borrower must be used to reduce the principal balance. The loans will convert to fully amortizing loans with 16 quarterly payments beginning in year six. Unless the Board of Directors approves otherwise, loans must be repaid within 90 days after termination of employment for any reason, other than in connection with a change in control of the Company. In 1998 and 1997, the Company's management, consultants and directors purchased 146,500 and 686,500 of the Company's common stock under the loan program. At December 31, 1998 and 1997, loans totaling $11,200,000 and $9,429,000 bearing interest at rates ranging from 5.77% to 6.63% per annum were outstanding. These loans are secured by a pledge of the shares of common stock acquired through the exercise of options and are full recourse to the borrower. The market value of the common stock securing these loans was $13,849,000 at December 31, 1998. 9. Distributions The Company must distribute at least 95% of its taxable income in order to continue to qualify as a REIT. Annual distributions may exceed the Company's earnings and profits due to non-cash expenses such as depreciation and amortization. Under special tax rules for REITs, dividends declared in the last quarter of the calendar year and paid by January 31 of the following year are treated as paid on December 31 of the year declared. Distributions for 1997 and 1996 were cash distributions. The 1998 distribution consisted of $1.535 per share in cash and $.469 per share (unaudited) in the form of Healthcare common stock. See "Note 5. Disposition of Other Assets -LTC Healthcare, Inc." The Federal income tax classification of the per share common stock distributions are as follows (unaudited): 1998 1997 1996 --------- --------- --------- Ordinary income $ 1.355 $ 1.293 $ 1.228 Non-taxable distribution 0.397 0.037 0.107 Section 1250 capital gain 0.051 0.030 -- Long term capital gain 0.201 0.075 -- --------- --------- --------- Total $ 2.004 $ 1.435 $ 1.335 ========= ========= ========= 51
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. Net Income Per Share Basic and diluted net income per share were as follows (in thousands, except per share amounts): 1998 1997 1996 -------- -------- -------- Net income $ 50,593 $ 35,763 $ 28,710 Preferred dividends (12,896) (6,075) -- -------- -------- -------- Net income for basic net income per share 37,697 29,688 28,710 7.75% debentures due 2002 516 -- 2,187 8.5% debentures due 2001 -- -- 4,509 8.5% debentures due 2000 684 -- 2,350 8.25% debentures due 1999 860 -- -- Other dilutive securities 192 32 977 -------- -------- -------- Net income for diluted net income per share $ 39,949 $ 29,720 $ 38,733 ======== ======== ======== Shares for basic net income per share 27,077 23,511 18,983 Stock options 11 277 374 7.75% debentures due 2002 417 -- 1,757 8.5% debentures due 2001 -- -- 3,174 8.5% debentures due 2000 497 -- 1,751 8.25% debentures due 1999 645 -- -- Other dilutive securities 176 75 824 -------- -------- -------- Shares for diluted net income per share 28,823 23,863 26,863 ======== ======== ======== Basic net income per share $ 1.39 $ 1.26 $ 1.51 ======== ======== ======== Diluted net income per share $ 1.39 $ 1.25 $ 1.44 ======== ======== ======== 12. Quarterly Financial Information (Unaudited) <TABLE> <CAPTION> Quarter ended ---------------------------------------------------------------------------- March 31 June 30 September 30 December 31 ----------------- --------------- ---------------------- ------------------- 1998 <S> <C> <C> <C> <C> Revenues $ 21,219 $ 22,579 $ 23,251 $ 22,342 Net income available to Common stockholders 8,551 17,124 3,537 8,485 Basic net income per share 0.33 0.64 0.13 0.30 Diluted net income per share 0.33 0.59 0.13 0.30 Dividends per share 0.365 0.39 0.39 0.39 1997 Revenues $ 16,487 $ 18,115 $ 18,809 $ 20,023 Net income 6,107 8,098 7,545 7,938 Basic net income per share 0.28 0.35 0.32 0.31 Diluted net income per share 0.27 0.35 0.31 0.31 Dividends per share 0.34 0.365 0.365 0.365 </TABLE> 52
LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 25, 1999, to be filed pursuant to Regulation 14A. Item 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 25, 1999, to be filed pursuant to Regulation 14A. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 25, 1999, to be filed pursuant to Regulation 14A. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the Company's definitive proxy statement for the Annual Meeting of Stockholders to be held May 25, 1999, to be filed pursuant to Regulation 14A. Item 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K. (a) Financial Statement Schedules The financial statement schedules listed in the accompanying index to financial statement schedules are filed as part of this annual report. (b) Exhibits The exhibits listed in the accompanying index to exhibits are filed as part of this annual report. (c) Reports on Form 8-K None. 53
INDEX TO FINANCIAL STATEMENT SCHEDULES (Item 14(a)) VII. Valuation and Qualifying Accounts ................................... 55 XI. Real Estate and Accumulated Depreciation............................ 56 XII. Mortgage Loans on Real Estate ...................................... 59 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule. 54
LTC PROPERTIES, INC. SCHEDULE VII VALUATION AND QUALIFYING ACCOUNTS (in thousands) Balance at Beginning Charge to Balance at of Period Operations End of Period -------------------- ---------- --------------- Allowance for Doubtful Accounts: 1998 $1,000 $ 250 $1,250 1997 $1,000 -- $1,000 1996 $ 997 3 $1,000 55
LTC PROPERTIES, INC. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) <TABLE> <CAPTION> Gross Amount at which Carried Initial Cost to Company Costs at December 31, 1998 ----------------------- Capitalized ----------------------------- Building and Subsequent Building and Encumbrances Land Improvements to Acquisition Land Improvements Total (1) ------------ ---- ------------ -------------- ---- ------------ --------- Skilled Nursing Facilities: <S> <C> <C> <C> <C> <C> <C> <C> Demopolis, AL $10,528(3) $ 71 $ 2,141 $ -- $ 71 $ 2,141 $ 2,212 Fort Payne, AL (3) 37 3,588 -- 37 3,588 3,625 Jackson, AL (3) 64 2,620 -- 64 2,620 2,684 Madison, AL (3) 30 2,328 -- 30 2,328 2,358 Phoenix, AL (3) 59 2,123 -- 59 2,123 2,182 Bradenton, FL -- 330 2,720 -- 330 2,720 3,050 Clearwater, FL -- 454 2,903 -- 454 2,903 3,357 Crestview, FL -- 140 2,306 -- 140 2,306 2,446 San Destin, FL -- 175 3,875 -- 175 3,875 4,050 Gulf Breeze, FL -- 600 6,020 -- 600 6,020 6,620 Lecanto, FL -- 351 2,665 2,247 351 4,912 5,263 Pensacola, FL -- 190 4,295 -- 190 4,295 4,485 Pensacola, FL -- 230 4,663 -- 230 4,663 4,893 Starke, FL -- 113 4,783 -- 113 4,783 4,896 Chicago Heights, IL -- 221 6,406 -- 221 6,406 6,627 Rusk, TX -- 34 2,399 -- 34 2,399 2,433 Chesapeake, VA -- 373 3,298 -- 373 3,298 3,671 Richmond,h VA -- 373 3,298 -- 373 3,298 3,671 Tappahannock, VA -- 373 3,298 -- 373 3,298 3,671 Toppanish, WA 2,594 132 2,654 -- 132 2,654 2,786 Vancouver, WA (4) 60 3,031 -- 60 3,031 3,091 Jefferson, IA 10,431 36 1,933 -- 36 1,933 1,969 Houston, TX 7,100 202 4,458 -- 202 4,458 4,660 Houston, TX 6,746 361 3,773 -- 361 3,773 4,134 Montgomery, AL 3,864 144 5,426 -- 144 5,426 5,570 Carroll, IA (5) 60 1,020 -- 60 1,020 1,080 Houston, TX (9) 202 4,458 -- 202 4,458 4,660 Woodbury, TN -- 100 2,900 -- 100 2,900 3,000 Whiteright, TX 1,112 100 2,923 -- 100 2,923 3,023 Granger,IA (5) 93 1,325 -- 93 1,325 1,418 Bedford, TX (5) 345 3,195 -- 345 3,195 3,540 Midland, TX 2,017 32 2,285 -- 32 2,285 2,317 Tiptonville, TN -- 100 2,450 -- 100 2,450 2,550 Gardendale, AL -- 84 6,316 -- 84 6,316 6,400 Polk City, IA (5) 88 1,351 -- 88 1,351 1,439 Atmore, AL (6) 23 2,985 -- 23 2,985 3,008 Mesa, AZ 4,460 305 6,909 1,696 305 8,605 8,910 Houston, TX (10) 572 5,965 -- 572 5,965 6,537 Roberta, GA -- 100 2,400 -- 100 2,400 2,500 Norwalk, IA (5) 45 1,035 -- 45 1,035 1,080 Altoona, IA (5) 102 2,312 -- 102 2,312 2,414 Los Angeles, CA -- 100 2,475 -- 100 2,475 2,575 Sacramento, CA -- 220 2,929 -- 220 2,929 3,149 Coffeyville, KS -- 100 335 148 100 483 583 Salina, KS -- 100 1,153 352 100 1,505 1,605 South Haven, KS -- -- 13 -- -- 13 13 Portland, OR -- 100 1,925 393 100 2,318 2,418 Nacogdoches, TX -- 100 1,738 -- 100 1,738 1,838 Cushing, TX -- 100 1,679 -- 100 1,679 1,779 Mesa, AZ 2,992 420 4,258 32 420 4,290 4,710 Wells, TX 2,265 100 1,649 7 100 1,656 1,756 Corrigan, TX (7) 100 1,649 7 100 1,656 1,756 Grosebeck, TX 1,323 100 1,649 7 100 1,656 1,756 Tampa, FL -- 100 6,402 42 100 6,444 6,544 -------- -------- -------- -------- -------- -------- -------- SNFs 55,432 9,144 164,687 4,931 9,144 169,618 178,762 -------- -------- -------- -------- -------- -------- -------- <CAPTION> Construction/ Accum Renovation Acquisition Deprec.