UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2001 Commission File No. 1-8923 HEALTH CARE REIT, INC. (Exact name of registrant as specified in its charter) DELAWARE 34-1096634 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One SeaGate, Suite 1500, Toledo, Ohio 43604 (Address of principal executive office) (Zip Code) (419) 247-2800 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered ----------------------- ----------------------- Common Stock, $1.00 par value New York Stock Exchange 8.875% Series B Cumulative New York Stock Exchange Redeemable Preferred Stock Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant (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; 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 Form 10-K or any amendment of this Form 10-K. [ X ] The aggregate market value of voting common stock held by non-affiliates of the Registrant on March 21, 2002 was $925,794,000 based on the reported closing sales price of such shares on the New York Stock Exchange for that date. As of March 21, 2002, there were 33,947,137 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for the annual stockholders' meeting to be held May 2, 2002, are incorporated by reference into Part III.
HEALTH CARE REIT, INC. 2001 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I <TABLE> <CAPTION> Page ---- <S> <C> Item 1. Business.............................................................................................. 3 Item 2. Properties.............................................................................................15 Item 3. Legal Proceedings......................................................................................16 Item 4. Submission of Matters to a Vote of Security Holders....................................................16 PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.........................................................................16 Item 6. Selected Financial Data................................................................................17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................................22 Item 8. Financial Statements and Supplementary Data............................................................23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................................38 PART III Item 10. Directors and Executive Officers of the Registrant.....................................................38 Item 11. Executive Compensation.................................................................................38 Item 12. Security Ownership of Certain Beneficial Owners and Management......................................................................................38 Item 13. Certain Relationships and Related Transactions.........................................................38 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................................................................39 </TABLE> -2-
PART I ITEM 1. BUSINESS GENERAL Health Care REIT, Inc. (the "Company") is a self-administered, equity real estate investment trust that invests in health care facilities, primarily skilled nursing and assisted living facilities. The Company also invests in specialty care facilities. As of December 31, 2001, long-term care facilities, which include skilled nursing and assisted living facilities, comprised approximately 93% of the investment portfolio. Founded in 1970, the Company was the first real estate investment trust to invest exclusively in health care facilities. As of December 31, 2001, the Company had $1,231,850,000 of real estate investments, inclusive of credit enhancements, in 214 facilities located in 33 states and managed by 38 different operators. At that date, the portfolio included 150 assisted living facilities, 57 skilled nursing facilities, and seven specialty care facilities. At December 31, 2001, the Company had approximately $35,000,000 in unfunded commitments. The Company's primary objectives are to protect stockholders' capital and enhance stockholder value. The Company seeks to pay consistent cash dividends to stockholders and create opportunities to increase dividend payments from annual increases in rental and interest income and portfolio growth. To meet these objectives, the Company invests primarily in long-term care facilities managed by experienced operators and diversifies its investment portfolio by operator and geographic location. The Company anticipates investing in additional health care facilities through operating lease arrangements with, and mortgage loans for, qualified health care operators. Capital for future investments may be provided by borrowing under the Company's revolving credit facilities, public offerings or private placements of debt or equity, and the assumption of secured indebtedness. PORTFOLIO OF PROPERTIES The following table shows the Company's portfolio as of December 31, 2001: <TABLE> <CAPTION> Percentage Number Number Investment Number Number Type of Investments of of of Beds/ Per Bed/ of of Facility (1) Portfolio Facilities Units Unit(2) Operators(3) States(3) -------- -------------- ---------- ---------- ------ -------- ------------ --------- (In thousands) <S> <C> <C> <C> <C> <C> <C> <C> Assisted Living Facilities $ 774,285 63% 150 9,841 $ 78,859 24 30 Skilled Nursing Facilities 369,253 30% 57 7,933 46,547 15 15 Specialty Care Facilities 88,312 7% 7 1,305 67,672 4 3 ---------- ---------- ---------- ---------- Totals $1,231,850 100% 214 19,079 ========== ========== ========== ========== </TABLE> - ---------- (1) Investments include real estate investments and credit enhancements which amounted to $1,220,425,000 and $11,425,000, respectively. (2) Investment Per Bed/Unit was computed by using the total investment amount of $1,233,614,000 which includes real estate investments, credit enhancements, and unfunded commitments for which initial funding has commenced which total $1,220,425,000, $11,425,000 and $1,764,000, respectively. (3) The Company has investments in properties located in 33 states and managed by 38 different operators. -3-
ASSISTED LIVING FACILITIES Assisted living facilities provide personal care services to assist in activities of daily living, such as bathing, meals, security, transportation, recreation, medication supervision and limited therapeutic programs. More intensive medical needs of the resident within assisted living facilities may be provided by home health providers through close coordination with the resident's physician and skilled nursing facilities. Assisted living facilities represent lower cost, less institutional alternatives for the care of the elderly or medically frail. SKILLED NURSING FACILITIES Skilled nursing facilities provide inpatient skilled nursing and personal care services as well as rehabilitative, restorative and transitional medical services. In some instances, nursing facilities supplement hospital care by providing specialized care for medically complex patients whose conditions require intense medical and therapeutic services, but who are medically stable enough to have these services provided in facilities that are less expensive than acute care hospitals. SPECIALTY CARE FACILITIES Specialty care facilities provide specialized inpatient services for specific illnesses or diseases including, among others, coronary and cardiovascular services and behavioral care. Specialty care facilities are lower cost alternatives to acute care hospitals. INVESTMENTS The Company invests in income producing health care facilities with a primary focus on long-term care facilities, which include skilled nursing facilities and assisted living facilities. The Company also invests in specialty care facilities. The Company diversifies its investment portfolio by operator and geographic location. In determining whether to invest in a facility, the Company focuses on: (a) the experience of the management team of that operator; (b) the historical and projected financial and operational performance of the facility; (c) the credit of the borrower or lessee; (d) the security for the lease or loan; and (e) the capital committed to the facility by the borrower or lessee. Management conducts market research and analysis for all potential investments. In addition, Management reviews the value of all facilities, the interest rates and debt service coverage requirements of any debt to be assumed and the anticipated sources for repayment for such debt. The Company's investments are primarily operating lease transactions and mortgage loans. Construction financing is provided, but only as a part of a operating lease or mortgage loan. Substantially all of the Company's investments are designed with escalating rate structures. The Company's policy is to structure long term investments to maximize returns. Depending upon market conditions, the Company believes that appropriate new investments will be available in the future with substantially the same spreads over its costs of borrowing. Operating leases and mortgage loans are normally secured by guarantees and/or letters of credit. In addition, the leases and loans are generally cross-defaulted and the loans are cross-collateralized with other mortgage loans, leases, or agreements between the Company and the operator and its affiliates. At December 31, 2001, 75% of the operating leases were subject to master leases. By structuring investments with an operator as a master lease, the operator must exercise all rights to purchase the facility or to renew or terminate the lease with respect to all leased properties included in the master lease. This structure is believed to provide protection for the Company in the event the operator seeks bankruptcy protection. The Company is in the process of converting certain additional leases with existing operators to master leases. If completed, the percentage of the Company's lease portfolio structured as master leases would increase to approximately 81%. The Company typically invests in or finances up to 90% of the appraised value of a property. Economic terms normally include annual rate increases and fair market value based purchase options in operating leases. The Company monitors its investments through a variety of methods, which are determined by the type of health care facility and operator. The monitoring process includes a review and analysis of facility, borrower or lessee, and guarantor financial statements; periodic site visits; property reviews; and meetings with operators. Such reviews of operators and facilities generally encompass licensure and regulatory compliance materials and reports, contemplated building improvements and other material developments. -4-