(2) Date Date ---------- ---- ---- Skilled Nursing Facilities: <S> <C> <C> <C> Demopolis, AL $ 262 1972 Jun. 1995 Fort Payne, AL 473 1967/73 Jun. 1995 Jackson, AL 312 1964 Jun. 1995 Madison, AL 298 1964/74 Jun. 1995 Phoenix, AL 280 1969 Jun. 1995 Bradenton, FL 489 1989 Sep. 1993 Clearwater, FL 620 1965/93 Sep. 1993 Crestview, FL 358 1988 Jun. 1994 San Destin, FL 535 1986 Feb. 1995 Gulf Breeze, FL 932 1984 Jun. 1994 Lecanto, FL 763 1988 Sep. 1993 Pensacola, FL 676 1972 Jun. 1994 Pensacola, FL 723 1991 Jun. 1994 Starke, FL 738 1989 Jun. 1994 Chicago Heights, IL 975 1988 Sep. 1994 Rusk, TX 476 1969 Mar. 1994 Chesapeake, VA 379 1977 Oct. 1995 Richmond,h VA 649 1970/75/80 Oct. 1995 Tappahannock, VA 323 1977/78 Oct. 1995 Toppanish, WA 342 1960/70 Jun. 1995 Vancouver, WA 403 1952/94 Jun. 1995 Jefferson, IA 192 1968/72 Jan. 1996 Houston, TX 451 1961 Jun. 1996 Houston, TX 380 1964/68 Jun. 1996 Montgomery, AL 551 1967/74 Jan. 1996 Carroll, IA 106 1969 Jan. 1996 Houston, TX 399 1967 Jun. 1996 Woodbury, TN 275 1972/75/90 May 1996 Whiteright, TX 321 1962/64/65 Jan. 1996 Granger,IA 138 1979 Jan. 1996 Bedford, TX 343 1960 Jan. 1996 Midland, TX 248 1973 Feb. 1996 Tiptonville, TN 252 1975 May 1996 Gardendale, AL 542 1976/84 May 1996 Polk City, IA 135 1976 Jan. 1996 Atmore, AL 296 1967/74 Jan. 1996 Mesa, AZ 635 1975/96 Jun. 1996 Houston, TX 658 1967 Jun. 1996 Roberta, GA 236 1964 May 1996 Norwalk, IA 107 1975 Jan. 1996 Altoona, IA 227 1973 Jan. 1996 Los Angeles, CA 184 1963 Jan. 1997 Sacramento, CA 213 1968 Feb. 1997 Coffeyville, KS 185 1962 May 1997 Salina, KS 492 1985 May 1997 South Haven, KS 13 1969 May 1997 Portland, OR 124 1956/74 Jun. 1997 Nacogdoches, TX 77 1973 Oct. 1997 Cushing, TX 73 1973/84 Oct. 1997 Mesa, AZ 145 1972 Oct. 1997 Wells, TX 58 1980 Jan. 1998 Corrigan, TX 58 1985 Jan. 1998 Grosebeck, TX 58 1972 Jan. 1998 Tampa, FL 122 Jun. 1998 -------- SNFs 19,300 -------- </TABLE> 56
LTC PROPERTIES, INC. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) <TABLE> <CAPTION> Gross Amount at which Carried Initial Cost to Company Costs at December 31, 1998 ----------------------- Capitalized ----------------------------- Building and Subsequent Building and Encumbrances Land Improvements to Acquisition Land Improvements Total (1) ------------ ---- ------------ -------------- ---- ------------ --------- Assisted Living Facilities: <S> <C> <C> <C> <C> <C> <C> <C> Dodge City, KS 1,566 88 1,663 -- 88 1,663 1,751 Great Bend, KS 1,318 87 1,563 17 87 1,580 1,667 McPherson, KS 1,141 75 1,575 -- 75 1,575 1,650 Salina, KS 1,314 72 1,578 -- 72 1,578 1,650 Longview, TX -- 38 1,568 -- 38 1,568 1,606 Marshall, TX -- 38 1,568 450 38 2,018 2,056 Walla Walla, WA 8,065(8) 100 1,940 -- 100 1,940 2,040 Greenville, TX -- 42 1,565 -- 42 1,565 1,607 Camas, WA (8) 100 2,175 -- 100 2,175 2,275 Grandview, WA (8) 100 1,940 -- 100 1,940 2,040 Vancouver, WA (8) 100 2,785 -- 100 2,785 2,885 Athens, TX -- 96 1,512 -- 96 1,512 1,608 Lufkin, TX -- 100 1,950 -- 100 1,950 2,050 Kennewick. WA (8) 100 1,940 -- 100 1,940 2,040 Gardendale, AL -- 16 1,234 -- 16 1,234 1,250 Jacksonville, TX -- 100 1,900 -- 100 1,900 2,000 Kelso, WA -- 100 2,500 -- 100 2,500 2,600 Battleground, WA -- 100 2,500 -- 100 2,500 2,600 Hayden, ID -- 100 2,450 243 100 2,693 2,793 Klamath Falls, OR -- 100 2,300 -- 100 2,300 2,400 Newport, OR -- 100 2,050 -- 100 2,050 2,150 Tyler, TX -- 100 1,800 -- 100 1,800 1,900 Wichita Falls, TX -- 100 1,850 -- 100 1,850 1,950 Ada, OK -- 100 1,650 -- 100 1,650 1,750 Nampa, ID -- 100 2,240 23 100 2,263 2,363 Tulsa, OK -- 200 1,650 -- 200 1,650 1,850 Durant, OK -- 100 1,769 -- 100 1,769 1,869 San Antonio, TX -- l00 1,900 -- 100 1,900 2,000 Troy,OH -- l00 2,435 306 100 2,741 2,841 Waco, TX -- 100 2,235 -- 100 2,235 2,335 Tulsa, OK -- 100 2,395 -- 100 2,395 2,495 San Antonio, TX -- 100 2,055 -- 100 2,055 2,155 Norfolk, NE -- 100 2,123 -- 100 2,123 2,223 Wahoo, NE -- 100 2,318 -- 100 2,318 2,418 York, NE -- 100 2,318 -- 100 2,318 2,418 Hoquiam, WA -- 100 2,500 -- 100 2,500 2,600 Tiffin, OH -- 100 2,435 -- 100 2,435 2,535 Millville, NJ -- 100 2,825 -- 100 2,825 2,925 Fremont, OH -- 100 2,435 -- 100 2,435 2,535 Lake Havasu, AZ -- 100 2,420 -- 100 2,420 2,520 Greeley, CO -- 100 2,310 270 100 2,580 2,680 Springfield, OH -- 100 2,035 270 100 2,305 2,405 Watauga, TX -- 100 1,667 -- 100 1,667 1,767 Bullhead Ctiy, AZ -- 100 2,500 -- 100 2,500 2,600 Arvada, CO -- 100 2,810 276 100 3,086 3,186 Edmond, OK -- 100 1,365 526 100 1,891 1,991 Wetherford, OK -- 100 1,668 592 100 2,260 2,360 Eugene, OR -- 100 2,600 -- 100 2,600 2,700 Caldwell, ID -- 100 2,200 -- 100 2,200 2,300 Burley, ID -- 100 2,200 -- 100 2,200 2,300 Wheelersburg, OH -- 100 2,435 -- 100 2,435 2,535 Loveland, CO -- 100 2,865 270 100 3,135 3,235 Wichita Falls,TX -- 100 2,750 -- 100 2,750 2,850 Beatrice, NE -- 100 2,173 -- 100 2,173 2,273 Madison, IN -- 100 2,435 -- 100 2,435 2,535 Newark, OH -- 100 2,435 -- 100 2,435 2,535 <CAPTION> Construction/ Accum Renovation Acquisition Deprec.(2) Date Date ---------- ---- ---- <S> <C> <C> <C> Assisted Living Facilities: Dodge City, KS 150 1995 Dec. 1995 Great Bend, KS 141 1995 Dec. 1995 McPherson, KS 142 1994 Dec. 1995 Salina, KS 142 1994 Dec. 1995 Longview, TX 137 1995 Oct. 1995 Marshall, TX 158 1995 Oct. 1995 Walla Walla, WA 147 1996 Apr. 1996 Greenville, TX 130 1995 Jan. 1996 Camas, WA 153 1996 May 1996 Grandview, WA 152 1996 Mar. 1996 Vancouver, WA 195 1996 Jun. 1996 Athens, TX 125 1995 Jan. 1996 Lufkin, TX 147 1996 Apr. 1996 Kennewick. WA 155 1996 Feb. 1996 Gardendale, AL 103 1988 May 1996 Jacksonville, TX 149 1996 Mar. 1996 Kelso, WA 146 1996 Nov. 1996 Battleground, WA 140 1996 Nov. 1996 Hayden, ID 144 1996 Dec. 1996 Klamath Falls, OR 130 1996 Dec. 1996 Newport, OR 112 1996 Dec.1996 Tyler, TX 100 1996 Dec. 1996 Wichita Falls, TX 102 1996 Dec. 1996 Ada, OK 92 1996 Dec. 1996 Nampa, ID 123 1997 Jan. 1997 Tulsa, OK 85 1997 Feb. 1997 Durant, OK 82 1997 Apr. 1997 San Antonio, TX 87 1997 May 1997 Troy,OH 112 1997 May 1997 Waco, TX 96 1997 Jun. 1997 Tulsa, OK 102 1997 Jun. 1997 San Antonio, TX 89 1997 Jun. 1997 Norfolk, NE 87 1997 Jun. 1997 Wahoo, NE 89 1997 Jul. 1997 York, NE 89 1997 Aug. 1997 Hoquiam, WA 95 1997 Aug. 1997 Tiffin, OH 93 1997 Aug. 1997 Millville, NJ 107 1997 Aug. 1997 Fremont, OH 93 1997 Aug. 1997 Lake Havasu, AZ 92 1997 Aug. 1997 Greeley, CO 93 1997 Aug. 1997 Springfield, OH 79 1997 Aug. 1997 Watauga, TX 62 1996 Aug. 1997 Bullhead Ctiy, AZ 90 1997 Aug. 1997 Arvada, CO 105 1997 Aug. 1997 Edmond, OK 62 1996 Aug. 1997 Wetherford, OK 73 1996 Aug. 1997 Eugene, OR 93 1997 Sep. 1997 Caldwell, ID 80 1997 Sep. 1997 Burley, ID 80 1997 Sep. 1997 Wheelersburg, OH 82 1997 Sep. 1997 Loveland, CO 100 1997 Sep. 1997 Wichita Falls,TX 98 1997 Sep. 1997 Beatrice, NE 69 1997 Oct. 1997 Madison, IN 77 1997 Oct. 1997 Newark, OH 77 1997 Oct. 1997 </TABLE> 57
LTC PROPERTIES, INC. SCHEDULE XI REAL ESTATE AND ACCUMULATED DEPRECIATION (in thousands) <TABLE> <CAPTION> Gross Amount at which Carried Initial Cost to Company Costs at December 31, 1998 ----------------------- Capitalized ----------------------------- Building and Subsequent Building and Encumbrances Land Improvements to Acquisition Land Improvements Total (1) ------------ ---- ------------ -------------- ---- ------------ --------- Assisted Living Facilities (continued): <S> <C> <C> <C> <C> <C> <C> <C> Elkhart, IN -- 100 2,435 -- 100 2,435 2,535 Newport Richey, FL -- 100 5,845 28 100 5,873 5,973 Freemont, CA -- 100 3,080 212 100 3,292 3,392 Eugene, OR -- 100 8,100 31 100 8,131 8,231 Rio Rancho, NM -- 100 8,300 32 100 8,332 8,432 Fort Meyers, FL -- 100 2,728 9 100 2,737 2,837 Tallahassee, FL -- 100 3,075 -- 100 3,075 3,175 Niceville, FL -- 100 2,680 -- 100 2,680 2,780 Longmont, CO -- 100 2,640 -- 100 2,640 2,740 Shelby, NC -- 100 2,805 -- 100 2,805 2,905 Spring Hill, FL -- 100 2,650 -- 100 2,650 2,750 Portland, OR 4,192 100 7,622 -- 100 7,622 7,722 Tuscon, AZ -- 100 8,700 -- 100 8,700 8,800 Denison, IA -- 100 2,713 -- 100 2,713 2,813 Roseville, CA -- 100 7,300 -- 100 7,300 7,400 Cheyenne, WY -- 100 5,290 -- 100 5,290 5,390 Casper, WY -- 100 3,610 -- 100 