OPERATING LEASES Each facility, which includes the land, buildings, improvements and related rights (the "Leased Properties") owned by the Company is leased to an operator pursuant to a long-term lease (collectively, the "Leases"). The Leases generally have a fixed term of 10 to 15 years and contain multiple five to 10-year renewal options. Each Lease is a triple net lease requiring the lessee to pay rent and all additional charges incurred in the operation of the Leased Property. The lessees are required to repair, rebuild and maintain the Leased Properties. The net value of the Company's completed leased properties aggregated approximately $956,851,000 at December 31, 2001. The base rents range from approximately 7.2% to 15.5% per annum of the Company's net book value in the leased properties. The rental yield to the Company from Leases depends upon a number of factors, including the initial rent charged, any rental adjustments and the amount of the commitment fee charged at the inception of the transaction. The base rents for the renewal periods are generally fixed rents set at a spread above the Treasury yield for the corresponding period. MORTGAGE LOANS The Company's investments in mortgage loans are typically structured to provide the Company with interest income, principal amortization and commitment fees and are secured by a first mortgage lien. The interest rates range from 8.1% to 15.0% per annum on the outstanding loan balances. The yield to the Company on mortgage loans depends upon a number of factors, including the stated interest rate, average principal amount outstanding during the term of the loan, the amount of the commitment fee charged at the inception of the loan and any interest rate adjustments. The mortgage loans made through December 31, 2001, are generally subject to seven to 10-year terms with 25-year amortization schedules that provide for a balloon payment of the outstanding principal balance at the end of the term. Generally, the mortgage loans provide five to seven years of prepayment protection. CONSTRUCTION FINANCING The Company provides funding for construction of a facility subject to a long-term operating lease or mortgage loan upon the completion of the facility. Generally, the rates on the outstanding balances of the Company's construction financings are 225 to 350 basis points over the prime rate of a specified financial institution. The Company also typically charges a commitment fee at the commencement of the financing. The construction period commences upon funding and terminates upon the earlier of the completion of development of the applicable facility or the end of a specified period, generally 12 to 18 months. During the construction period, funds are advanced pursuant to draw requests made by the operator in accordance with agreed upon terms and conditions which require, among other things, a site visit by a Company representative prior to the advancement of funds. Monthly payments are made on the total amount of the proceeds advanced during the development period. During the construction period, the Company generally requires additional security and collateral in the form of either payment and performance bonds and/or completion guarantees by either one, or a combination of, the operator's parent entity, other affiliates of the operator, or one or more of the individual principals of the operator. At December 31, 2001, the Company had no construction investments. SUBDEBT INVESTMENTS Subdebt investments represent debt instruments in operators of facilities that have been financed by the Company. Generally, these instruments are for five to seven-year terms with interest at 11% to 15%. At December 31, 2001, the Company had provided subdebt financing to four operators. EQUITY INVESTMENTS Management determines the appropriate classification of an equity investment at the time of acquisition and reevaluates such designation as of each balance sheet date. At December 31, 2001, included in equity investments are the common stock of a corporation, and ownership representing a 31% interest in Atlantic Healthcare Finance L.P., a property investment group that specializes in the financing, through sale and leaseback transactions, of nursing and care homes located in the United Kingdom. BORROWING POLICIES The Company may place long-term indebtedness through banks, private placements to institutional investors, or public offerings. For short-term purposes, the Company may, from time to time, obtain lines of credit or other short-term borrowings from banks or others. In addition, the Company may incur mortgage indebtedness on real estate that it has acquired through purchase, foreclosure or otherwise. When terms are deemed favorable, the Company may invest in properties subject to existing loans and mortgages. In addition, the -5-
Company may obtain financing for unleveraged properties in which it has invested or may refinance properties acquired on a leveraged basis. Under documents pertaining to existing indebtedness, the Company is subject to various restrictions with respect to secured and unsecured indebtedness. COMPETITION The Company competes with other real estate investment trusts, real estate partnerships, banks, insurance companies and other investors in the acquisition, leasing and financing of health care facilities. The operators of the facilities compete on a local and regional basis with operators of facilities that provide comparable services. Operators compete for patients and residents based on a number of factors including quality of care, reputation, physical appearance of facilities, services offered, family preferences, physicians, staff and price. EMPLOYEES As of December 31, 2001, the Company employed 24 full-time employees. CERTAIN GOVERNMENT REGULATIONS MEDICARE AND MEDICAID PAYMENT PROGRAMS The Company invests in assisted living facilities ("ALFs"), which constitute approximately 63% of investments, nursing facilities ("NFs") (approximately 30% of investments), and specialty care facilities that provide inpatient and outpatient services in specific areas such as physical rehabilitation, behavioral care and cardiac care ("SCFs"). NFs and SCFs receive a substantial portion of their revenues from the federal Medicare program and state Medicaid programs. Medicare does not pay for ALF services. Medicaid funding is available for assisted living services in many states through various Medicaid waiver provisions. The Medicaid waiver funding is limited and not typically a substantial portion of the revenues of an ALF. The amount of Medicare and Medicaid program payments can be changed by legislative or regulatory actions and by determinations of program agents. Since Medicaid programs are funded by both the state government and the federal government, Medicaid payments can be affected by changes at either the state or federal level. There is no assurance that payments under these programs will remain comparable to present levels or be adequate to cover the costs of care. Substantial reductions in payments to NFs and SCFs could impact their ability to make rent or loan payments when due unless the facilities make operational changes that reduce expenses. Such operational changes may not be possible because of regulatory requirements or may adversely impact the quality of care and the ability to attract prospective residents and patients. Legislation adopted in 1999 and 2000 increased Medicare payments to NFs and SCFs. Section 101 of the Balanced Budget Relief Act of 1999 ("BBRA") included a 20% increase for 15 of the Resource Utilization Groups (RUGs) and a 4% across-the-board increase of the adjusted federal per diem payment rate. The 20% increase was implemented in April 2000 and will remain in effect until the implementation of refinements in the current RUG case-mix classification system to more accurately estimate the cost of non-therapy ancillary services. The 4% increase was implemented in April 2000 and will remain in effect until September 30, 2002. The Benefits Improvement and Patient Protection Act of 2000 ("BIPA") included a 16.66% increase in the nursing component of the case-mix adjusted federal periodic payment rate and a 6.7% increase in the 14 RUG payments for rehabilitation therapy services. The 16.66% increase was implemented in April 2000 and will remain in effect until September 30, 2002. The 6.7% increase is an adjustment to the 20% increase granted in the BBRA and spreads the funds directed at 3 of those 15 RUGs to an additional 11 rehabilitation RUGs. The increase was implemented in April 2001 and will remain in effect until the implementation of refinements in the current RUG case-mix classification system. Due to the temporary nature of these payment increases, there is no assurance that federal reimbursement will remain at levels comparable to the present levels or that such reimbursement will be sufficient to cover all the operating and fixed costs necessary to care for Medicaid and Medicare patients. In addition, the Medicare Payment Advisory Commission, an independent federal body established by the Balanced Budget Act of 1997, has recommended that the 4% increase implemented in BBRA and the 16.66% increase implemented in BIPA be allowed to expire September 30, 2002. If the 4% and 16.66% increases are not extended beyond their scheduled expiration, the Centers for Medicare and Medicaid Services ("CMS") estimates that Medicare reimbursement will decrease by approximately 10% from the amount that would otherwise be paid in fiscal 2003. Reimbursement could be further reduced when CMS completes its RUG refinement due to the termination of the 20% and 6.7% increases. However, the Medicare Payment Advisory Commission ("MedPAC") has recommended that the 20% and 6.7% increases be folded into the base rate upon the completion of the RUG refinement. The expiration of any of the BBRA and BIPA increases could have an adverse impact on the revenues of the operators of nursing facilities and would negatively impact their ability to satisfy their monthly lease or debt payments to us. -6-