3,610 3,710 Laramie, WY -- 100 3,610 -- 100 3,610 3,710 ------ ----- ------- ----- ----- ------- ------- ALFs 17,596 7,152 201,240 3,555 7,152 204,795 211,947 ------ ----- ------- ----- ----- ------- ------- Private and Charter Schools: Phoeniz, AZ -- 100 1,833 -- 100 1,833 1,933 Paradise Valley, AZ -- 100 2,728 -- 100 2,728 2,828 Egan, MN -- 100 3,688 -- 100 3,688 3,788 Phoeniz, AZ -- 100 5,201 -- 100 5,201 5,301 Trenton, NJ -- 100 6,000 -- 100 6,000 6,100 ------- ------- -------- ------ ------- -------- -------- Schools -- 500 19,450 -- 500 19,450 19,950 ------- ------- -------- ------ ------- -------- -------- Total $73,028 $16,796 $385,377 $8,486 $16,796 $393,863 $410,659 ======= ======= ======== ====== ======= ======== ======== <CAPTION> Construction/ Accum Renovation Acquisition Deprec.(2) Date Date ---------- ---- ---- <S> <C> <C> <C> Assisted Living Facilities (continued): Elkhart, IN 66 1997 Dec. 1997 Newport Richey, FL 172 1986/95 Jan. 1998 Freemont, CA 62 1998 Jan. 1998 Eugene, OR 155 1998 Mar. 1998 Rio Rancho, NM 159 1998 Mar. 1998 Fort Meyers, FL 54 1998 Mar. 1998 Tallahassee, FL 55 1998 Mar. 1998 Niceville, FL 36 1998 Jun. 1998 Longmont, CO 35 1998 Jun. 1998 Shelby, NC 38 1998 Jun. 1998 Spring Hill, FL 36 1998 Jun. 1998 Portland, OR 98 1998 Jun. 1998 Tuscon, AZ 111 1998 Jun. 1998 Denison, IA 36 1998 Jun. 1998 Roseville, CA 94 1998 Jun. 1998 Cheyenne, WY 69 1998 Jun. 1998 Casper, WY 48 1998 Jun. 1998 Laramie, WY 39 1998 Jul. 1998 ------- ALFs 7,496 ------- Private and Charter Schools: Phoeniz, AZ 27 1980/97/98 May 1998 Paradise Valley, AZ 45 1988/95 Jun. 1998 Egan, MN 61 1987/97 Jun. 1998 Phoeniz, AZ 43 1998 Sep. 1998 Trenton, NJ -- 1930/98 Dec. 1998 -------- Schools 176 -------- Total $26,972 ======== </TABLE> (1) The aggregate basis for federal income tax purposes approximates the carrying values. (2) Depreciation for building is calculated rising a 35 year life for skilled nursing facilities, a 30 year life for schools and a 40 year life for assisted living residences and additions to facilities. Depreciation for furniture and fixtures is calculated based on a 7 year life for all facilities. (3) Single note backed by five facilities in Alabama. (4) Single note backed by two facilities in Washington, (5) Single note backed by six facilities in Iowa and one facility in Texas. (6) Single note backed by two facilities in Alabama. (7) Single note backed by two facilities in Texas. (8) Single note backed by five facilities in Washington. (9) Single note backed by two facilities in Texas. (10) Single note backed by two facilities in Texas. Activity for the years ended December 31, 1996, 1997 and 1998 is as follows: Real Estate Accumulated & Equipment Depreciation ------------------------------- Balance at December 31, 1995 $117,269 $5,487 Additions 113,959 6,214 Cost of real estate sold (7,650) (61) -------------------------- Balance at December 31, 1996 223,578 11,640 Additions 127,937 9,040 Write-down of assets (1,400) -- Cost of real estate sold (31,245) (638) -------------------------- Balance at December 31, 1997 318,870 20,042 Additions 164,625 11,959 Cost of real estate sold (7,654) (1,309) Spin-off of real estate to Healthcare (65,182) (3,720) -------------------------- Balance at December 31, 1998 $410,659 $26,972 ========================== 58
LTC PROPERTIES, INC. SCHEDULE XII MORTGAGE LOANS ON REAL ESTATE (Dollars in thousands) <TABLE> <CAPTION> Final Carrying Amount Current Number of Interest Maturity Balloon Face Amount of Mortgages Monthly State Facilities Units/Beds Rate (1) Date Amount (2) of Mortgages December 31,1998 Debt Service - ----- ------------------------- -------- -------- ---------- ------------ ---------------- ------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> SC 5 509 12.10% 2003 $ 11,119 $11,250 $ 11,173 $ 117 AZ 1 n/a 11.00% 2003 6,262 6,500 6,500 64 CO 2 230 11.38% 2007 5,412 6,000 5,937 61 MS 1 180 11.32% 2006 5,033 5,465 5,443 55 Various (4) 71 7,014 8.88-13.40% 1999-2018 84,425 153,839 151,911 1,472 ----------------- -------- -------- -------- ------ 80 7,933 $112,251 $183,054 $ 180,964(3) $ 1,769 ================= ======== ======== ========= ======= </TABLE> (1) Represents current stated interest rate. Generally, the loans have 25 year amortization with principal and interest payable at varying amounts over the life to maturity with annual interest adjustments through specified fixed rate increases effective either on the first anniversary or calendar year of the loan. (2) Balloon payment is due upon maturity, generally the 10th year of the loan, with various prepayment penalties (as defined in the loan agreement). (3) The carrying amount equals the aggregate cost for federal income tax purposes. No loan has been extended or renewed or has any prior liens. At December 31, 1998, loan with a total principal balance of $3,266,000 were subject to delinquent principal or interest. (4) Includes 69 first-lien mortgage loans: No. of Loans Original loan amounts, ------------------------------- 34 $ 305 - $2,000 22 $2,001 - $3,000 7 $3,001 - $4,000 3 $4,001 - $5,000 3 $5,001 - $5,400 Activity for the years ended December 31, 1996, 1997 and 1998 is as follows: Balance at December 31, 1995 $162,056 New Mortgage loans 130,965 Sales of notes to REMIC (112,487) Collections of principal (2,272) --------- Balance at December 31, 1996 178,262 New Mortgage loans 111,157 Conversion of notes to owned properties (9,348) Collections of principal (24,977) --------- Balance at December 31, 1997 255,094 New Mortgage loans 47,452 Sales of notes to REMIC (103,523) Conversion of notes to owned properties (7,301) Collections of principal (10,758) --------- Balance at December 31, 1998 $180,964 ========= 59
INDEX TO EXHIBITS (Item 14(b)) Exhibit Number Description - ------ ----------- 3.1 Amended and Restated Articles of Incorporation of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.'s Current Report on Form 8-K dated June 19, 1997) 3.2 Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1996) 3.3 Articles Supplementary Classifying 3,080,000 shares of 9.5% Series A Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.'s Current Report on Form 8-K dated June 19, 1997) 3.4 Articles of Amendment of LTC Properties, Inc. (incorporated by reference to Exhibit 3.3 to LTC Properties, Inc.'s Current Report on Form 8-K dated June 19, 1997) 3.5 Articles Supplementary Classifying 2,000,000 Shares of 9.0% Series B Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 2.5 to LTC Properties, Inc.'s Registration Statement on Form 8-A filed on December 15, 1997) 3.6 Certificate of Amendment to Amended and Restated Bylaws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 3.7 Articles Supplementary Classifying 2,000,000 Shares of 8.5% Series C Cumulative Convertible Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 4.1 Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee (incorporated by reference to Exhibit 4.2 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 4.2 Second Supplemental Indenture dated as of September 21, 1995 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $51,500,000 in principal amount of 8.5% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 10.17 to LTC Properties, Inc.'s Form 10-Q for the quarter ended September 30, 1995) 4.3 Third Supplemental Indenture dated as of September 26, 1995 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 (incorporated by reference to Exhibit 10.19 to LTC Properties, Inc.'s Form 10-Q for the quarter ended September 30, 1995) 4.4 Fourth Supplemental Indenture dated as of February 5, 1996 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $30,000,000 in principal amount of 7.75% Convertible Subordinated Debentures due 2002 (incorporated by reference to Exhibit 4.6 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1995) 4.5 Fifth Supplemental Indenture dated as of August 23, 1996 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 4.6 Sixth Supplemental Indenture dated as of December 30, 1998 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 4.7 Seventh Supplemental Indenture dated as of January 14, 1999 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 10.1 Master Repurchase Agreement dated May 14, 1993 between LTC Properties, Inc. and Goldman 60