MedPAC has also recommended that the annual update in rates for Federal Fiscal 2003 be 0% for free-standing nursing facilities and 10% for hospital-based nursing facilities. Nursing Facilities - Payment Systems Medicare and Medicaid programs historically reimbursed NFs for the costs incurred in providing services (subject to certain cost ceilings). However, Medicare and most state Medicaid programs have adopted payment systems that are based on rates determined before the care is rendered ("prospective rates"). For this reason, a nursing facility's ability to operate profitably now depends on the efficiency of its operations. Many publicly-owned NFs negatively impacted by these changes have sought bankruptcy protection. MEDICARE. In 1998, the Medicare cost-based reimbursement system was replaced by a federal per diem rate based on the resident's condition, to be phased in over three years. New facilities were immediately paid based on the federal per diem rate. The new per diem rate is the sole payment for direct nursing care, ancillary services and capital costs. MEDICAID. Until 1997, state Medicaid programs were required to pay NFs and SCFs rates that were reasonable and adequate to meet the costs that must be incurred by efficiently and economically operated facilities in order to provide services in accordance with legal requirements and to assure reasonable access to patients. This law, which restricted the ability of the states to reduce Medicaid payments, was repealed in 1997. Under the new law, states need only publish the methodology used to develop the proposed rates, along with a justification for the methodology, and allow public comment. Most states have adopted a system based on prospective rates. An August 2001 analysis prepared by BDO Seidman, LLP concluded that the gap between the costs of care to NF residents and state Medicaid payments for that care is increasing. The analysis cited several reasons, including increased pressure on state budgets caused by a softening economy and increased Medicaid utilization and escalating costs of care. Specialty Care Facilities - Payment Systems Medicare and Medicaid payment methodologies for SCFs vary. Acute care specialty hospitals are typically paid a fixed amount per discharge (based on the patient's diagnosis) for inpatient services. Behavioral facilities are paid by Medicare on a cost basis, subject to limitations based on a "target amount" per discharge. The target amount is based on updates to the facility's costs per discharge in a base year. Medicare payment rules were changed effective October 1, 1997, to further limit reimbursable costs, reduce payment incentives for providers whose costs are below the target amount and reduce capital-related payments by 15%. The target amount was capped at the 75th percentile of the target amounts for facilities of the same type. For new facilities, the target is 110% of the median costs per discharge of similar facilities. In addition, the target amount update is set at 0% for federal fiscal 1998. Depending on how the facility's costs per discharge compare to its target amount, annual increases range from 0% to the "market basket" percentage reflecting the inflation rate for costs of items purchased by similar facilities. Rehabilitation facilities have been paid by Medicare on the same basis as behavioral facilities. However, a new system is currently being implemented under which payments will be based on fixed rates per discharge that vary according to the nature of the patient's condition. The new system is being phased in over three years beginning with the cost reporting year commencing after January 1, 2002. OTHER MEDICARE AND MEDICAID PROGRAM CONSIDERATIONS Medicare and Medicaid agencies routinely perform retrospective audits to confirm that the amounts claimed by and paid to health care facilities are supported by adequate documentation of the factors affecting the amount of payment, such as the patient's condition. If any amount is determined to be unsupported, the facility is required to repay the program and the amounts can be deducted from current payments to the facility. This can result in a sudden loss of cash flow. In some cases, it may be necessary for the Company to make additional advances to the facility to prevent the facility from closing and jeopardizing the Company's investment. Federal and state laws prohibit facilities from charging Medicare and Medicaid for services that do not satisfy program requirements. The Medicare and Medicaid laws also prohibit the failure to refund overpayments when discovered, certain payments to physicians and other parties who influence purchases of health care services and the provision of unnecessary services. Penalties for violations may include criminal penalties and/or exclusion of the facility from participation in Medicare and Medicaid programs. In addition, substantial civil monetary penalties may be imposed for improper billings if the facility acted in reckless disregard or deliberate ignorance of program rules. Health care facilities that participate in Medicare or Medicaid must meet extensive program requirements, including physical plant and operational requirements, which are revised from time to time. Such requirements may include a duty to admit Medicare and Medicaid patients, limiting the ability of the facility to increase its private pay census beyond certain limits. Medicare and Medicaid certified facilities are regularly inspected to determine compliance. Sanctions for failure to meet program requirements may include exclusion from the program or a prohibition on new admissions of program beneficiaries until the failures are corrected. These sanctions may be imposed without a prior hearing in some cases. Under the Medicare program, "peer review organizations" have been established to review the quality and appropriateness of care rendered by health care providers. These organizations may not only deny claims that fail to meet their criteria, but can also fine and/or recommend termination of participation in the program. -7-
Changes in the Medicare and Medicaid programs will likely result in increased use of "managed care" organizations to meet the needs of program beneficiaries. These organizations selectively contract with health care facilities, resulting in some facilities being excluded from the ability to serve program beneficiaries. CERTAIN GOVERNMENT REGULATIONS AFFECTING HEALTH CARE FACILITIES NFs, SCFs and (in some states) ALFs must comply with state licensing requirements and with the requirements of municipal building codes, health codes, and local fire departments. In granting and renewing a facility's license, the licensure agency considers, among other things, the building and equipment, the number and qualifications of the administrative personnel and clinical staffs, the quality of health care programs and compliance with applicable laws. Failure to meet these requirements can result in the imposition of sanctions, including admission bans, fines, penalties and closure of a facility. Regulatory requirements may be changed from time to time. Some changes including increased staffing requirements, may negatively impact operating revenues or costs and thereby affect the ability of the operator to pay rent, interest or principal. Most states require NFs and SCFs to obtain a "certificate of need" before opening a new inpatient health care facility. Most states, however, do not require ALFs to obtain a "certificate of need." Once a facility closes, it may be unable to reopen without obtaining a new certificate of need, which may be impossible to obtain. In 1987, a federal law that required states to have certificate of need programs was repealed. As a result, some states have repealed these requirements, resulting in increased competition, and other states are considering similar repeals. Federal and state laws prohibit misrepresentations in billings for health care facility services and certain payments to physicians and other parties who influence the purchase of health care services, whether or not the payor is a governmental health care program. TAXATION FEDERAL INCOME TAX CONSEQUENCES This discussion is for general information only and is not tax advice. The information in this section is based on the Internal Revenue Code of 1986, as amended ("Code"), current, temporary and proposed Treasury Regulations thereunder, the legislative history of the Code, current administrative interpretations and practices of the Internal Revenue Service (including its practices and policies as endorsed in private letter rulings, which are not binding on the Internal Revenue Service except with respect to a taxpayer that receives such a ruling), and court decisions, all as of the date hereof. Future legislation, Treasury Regulations, administrative interpretations or court decisions could significantly change the current law or adversely affect existing interpretations of current law. Any such change could apply retroactively to transactions preceding the date of the change. This summary does not address all aspects of taxation that may be relevant to certain types of stockholders (including, but not limited to, insurance companies, tax-exempt entities, financial institutions or broker-dealers, and foreign corporations and persons who are not citizens or residents of the United States). Each investor is advised to consult its own tax advisor regarding the tax consequences of the acquisition, ownership and sale of the shares, including the federal, state, local, foreign and other tax consequences of such acquisition, ownership, sale, and potential changes in applicable tax laws. General We elected to be taxed as a REIT under Sections 856 through 860 of the Code, commencing with our first fiscal year. We intend to remain qualified as a REIT, but there is no guarantee that we will qualify or remain qualified as a REIT for subsequent years. Qualification as a REIT depends upon the Company's ability to meet, through actual annual operating results, various asset composition, distribution level, diversity of share ownership, and qualification tests imposed under the Code and Treasury Regulations and discussed below under "--Qualification as a REIT". In particular, qualification for REIT status under current laws requires compliance with certain complex limitations on the type and amount of income a REIT can receive and the type of assets a REIT can own. However, there can be no assurance that we will qualify or remain qualified. In any year in which we qualify as a REIT, in general, we will not be subject to federal income tax on that portion of our REIT taxable income or capital gain which is distributed to stockholders. We may, however, be subject to tax at normal corporate rates upon any taxable income or capital gain not distributed. If we elect to retain and pay income tax on our net long-term capital gain, stockholders are required to include their proportionate share of our undistributed long-term capital gain in income but receive a credit for their share of any taxes paid on such gain by us. Despite the REIT election, we may be subject to federal income and excise tax as follows: (i) we will be taxed at regular corporate rates on our undistributed REIT taxable income, including undistributed net capital gains; (ii) we may be subject to the "alternative minimum tax" on certain items of tax preference if that tax exceeds our regular tax; (iii) if we have net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or other non-qualifying income from foreclosure property, such income will be subject to tax at the highest corporate rate on such income; (iv) any -8-