INDEX TO EXHIBITS (Item 14(b)) Exhibit Number Description - ------ ----------- Sachs Mortgage Company (incorporated by reference to Exhibit 10.5 to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1993) 10.2 Purchase Agreement dated July 28, 1993 between LTC Properties, Inc., LTC REMIC Corporation and Goldman Sachs Mortgage Company (incorporated by reference to Exhibit 10.6 to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1993) 10.3 Transfer and Repurchase Agreement, dated as of July 20, 1993, between LTC Properties, Inc. and LTC REMIC Corporation (incorporated by reference to Exhibit 10.10 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.4 Pooling and Servicing Agreement, dated as of July 20, 1993, among LTC REMIC Corporation, as depositor, Bankers Trust Company, as master servicer, LTC Properties, Inc., as special servicer and originator and Union Bank, as trustee (incorporated by reference to Exhibit 10.11 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.5 Transfer and Repurchase Agreement, dated as of November 1, 1994, between LTC Properties, Inc. and LTC REMIC Corporation (incorporated by reference to Exhibit 10.12 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.6 Pooling and Servicing Agreement, dated as of November 1, 1994, among LTC REMIC Corporation, as depositor, Bankers Trust Company, as master servicer, LTC Properties, Inc., as special servicer and originator and Marine Midland Bank, as trustee (incorporated by reference to Exhibit 10.13 to LTC Properties, Inc.'s Form 10-K dated December 31, 1994) 10.7 Amended Deferred Compensation Plan (incorporated by reference to Exhibit 10.17 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1995) 10.8 Pooling and Servicing Agreement dated as of March 1, 1996, among LTC REMIC Corporation, as depositor, GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc., as Special Servicer and Originator, LaSalle National Bank, as Trustee and ABN AMRO Bank, N.V., as fiscal agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Form 10-Q for the quarter ended March 31, 1996) 10.9 Transfer and Repurchase Agreement by and between LTC Properties, Inc. and LTC REMIC Corporation dated as of March 1, 1996 (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.'s Form 10-Q for the quarter ended March 31, 1996) 10.10 Amended and Restated 1992 Stock Option Plan (incorporated by reference to Exhibit 10.22 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1996) 10.11 Subservicing Agreement dated as July 20, 1993 by and between Bankers Trust Company, as Master Servicer and LTC Properties, Inc., as Special Servicer (incorporated by reference to Exhibit 10.25 to LTC Properties, Inc.'s Form 10-K/A for the year ended December 31, 1996) 10.12 Custodial Agreement dated as of July 20, 1993 by and among Union Bank, as Trustee, LTC REMIC Corporation, as Depositor, and Bankers Trust Company as Master Servicer and Custodian (incorporated by reference to Exhibit 10.26 to LTC Properties, Inc.'s Form 10-K/A for the year ended December 31, 1996) 10.13 Form of Certificates as Exhibit as filed herewith to the Pooling and Servicing Agreement dated as of July 20, 1993 among LTC REMIC Corporation, as Depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and Union Bank as Trustee (incorporated by reference to Exhibit 10.11 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.14 Purchase Agreement dated November 16, 1994 between LTC REMIC Corporation, LTC Properties, Inc. and Goldman Sachs & Co. Trustee (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.'s Form 10-K/A for the year ended December 31, 1996) 61
INDEX TO EXHIBITS (CONTINUED) (Item 14(b)) Exhibit Number Description - ------ ----------- 10.15 Form of Certificates, Form of Custodial Agreement and Form of Subservicing Agreement as Exhibits as filed herewith to the Pooling and Servicing Agreement dated as of November 1, 1994 among LTC REMIC Corporation, as Depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and Marine Midland Bank as Trustee (incorporated by reference to Exhibit 10.13 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.16 Purchase Agreement dated March 27, 1996 between LTC REMIC Corporation, LTC Properties, Inc. and Goldman Sachs & Co. (incorporated by reference to Exhibit 10.30 to LTC Properties, Inc.'s Form 10-K/A for the year ended December 31, 1996) 10.17 