net income from prohibited transactions (which are, in general, sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than dispositions of foreclosure property and dispositions of property due to an involuntary conversion) will be subject to a 100% tax; (v) if we fail to satisfy either the 75% or 95% gross income tests (as discussed below), but nonetheless maintain our qualification as a REIT because certain other requirements are met, we will be subject to a 100% tax on an amount equal to (a) the gross income attributable to the greater of the amounts by which we failed the 75% or 95% test, multiplied by (b) a fraction intended to reflect our profitability; (vi) if we fail to distribute during each year at least the sum of (a) 85% of our REIT ordinary income for such year, (b) 95% of our REIT capital gain net income for such year (other than capital gain that we elect to retain and pay tax on) and (c) any undistributed taxable income from preceding periods, we will be subject to 4% excise tax on the excess of such required distribution over the amounts actually distributed, and (vii) we will also be subject to a tax of 100% on the amount of any rents from real property, deductions or excess interest paid to us by any of our "taxable REIT subsidiaries" that would be reduced through reapportionment under section 482 of the Code in order to more clearly reflect income of the taxable REIT subsidiary. A taxable REIT subsidiary is any corporation for which a joint election has been made by a REIT and such corporation to treat such corporation as a taxable REIT subsidiary with respect to such REIT. If we acquire any assets from a taxable "C" corporation in a carryover basis transaction, we could be liable for specified liabilities that are inherited from the "C" corporation. If we recognize gain on the disposition of such assets during the 10-year period beginning on the date on which such assets were acquired by us, then to the extent of such assets' "built-in gain" (i.e., the excess of the fair market value of such asset at the time of the acquisition by us over the adjusted basis in such asset, determined at the time of such acquisition), we will be subject to tax on such gain at the highest regular corporate rate applicable. This treatment of the recognition of built-in gain assumes that we made or will make (or will be deemed to make) an election pursuant to Notice 88-19 or Treasury Regulations that were promulgated in 2000 and 2001 with respect to any assets acquired from a "C" corporation in a carryover basis transaction. Qualification as a REIT A REIT is defined in the Code 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 as a domestic corporation but for Sections 856 through 860 of the Code; (4) which is neither a financial institution nor an insurance company; (5) the beneficial ownership of which is held by 100 or more persons in each taxable year of the REIT except for its first taxable year; (6) not more than 50% in value of the outstanding stock of which is owned during the last half of each taxable year, excluding the REIT's first taxable year, directly or indirectly, by or for five or fewer individuals (as defined in the Code to include certain entities) (the "Five or Fewer Requirement"); and (7) which meets certain income and asset tests described below. Conditions (1) to (4), inclusive, must be met during the entire taxable year and 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. For purposes of conditions (5) and (6), pension funds and certain other tax-exempt entities are treated as individuals, subject to a "look-through" exception in the case of condition (6). As of December 31, 2001, based on publicly available information, we satisfied the share ownership requirements set forth in (5) and (6) above. In addition, our Amended and Restated By-Laws provide for restrictions regarding ownership and transfer of shares. These restrictions are intended to assist us in continuing to satisfy the share ownership requirements described in (5) and (6) above. These ownership and transfer restrictions are described in Article VI of the By-Laws. These restrictions, however, may not ensure that we will, in all cases, be able to satisfy the share ownership requirements described in (5) and (6) above. We have complied with, and will continue to comply with, regulatory rules to send annual letters to certain of our stockholders requesting information regarding the actual ownership of our stock. If despite sending the annual letters, we do not know, or after exercising reasonable diligence would not have known, whether we failed to meet the Five or Fewer Requirement, we will be treated as having met the requirement described in condition (6) above. If we failed to comply with these regulatory rules, we would be subject to monetary damages. If our failure to comply was due to intentional disregard of the requirement, the penalty is increased. However, if our failure to comply were due to reasonable cause and not willful neglect, no penalty would be imposed. We may own and operate a number of properties through wholly owned subsidiaries. Code Section 856(i) provides that a corporation which is a "qualified REIT subsidiary" shall not be treated as a separate corporation, and all assets, liabilities and items of income, deductions, and credit of a "qualified REIT subsidiary" will be treated as assets, liabilities and items (as the case may be) of the REIT. Thus, in applying the requirements described in this Code Section, the assets, liabilities and items of income, deduction and credit of our qualified REIT subsidiaries will be treated as our assets, liabilities and items. If we invest in a partnership, a limited liability company or a trust taxed as a partnership or as a disregarded entity, we will be deemed to own a proportionate share of the partnership's limited liability company's or trust's assets. Likewise, we will be treated as receiving our share of the income and loss of the partnership, limited liability company or trust, and the gross income will retain the same character in our hands as it has in the hands of the partnership, limited liability company or trust. These "look-through" rules apply for purposes of the income tests and assets tests described below. INCOME TESTS. There are two separate percentage tests relating to our sources of gross income that we must satisfy for each taxable year. First, at least 75% of our gross income (excluding gross income from certain sales of property held primarily for sale) must be directly or indirectly derived each taxable year from "rents from real property," other income from investments relating to real -9-
property or mortgages on real property, or certain income from qualified temporary investments. Second, at least 95% of our gross income (excluding gross income from certain sales of property held primarily for sale) must be directly or indirectly derived each taxable year from any of the sources qualifying for the 75% test and from dividends, interest, gain from the sale or disposition of stock securities, and payments to us under an interest rate swap, cap agreement, option, futures contract, forward rate agreement or any similar financial instrument entered into by us to hedge indebtedness incurred or to be incurred. Rents received by us will qualify as "rents from real property" for purposes of satisfying the gross income tests for a REIT only if several conditions are met. First, the amount of rent must not be based in whole or in part on the income or profits of any person, although rents generally will not be excluded merely because they are based on a fixed percentage or percentages of receipts or sales. Second, rents received from a tenant will not qualify as "rents from real property" if the REIT, or an owner of 10% or more of the REIT, also directly or constructively owns 10% or more of such tenant unless the tenant is a taxable REIT subsidiary of ours and certain other requirements are met with respect to the real property being rented. Third, if rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." Finally, for rents received to qualify as rents from real property, we generally must not furnish or render services to tenants, other than through a taxable REIT subsidiary or an "independent contractor" from whom we derive no income, except that we may directly provide services that are "usually or customarily rendered" in the geographic area in which the property is located in connection with the rental of real property for occupancy only, or are not otherwise considered "rendered to the occupant for his convenience." For taxable years beginning after August 5, 1997, a REIT has been permitted to render a de minimis amount of impermissible services to tenants and still treat amounts received with respect to that property as rent from real property. The amount received or accrued by the REIT during the taxable year for the impermissible services with respect to a property may not exceed 1% of all amounts received or accrued by the REIT directly or indirectly from the property. The amount received for any service or management operation for this purpose shall be deemed to be not less than 150% of the direct cost of the REIT in furnishing or rendering the service or providing the management or operation. Furthermore, impermissible services may be furnished to tenants by a taxable REIT subsidiary subject to certain conditions, and we may still treat rents received with respect to the property as rent from real property. The term "interest" generally does not include any amount if the determination of such amount depends in whole or in part on the income or profits of any person, although an amount generally will not be excluded from the term "interest" solely by reason of being based on a fixed percentage of receipts or sales. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for such year if we are eligible for relief under certain provisions of the Code. These relief provisions will be generally available if our failure to meet such tests was due to reasonable cause and not due to willful neglect, we attach a schedule of the sources of our income to our return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not now possible to determine the circumstances under which we may be entitled to the benefit of these relief provisions. If these relief provisions apply, a 100% tax is imposed on an amount equal to (a) the gross income attributable to the greater of the amount by which we failed the 75% or 95% test, multiplied by (b) a fraction intended to reflect our profitability. ASSET TESTS. At the close of each quarter of our taxable year, we must also satisfy several tests relating to the nature and diversification of our assets determined in accordance with generally accepted accounting principles. At least 75% of the value of our total assets must be represented by real estate assets, cash, cash items (including receivables arising in the ordinary course of our operation), government securities and qualified temporary investments. Although the remaining 25% of our assets generally may be invested without restriction, we are prohibited from owning securities representing more than 10% of either the vote or value of the outstanding securities of any issuer other than a qualified REIT subsidiary, another REIT or a taxable REIT subsidiary (the "10% test"). Further, no more than 20% of the total assets may be represented by securities of one or more taxable REIT subsidiaries and no more than 5% of the value of our total assets may be represented by securities of any non-governmental issuer other than a qualified REIT subsidiary, another REIT or a taxable REIT subsidiary. Each of the 10% vote and value test and the 20% and 5% asset tests must be satisfied at the end of any quarter. There are special rules which provide relief if the value related tests are not satisfied due to changes in the value of the assets of a REIT. ANNUAL DISTRIBUTION REQUIREMENTS. We are, in order to avoid being taxed as a regular corporation, required to make distributions (other than capital gain distributions) to our stockholders which qualify for the dividends paid deduction in an amount at least equal to (A) the sum of (i) 90% of our "REIT taxable income" (computed without regard to the dividends paid deduction and our net capital gain) and (ii) 90% of the after-tax net income, if any, from foreclosure property, minus (B) a portion of certain items of non-cash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for such year and if paid on or before the first regular distribution payment after such declaration. To the extent that we do not distribute all of our net capital gain or distribute at least 90%, but less than 100%, of our "REIT taxable income," as adjusted, we will be subject to tax on the undistributed amount at regular corporate tax rates. Finally, as discussed above, we may be subject to an excise tax if we fail to meet certain other distribution requirements. We intend to make timely distributions sufficient to satisfy these annual distribution requirements. It is possible that we, from time to time, may not have sufficient cash or other liquid assets to meet the 90% distribution requirement, or to distribute such greater amount as may be necessary to avoid income and excise taxation, due to, among other things, (a) timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of such income -10-
and deduction of such expenses in arriving at our taxable income, or (b) the payment of severance benefits that may not be deductible to us. In the event that such timing differences occur, we may find it necessary to arrange for borrowings or, if possible, pay dividends in the form of taxable stock dividends in order to meet the distribution requirement. Under certain circumstances, in the event of a deficiency determined by the Internal Revenue Service, we may be able to rectify a resulting failure to meet the distribution requirement for a year by paying "deficiency dividends" to stockholders in a later year, which may be included in our deduction for distributions paid for the earlier year. Thus, we may be able to avoid being taxed on amounts distributed as deficiency distributions; however, we will be required to pay applicable penalties and interest based upon the amount of any deduction taken for deficiency distributions. Failure to Qualify as a Real Estate Investment Trust If we fail to qualify for taxation as a REIT in any taxable year, we will be subject to federal income 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 nor will any particular amount of distributions be required to be made in any year. All distributions to stockholders will be taxable as ordinary income to the extent of current and accumulated earnings and profits allocable to such distributions and, subject to certain limitations, will be eligible for the dividends received deduction for corporate stockholders. Unless entitled to relief under specific statutory provisions, we also will 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 such statutory relief. Failure to qualify for even one year could result in our need to incur indebtedness or liquidate investments in order to pay potentially significant resulting tax liabilities. Federal Income Taxation of Stockholders GENERAL. So long as we qualify for taxation as a REIT, distributions on shares of common stock to a stockholder made out of the current or accumulated earnings and profits allocable thereto (and not designated as capital gain dividends) will be includable by such stockholder as ordinary income for federal income tax purposes. None of these distributions will be eligible for the dividends received deduction for stockholders that are corporations. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed our actual net capital gain for the taxable year), without regard to the period for which the stockholder has held its shares of common stock. However, corporate stockholders may be required to treat up to 20% of some capital gain dividends as ordinary income. If we elect to retain and pay income tax on any net long-term capital gain, stockholders would include in income, as long-term capital gain, their proportionate share of such net long-term capital gain. A stockholder would also receive a refundable tax credit for its proportionate share of the tax paid by us on such retained capital gains and an increase in its basis in the shares of common stock in an amount equal to the stockholder's includable capital gains less its share of the tax deemed paid. Stockholders may not include in their individual federal income tax returns any of our net operating losses or capital losses. Federal income tax rules may also require that certain minimum tax adjustments and preferences be apportioned to our stockholders. In addition, any distribution declared by us in October, November or December of any year payable to a stockholder of record on a specified date in any such month shall be treated as both paid by us and received by the stockholder on December 31 of such year, provided that the distribution is actually paid by us no later than January 31 of the following year. We will be treated as having sufficient earnings and profits to treat as a dividend any distribution up to the amount required to be distributed in order to avoid imposition of the 4% excise tax discussed under "--General", above, and "--Qualification as a REIT - Annual Distribution Requirements" above. As a result, stockholders may be required to treat as taxable dividends certain distributions that would otherwise result in a tax-free return of capital. Moreover, any "deficiency dividend" will be treated as a dividend (an ordinary dividend or a capital gain dividend, as the case may be), regardless of our earnings and profits. Any other distributions in excess of current or accumulated earnings and profits will be not taxable to a stockholder to the extent such distributions do not exceed the adjusted basis of such stockholder's shares of common stock. Stockholders will be required to reduce the tax basis of their shares of common stock by the amount of such distributions until such basis has been reduced to zero, after which such distributions will be taxable as capital gain, if the shares of common stock are held as a capital asset. The tax basis as so reduced will be used in computing the capital gain or loss, if any, realized upon sale of the shares of common stock. Any loss upon a sale or exchange of shares of common stock which were held for six months or less (after application of certain holding period rules) will generally be treated as a long-term capital loss to the extent such stockholder previously received capital gain distributions with respect to such shares of common stock. Gain from the sale or exchange of shares held for more than one year is taxed at a maximum long-term capital gain rate, which is currently 20%. Some taxpayers may be eligible for a lower long-term capital gain rate if shares are acquired after December 31, 2000 and held for at least five years. Pursuant to Internal Revenue Service guidance, we may classify portions of our capital gain dividends as gains eligible for the long-term capital gains rate or as unrecaptured Code section 1250 gain taxable to individual stockholders at a maximum rate of 25%. -11-