Form of Certificates, Form of Custodial Agreement and Form of Subservicing Agreement as Exhibits as filed herewith to the Pooling and Servicing Agreement dated as of March 1, 1996 among LTC REMIC Corporation, as Depositor, GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and LaSalle National Bank as Trustee and ABN AMRO Bank N.V., as Fiscal Agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Form 10-Q for the quarter ended March 31, 1996) 10.18 Senior Unsecured Revolving Line of Credit Agreement dated October 3, 1997 between LTC Properties, Inc. and Banque National de Paris, Sanwa Bank, California and The Sumitomo Bank (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.'s Form 10-Q for the quarter ended September 30, 1997) 10.19 Transfer and Repurchase Agreement dated as of April 20, 1998, by and between LTC REMIC IV Corporation and LTC Properties, Inc. (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10.20 Purchase Agreement dated as of May 11, 1998, by and between LTC REMIC IV Corporation, LTC Properties, Inc. and Goldman Sachs & Co. (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10.21 Subservicing Agreement dated as of May 14, 1998, by and between GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc. as Subservicer(incorporated by reference to Exhibit 10.3 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10.22 Pooling and Servicing Agreement dated as of April 20, 1998 among LTC REMIC IV Corporation, LaSalle National Bank and LTC Properties, Inc. (incorporated by reference to Exhibit 10.4 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10.23 Distribution Agreement, dated as of September 30, 1998, by and between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.5 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10.24 Administrative Services Agreement, dated as of September 30, 1998, by and between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.6 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10.25 Intercompany Agreement, dated as of September 30, 1998, by and between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.7 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10.26 Tax Sharing Agreement, dated as of September 30, 1998, by and between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.8 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 62
INDEX TO EXHIBITS (CONTINUED) (Item 14(b)) Exhibit Number Description - ------ ----------- 10.27 Amended and Restated Promissory Note, dated as of May 19, 1998, between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.9 to LTC Properties, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10.28 LTC Properties, Inc. 1998 Equity Participation Plan 10.29 Term Loan Agreement among LTC Properties, Inc. and Bank of Montreal, as Administrative Agent, and Sanwa Bank California, as Documentation Agent dated March 8, 1999 10.30 Second Amended and Restated Employment Agreement between Andre C. Dimitriadis and LTC Properties, Inc. dated March 26, 1999 10.31 Amended and Restated Employment Agreement between James J. Pieczynski and LTC Properties, Inc. dated March 26, 1999 10.32 Amended and Restated Employment Agreement between Christopher T. Ishikawa and LTC Properties, Inc. dated March 26, 1999 21.1 List of subsidiaries 23.1 Consent of Ernst & Young LLP with respect to the financial information of the Company 27.1 Financial data schedule for the year ended December 31, 1998 63
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. LTC Properties, Inc. Registrant Dated: March 31, 1999 By: /s/ JAMES J. PIECZYNSKI ------------------------ JAMES J. PIECZYNSKI President, Chief Financial Officer and Director /s/ ANDRE C. DIMITRIADIS Chairman of the Board, March 31, 1999 - --------------------------- Chief Executive Officer and ANDRE C. DIMITRIADIS Director /s/ JAMES J. PIECZYNSKI President, Chief Financial March 31, 1999 - --------------------------- Officer and Director JAMES J. PIECZYNSKI /s/ EDMUND C. KING Director March 31, 1999 - --------------------------- EDMUND C. KING /s/ WENDY L. SIMPSON Director March 31, 1999 - --------------------------- WENDY L. SIMPSON /s/ SAM YELLEN Director March 31, 1999 - --------------------------- SAM YELLEN 64