TREATMENT OF TAX-EXEMPT STOCKHOLDERS. Tax-exempt entities, including qualified employee pension and profit sharing trusts and individual retirement accounts, ("Exempt Organizations"), generally are exempt from federal income taxation. However, they are subject to taxation on their unrelated business taxable income ("UBTI"). While many investments in real estate generate UBTI, the Internal Revenue Service has issued a published revenue ruling that dividend distributions from a REIT to an exempt employee pension trust do not constitute UBTI, provided that the shares of the REIT are not otherwise used in an unrelated trade or business of the exempt employee pension trust. Based on this ruling, amounts distributed by us to Exempt Organizations generally should not constitute UBTI. However, if an Exempt Organization finances its acquisition of the shares of common stock with debt, a portion of its income from us will constitute UBTI pursuant to the "debt financed property" rules. Likewise, a portion of its income from us would constitute UBTI if we held a residual interest in a real estate mortgage investment conduit. In addition, in certain circumstances, a pension trust that owns more than 10% of our stock is required to treat a percentage of our dividends as UBTI. This rule applies to a pension trust holding more than 10% of our stock only if (i) the percentage of our income that is UBTI (determined as if we were a pension trust) is at least 5%, (ii) we qualify as a REIT by reason of the modification of the Five or Fewer Requirement that allows beneficiaries of the pension trust to be treated as holding shares in proportion to their actuarial interests in the pension trust, and (iii) either (A) one pension trust owns more than 25% of the value of our stock or (B) a group of pension trusts individually holding more than 10% of the value of our stock owns more than 50% of the value of our stock. SALE, EXCHANGE, OR REDEMPTION OF SHARES. Upon the sale or exchange of any shares of common stock to or with a person other than us or a sale or exchange of all shares of common stock (whether actually or constructively owned) with us, a stockholder will generally recognize capital gain or loss equal to the difference between the amount realized on such sale or exchange and the stockholder's adjusted tax basis in such shares of common stock. Such gain will be capital gain if the stockholder held such shares of common stock as a capital asset. TAXATION OF FOREIGN STOCKHOLDERS. We will qualify as a "domestically-controlled REIT" so long as less than 50% in value of our shares is held by foreign persons, for example, nonresident aliens and foreign corporations, partnerships, trusts and estates. We do and expect to continue to qualify as a domestically-controlled REIT. Under these circumstances, gain from the sale of shares by a foreign person should not be subject to U.S. taxation, unless such gain is effectively connected with such person's U.S. business or, in the case of an individual foreign person, such person is present within the U.S. for more than 182 days in such taxable year. Distribution of cash generated by our real estate operations, but not by the sale or exchange of our capital assets, that are paid to foreign persons generally will be subject to U.S. withholding tax at a rate of 30%, unless an applicable tax treaty reduces that tax and the foreign stockholder files with us the required form evidencing such lower rate or unless the foreign stockholder files an Internal Revenue Code Form W-8ECI with us claiming that the distribution is "effectively connected" income. Distributions of proceeds attributable to the sale or exchange by us of U.S. real property interests are subject to income and withholding taxes pursuant to the Foreign Investment in Real Property Tax Act of 1980, and may be subject to branch profits tax in the hands of a stockholder which is a foreign corporation if it is not entitled to treaty relief or exemption. We are required by applicable Treasury Regulations to withhold 35% of any distribution to a foreign person that could be designated by us as a capital gain dividend; this amount is creditable against the foreign stockholder's Foreign Investment in Real Property Tax Act liability. Backup withholding tax and information reporting will generally not apply to distributions paid to foreign stockholders outside the United States that are treated as (i) dividends to which the 30% or lower treaty rate withholding tax discussed above applies; (ii) capital gains dividends; or (iii) distributions attributable to gain from the sale or exchange by us of U.S. real property interests. Payment of the proceeds of a sale of common stock within the United States or conducted through certain U.S. related financial intermediaries is subject to both backup withholding and information reporting unless the beneficial owner certifies under penalties of perjury that he or she is not a U.S. person (and the payor does not have actual knowledge that the beneficial owner is a U.S. person) or the holder otherwise established an exemption. A foreign stockholder may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the Internal Revenue Service. The federal taxation of foreign persons is a highly complex matter that may be affected by many other considerations. Accordingly, foreign investors should consult their own advisors regarding the income, withholding and estate tax considerations with respect to their investment. BACKUP WITHHOLDING AND INFORMATION REPORTING. Under certain circumstances, a stockholder may be subject to backup withholding at applicable rates on payments made with respect to, or cash proceeds of a sale or exchange of, shares of common stock. Backup withholding will apply only if the holder (i) fails to furnish the person required to withhold with its taxpayer identification number ("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the Internal Revenue Service that it has failed to properly report payments of interest and dividends, or (iv) under certain circumstances, fails to certify, under penalty or perjury, that it has furnished a correct TIN and has not been notified by the Internal Revenue Service that it is subject to backup withholding for failure to report interest and dividend payments. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as corporations and tax-exempt organizations. A stockholder should consult with a tax advisor regarding qualification for exemption from backup withholding, and the procedure for obtaining such exemption. Backup withholding is not an additional tax. Rather, the amount of any backup withholding with respect to payment to a stockholder will be allowed as a credit against such stockholder's United States federal income tax liability and may entitle such stockholder to a refund, provided that the required information is -12-
provided to the Internal Revenue Service. In addition, withholding a portion of capital gain distributions made to stockholders may be required for stockholders who fail to certify their non-foreign status. Recent Legislation and Potential Legislation or Other Actions Affecting Tax Consequences The Tax Relief Extension Act of 1999 included several modifications to the provisions of the Code governing the taxation of real estate investment trusts. Effective for tax years beginning after December 31, 2000, a REIT may not own more than ten percent of the outstanding voting securities of any issuer or more than ten percent of the total value of the outstanding securities of any issuer. Certain types of securities are not subject to these limitations and the limitations do not apply to certain securities owned on or before July 12, 1999. The revised asset limitation test must be satisfied at the end of each calendar quarter. The Company reviewed its investment portfolio for compliance with these new standards, implemented new procedures and restructured as appropriate to enable the Company to continue complying with the asset limitation tests. Prospective stockholders should recognize that the present federal income tax treatment of an investment in us may be modified by legislative, judicial or administrative action at any time and that any such action may affect investments and commitments previously made. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. Revisions in federal tax laws and interpretations of these laws could adversely affect the tax consequences of an investment in us. State, Local and Foreign Taxation We and our stockholders may be subject to state, local, or foreign taxation in various state, local or foreign jurisdictions, including those in which it or they transact business or reside. Such state, local or foreign taxation may differ from the federal income tax treatment described above. Consequently, prospective investors should consult their own tax advisors regarding the effect of state, local and foreign tax laws on an investment in us. -13-
Subsidiaries and Affiliates The Company has formed subsidiaries in connection with its real estate transactions. As of March 21, 2002, the Company's wholly-owned subsidiaries consisted of the following entities: <TABLE> <CAPTION> STATE OF ORGANIZATION DATE OF NAME OF SUBSIDIARY AND TYPE OF ENTITY ORGANIZATION - ------------------ ------------------ ------------ <S> <C> <C> HCRI Pennsylvania Properties, Inc. Pennsylvania corporation November 1, 1993 HCRI Overlook Green, Inc. Pennsylvania corporation July 9, 1996 HCRI Texas Properties, Inc. Delaware corporation December 27, 1996 HCRI Texas Properties, Ltd. Texas limited partnership December 30, 1996 HCRI Friendship, LLC Virginia limited liability company February 21, 1997 HCRI St. Charles, LLC Virginia limited liability company February 21, 1997 HCRI Satyr Hill, LLC Virginia limited liability company November 24, 1997 Health Care REIT International, Inc. Delaware corporation February 11, 1998 HCN Atlantic GP, Inc. Delaware corporation February 20, 1998 HCN Atlantic LP, Inc. Delaware corporation February 20, 1998 HCRI Nevada Properties, Inc. Nevada corporation March 27, 1998 HCRI Southern Investments I, Inc. Delaware corporation June 11, 1998 HCRI Louisiana Properties, L.P. Delaware limited partnership June 11, 1998 HCN BCC Holdings, Inc. Delaware corporation September 25, 1998 HCRI Tennessee Properties, Inc. Delaware corporation September 25, 1998 HCRI Limited Holdings, Inc. Delaware corporation September 25, 1998 Pennsylvania BCC Properties, Inc. Pennsylvania corporation September 25, 1998 HCRI North Carolina Properties, LLC Delaware limited liability company December 10, 1999 HCRI Massachusetts Properties, Inc. Delaware corporation March 17, 2000 HCRI Massachusetts Properties Trust Massachusetts trust March 30, 2000 HCRI Indiana Properties, Inc. Delaware corporation June 15, 2000 HCRI Indiana Properties, LLC Indiana limited liability company June 16, 2000 HCRI Holdings Trust Massachusetts trust September 9, 2000 HCRI Maryland Properties, LLC Maryland limited liability company July 19, 2001 HCRI Massachusetts Properties Trust II Massachusetts trust September 26, 2001 HCRI Beachwood, Inc. Ohio corporation October 11, 2001 HCRI Broadview, Inc. Ohio corporation October 11, 2001 HCRI Westlake, Inc. Ohio corporation October 11, 2001 HCRI Westmoreland, Inc. Delaware corporation October 16, 2001 HCRI Wisconsin Properties, LLC Wisconsin limited liability company December 11, 2001 HCRI North Carolina Properties I, Inc. North Carolina corporation January 1, 2002 HCRI North Carolina Properties II, Inc. North Carolina corporation January 1, 2002 HCRI North Carolina Properties III, Limited Partnership North Carolina limited partnership January 1, 2002 HCRI Kentucky Properties, LLC Kentucky limited liability company January 7, 2002 HCRI Laurel, LLC Maryland limited liability company January 17, 2002 </TABLE> -14-
ITEM 2. PROPERTIES The Company's headquarters are currently located at One SeaGate, Suite 1500, Toledo, Ohio 43604. The following table sets forth certain information regarding the facilities that comprise the Company's investments as of December 31, 2001: <TABLE> <CAPTION> (In thousands) ----------------------------- Number Number of of Beds/ Total Annualized Facility Location Facilities Units Investment(1) Income(2) ----------------- ---------- ----- ------------- --------- <S> <C> <C> <C> <C> SKILLED NURSING FACILITIES: Arizona............................ 1 163 $ 3,693 $ 413 California......................... 1 122 4,778 621 Colorado........................... 1 180 5,716 638 Florida............................ 9 1,058 61,171 7,362 Idaho.............................. 3 393 20,443 2,253 Illinois........................... 2 212 14,049 1,752 Kentucky........................... 1 92 4,001 536 Massachusetts...................... 9 1,169 57,244 6,303 Missouri........................... 1 98 6,770 762 Ohio............................... 5 911 65,444 6,815 Oklahoma........................... 2 575 17,749 1,795 Oregon............................. 1 101 5,018 558 Pennsylvania....................... 4 464 22,495 3,054 Tennessee.......................... 10 1,273 62,765 7,898 Texas.............................. 7 1,122 17,917 2,385 -------------------------------------------------- Total............................. 57 7,933 369,253 43,145 ASSISTED LIVING FACILITIES: Alabama............................ 2 149 $ 10,498 $ 997 Arizona............................ 4 464 31,446 3,585 California......................... 6 341 37,783 3,824 Colorado........................... 1 50 3,890 370 Connecticut........................ 1 62 10,673 967 Florida............................ 18 914 75,956 8,625 Georgia............................ 4 361 35,223 4,133 Illinois........................... 2 321 8,746 82 Indiana............................ 11 540 48,452 6,101 Louisiana.......................... 2 209 17,108 2,038 Maryland........................... 6 432 46,484 5,483 Massachusetts...................... 1 130 10,255 1,210 Minnesota.......................... 1 78 6,170 724 Montana............................ 2 104 9,314 1,157 Nevada............................. 3 294 26,893 3,295 New Jersey......................... 3 450 31,847 3,914 New Mexico......................... 1 77 2,448 233 New York........................... 7 775 62,888 7,084 North Carolina..................... 9 581 57,697 6,956 Ohio............................... 8 664 41,844 5,222 Oklahoma........................... 17 586 24,022 3,137 Oregon............................. 2 70 9,762 1,149 Pennsylvania....................... 4 237 19,924 2,482 South Carolina..................... 5 230 19,981 2,358 Tennessee.......................... 4 194 13,088 1,565 Texas.............................. 22 1,333 83,325 9,685 Utah............................... 1 57 8,252 984 Virginia........................... 1 64 2,208 243 Washington......................... 1 46 13,682 1,468 Wisconsin.......................... 1 28 4,427 559 -------------------------------------------------- Total............................. 150 9,841 774,285 89,630 SPECIALTY CARE FACILITIES: California......................... 1 254 18,797 2,412 Florida............................ 2 294 8,488 792 Massachusetts...................... 4 757 61,027 5,069 -------------------------------------------------- Total............................. 7 1,305 88,312 8,273 ---------- --------- -------------- -------------- TOTAL ALL FACILITIES:............. 214 19,079 $1,231,850 $141,048 === ====== ========== ======== </TABLE> - -------------------------- (1) Investments include real estate investments and credit enhancements which amounted to $1,220,425,000 and $11,425,000, respectively. (2) Reflects contract rate of annual base rent or interest recognized. -15-
ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following table sets forth, for the periods indicated, the high and low prices of the Company's Common Stock on the New York Stock Exchange, as reported on the Composite Tape and dividends paid per share. There were 4,691 stockholders of record as of December 31, 2001. <TABLE> <CAPTION> SALES PRICE ----------- DIVIDENDS HIGH LOW PAID ---- --- ---- <S> <C> <C> <C> 2001 First Quarter....................................... $21.16 $16.06 $.585 Second Quarter...................................... 24.80 20.87 .585 Third Quarter....................................... 26.25 22.50 .585 Fourth Quarter...................................... 26.40 24.25 .585 2000 First Quarter....................................... $17.44 $14.75 $.580 Second Quarter...................................... 16.75 13.81 .585 Third Quarter ...................................... 19.25 16.19 .585 Fourth Quarter...................................... 18.25 15.94 .585 </TABLE> -16-
ITEM 6. SELECTED FINANCIAL DATA The following selected financial data for the five years ended December 31, 2001, are derived from the audited consolidated financial statements of the Company. <TABLE> <CAPTION> Year ended December 31, ----------------------------------------- (In thousands, except per share data) 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> OPERATING DATA Revenues(1) $ 133,870 $ 136,954 $ 129,307 $ 97,992 $ 73,308 Expenses: Interest expense 32,028 34,622 26,916 18,030 15,365 Provision for depreciation 30,227 22,706 17,885 10,254 5,287 General and administrative and other expenses(2) 10,853 9,570 8,868 7,399 6,178 Loss on investment 2,000 ----------- ----------- ----------- ----------- ----------- Total expenses 73,108 68,898 53,669 35,683 26,830 ----------- ----------- ----------- ----------- ----------- Income before extraordinary item 60,762 68,056 75,638 62,309 46,478 Extraordinary loss on extinguishment of debt 213 ----------- ----------- ----------- ----------- ----------- Net income 60,549 68,056 75,638 62,309 46,478 Preferred stock dividends 13,505 13,490 12,814 4,160 ----------- ----------- ----------- ----------- ----------- Net income available to common stockholders $ 47,044 $ 54,566 $ 62,824 $ 58,149 $ 46,478 =========== =========== =========== =========== =========== OTHER DATA Average number of common shares outstanding: Basic 30,534 28,418 28,128 25,579 21,594 Diluted 31,027 28,643 28,384 25,954 21,929 PER SHARE DATA Basic: Income before extraordinary item $ 1.55 $ 1.92 $ 2.23 $ 2.27 $ 2.15 Extraordinary loss on extinguishment of debt (.01) Income available to common stockholders 1.54 1.92 2.23 2.27 2.15 Diluted: Income before extraordinary item 1.52 1.91 2.21 2.24 2.12 Extraordinary loss on extinguishment of debt Income available to common stockholders 1.52 1.91 2.21 2.24 2.12 Cash distributions per common share 2.34 2.335 2.27 2.19 2.11 </TABLE> <TABLE> <CAPTION> December 31, ----------------------------------------- (In thousands) 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> BALANCE SHEET DATA Net real estate investments $ 1,213,564 $ 1,121,419 $ 1,241,722 $ 1,047,511 $ 716,193 Total assets 1,269,843 1,156,904 1,271,171 1,073,424 734,327 Total debt 491,216 439,752 538,842 418,979 249,070 Total liabilities 511,973 458,297 564,175 439,665 264,403 Total stockholders' equity 757,870 698,607 706,996 633,759 469,924 </TABLE> - -------------------------- (1) Revenues include net gains and losses from sales of properties. (2) General and administrative and other expenses include loan expense, provision for loan losses, and other operating expenses. -17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES At December 31, 2001, the Company's net real estate investments totaled approximately $1,213,564,000, that included 150 assisted living facilities, 57 skilled nursing facilities and seven specialty care facilities. Depending upon the availability and cost of external capital, the Company anticipates making additional investments in health care related facilities. New investments are funded from temporary borrowings under the Company's line of credit arrangements, internally generated cash and the proceeds derived from asset sales. Permanent financing for future investments, which replaces funds drawn under the line of credit arrangements, is expected to be provided through a combination of private and public offerings of debt and equity securities, and the assumption of secured debt. The Company believes its liquidity and various sources of available capital are sufficient to fund operations, meet debt service and dividend requirements, and finance future investments. During the previous two years, the underperformance of publicly owned skilled nursing and assisted living companies, combined with the much publicized shift in equity funds flow from income-oriented investments to high-growth opportunities, impaired the stock valuations in the health care REIT sector. In 2001, certain events took place that improved the access to capital for the health care REIT sector. First, several of the publicly owned skilled nursing companies that had previously filed for bankruptcy protection, settled their claims and emerged from bankruptcy. Assisted living construction declined significantly, allowing more of the existing projects to improve their occupancy and stabilize operations. Finally, the broad stock market decline and the drop in interest rates generated renewed interest in income-oriented investments such as REITs. As a result of these factors, the Company was able to access the capital markets during 2001. In June 2001, the Company issued 3,450,000 shares of common stock, generating net proceeds of $74,184,000. In August 2001, the Company issued $175 million of senior notes, due in 2007 at an effective yield of 7.78%. During 2001, the Company invested $181,420,000 in real property, provided permanent mortgage and loan financings of $18,639,000, made construction advances of $17,075,000 and funded $4,084,000 of subdebt investments. As of December 31, 2001, the Company had approximately $35,000,000 in unfunded commitments. As of December 31, 2001, the Company had stockholders' equity of $757,870,000 and a total outstanding debt balance of $491,216,000, which represents a debt to total capitalization ratio of 0.39 to 1.0. In January 2001, the Company extended its primary revolving line of credit through March 31, 2003. Under the terms of the extension, the total commitment was reduced from $175 million to $150 million and the effective interest rate was adjusted to the lender's prime rate or LIBOR plus 1.50%. As of December 31, 2001, the Company had no borrowings outstanding under the Company's revolving lines of credit. The Company also had a $25 million unsecured line of credit with no borrowings at December 31, 2001, and a $60 million secured line of credit, with $33 million outstanding at December 31, 2001. In February 2002, the Company issued 906,125 shares of common stock, generating net proceeds of $23,619,000. As of February 28, 2002, the Company had an effective shelf registration on file with the Securities and Exchange Commission under which the Company may issue up to $652,000,000 of securities including debt securities, common and preferred stock and warrants. Depending upon market conditions, the Company anticipates issuing securities under its shelf registration to invest in additional health care facilities and to repay borrowings under the Company's line of credit arrangements. The following table summarizes our payments under contractual obligations as of December 31, 2001: <TABLE> <CAPTION> Payments Due by Period ($000s) ------------------------------------------------------------------ Total 2002 2003-2004 2005-2006 After 2006 ----- ---- --------- --------- ---------- <S> <C> <C> <C> <C> <C> Senior notes $412,250 $12,250 $75,000 $50,000 $275,000 Mortgages 45,966 368 875 1,258 43,465 -------- ------- ------- ------- -------- Total contractual obligations $458,216 $12,618 $75,875 $51,258 $318,465 ======== ======= ======= ======= ======== </TABLE> The following table summarizes our other commercial commitments as of December 31, 2001: <TABLE> <CAPTION> Amount of Commitment Expiration Per Period ----------------------------------------------------------------- Total 2002 2003-2004 2005-2006 After 2006 ----- ---- --------- --------- ---------- <S> <C> <C> <C> <C> <C> Unsecured lines of credit $175,000 $25,000 $150,000 $ $ Secured lines of credit 60,000 60,000 Credit enhancements 11,425 3,500 7,925 --------- ------- --------- -------- -------- Total commercial commitments $246,425 $28,500 $210,000 $ 0 $ 7,925 ======== ======= ========= ======== ======== </TABLE> Credit enhancements include letters of credit provided by the Company and agreements to purchase facilities in the event that the present owners default upon their obligations. -18-
RESULTS OF OPERATIONS DECEMBER 31, 2001 VS. DECEMBER 31, 2000 Revenues were comprised of the following: Year ended Change --------------------------- --------------- Dec. 31, 2001 Dec. 31, 2000 $ % ------------- ------------- --------------- (in thousands) Rental income $ 98,988 $ 88,312 $ 10,676 12% Interest income 31,294 41,064 (9,770) -24% Commitment fees and other income 3,848 5,837 (1,989) -34% Prepayment fees 990 57 933 1637% -------- -------- --------------- Totals $135,120 $135,270 $ (150) 0% ======== ======== =============== The Company generated increased rental income as a result of the completion of real property construction projects for which the Company began receiving rent and the purchase of properties previously financed by the Company. This offsets a reduction in interest income due to the repayment of mortgage loans and the purchase of properties previously financed by the Company. The reduction in commitment fees and other income is due primarily to the significant reduction in construction and investing activity. During 2001, the Company received payoffs on mortgages that had significant prepayment fee requirements, generating the large increase over the prior year. Expenses were comprised of the following: Year ended Change ---------------------------- ----------------- Dec. 31, 2001 Dec. 31, 2000 $ % ------------- ------------- ----------------- (in thousands) Interest expense $ 32,028 $ 34,622 $ (2,594) -7% Provision for depreciation 30,227 22,706 7,521 33% Loss on investment 2,000 (2,000) 100% General and administrative expenses 8,078 7,405 673 9% Loan expense 1,775 1,165 610 52% Provision for losses 1,000 1,000 0% -------- -------- --------------- Totals $ 73,108 $ 68,898 $ 4,210 6% ======== ======== =============== The decrease in interest expense from 2000 to 2001 was primarily due to lower average borrowings during the year, offset by a reduction in the amount of capitalized interest offsetting interest expense. The Company capitalizes certain interest costs associated with funds used to finance the construction of properties owned directly by the Company. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest that approximates the Company's cost of financing. The Company's interest expense is reduced by the amount capitalized. Capitalized interest for the year ended December 31, 2001, totaled $841,000, as compared with $3,079,000 for the same period in 2000. The provision for depreciation increased primarily as a result of additional investment in properties owned directly by the Company. In 2000, the Company restructured its investments with Summerville Health Care. As part of the restructuring agreement, Summerville agreed to permit the Company to re-lease 10 of its 11 facilities to new operators and repaid substantially all of the Company's subdebt investment. As part of Summerville's recapitalization, the Company's $2,000,000 non-yielding preferred stock investment was substantially diluted. Accordingly, the Company wrote off its investment in 2000, resulting in a $2,000,000 charge. -19-
Other items: Year ended Change --------------------------- ----------------- Dec. 31, 2001 Dec. 31, 2000 $ % ------------- ------------- ----------------- (in thousands) Gain (loss) on sales of properties $ (1,250) $ 1,684 $ (2,934) -174% Loss on extinguishment of debt (213) (213) n/a Preferred dividends 13,505 13,490 15 0% As a result of the various factors mentioned above, net income available to common stockholders was $47,044,000, or $1.52 per diluted share, for 2001 as compared with $54,566,000, or $1.91 per diluted share, for 2000. RESULTS OF OPERATIONS DECEMBER 31, 2000 VS. DECEMBER 31, 1999 Revenues were comprised of the following: Year ended Change --------------------------- ----------------- Dec. 31, 2000 Dec. 31, 1999 $ % ------------- ------------- ----------------- (in thousands) Rental income $ 88,312 $ 72,700 $ 15,612 21% Interest income 41,064 48,076 (7,012) -15% Commitment fees and other income 5,837 6,263 (426) -7% Prepayment fees 57 1,565 (1,508) -96% -------- -------- ---------------- Totals $135,270 $128,604 $ 6,666 5% ======== ======== ================ The Company generated increased rental income as a result of the completion of real property construction projects for which the Company began receiving rent and the purchase of properties previously financed by the Company. This offsets a reduction in interest income due to the repayment of mortgage loans and the purchase of properties previously financed by the Company. Expenses were comprised of the following: Year ended Change --------------------------- ----------------- Dec. 31, 2000 Dec. 31, 1999 $ % ------------- ------------- ----------------- (in thousands) Interest expense $ 34,622 $ 26,916 $ 7,706 29% Provision for depreciation 22,706 17,885 4,821 27% Loss on investment 2,000 2,000 n/a General and administrative expenses 7,405 7,359 46 1% Loan expense 1,165 909 256 28% Provision for losses 1,000 600 400 67% -------- -------- ---------------- Totals $ 68,898 $ 53,669 $ 15,229 28% ======== ======== ================ The increase in interest expense from 1999 to 2000 was due to higher average interest rates on the Company's line of credit and secured debt and a reduction in the amount of capitalized interest offsetting interest expense. The Company capitalizes certain interest costs associated with funds used to finance the construction of properties owned directly by the Company. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest which approximates the Company's cost of financing. The Company's interest expense is reduced by the amount capitalized. Capitalized interest for the year ended December 31, 2000, totaled $3,079,000, as compared with $8,578,000 for the same period in 1999. The provision for depreciation increased as a result of additional investment in properties owned directly by the Company. In 2000, the Company restructured its investments with Summerville Health Care. As part of the restructuring agreement, Summerville agreed to permit the Company to re-lease 10 of its 11 facilities to new operators and repaid substantially all of the Company's subdebt investment. As part of Summerville's recapitalization, the Company's $2,000,000 non-yielding preferred stock investment was substantially diluted. Accordingly, the Company wrote off its investment in 2000, resulting in a $2,000,000 charge. -20-
Other items: Year ended Change --------------------------- ----------------- Dec. 31, 2000 Dec. 31, 1999 $ % ------------- ------------- ----------------- (in thousands) Gain on sales of properties $ 1,684 $ 703 $ 981 140% Preferred dividends 13,490 12,814 676 5% As a result of the various factors mentioned above, net income available to common stockholders was $54,566,000, or $1.91 per diluted share, for 2000 as compared with $62,824,000, or $2.21 per diluted share, for 1999. CRITICAL ACCOUNTING POLICIES The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the U.S., which require the Company to make estimates and assumptions (see Note 1 to the consolidated financial statements). The Company believes that of its significant accounting policies, the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. IMPAIRMENT OF LONG-LIVED ASSETS The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if there are indicators of impairment. These indicators may include anticipated operating losses at the property level, the tenant's inability to make rent payments, and changes in the market that may permanently reduce the value of the property. If indicators of impairment exist, then the undiscounted future cash flows from the most likely use of the property are compared to the current net book value. If the undiscounted cash flows are less than the net book value, an impairment loss would be recognized to the extent that the net book value exceeds the current fair market value. This analysis requires the Company to determine if indicators of impairment exist and to estimate the most likely stream of cash flows to be generated from the property during the period the property is expected to be held. If the projections or assumptions change in the future, the Company may be required to record an impairment charge and reduce the net book value of the property owned. ALLOWANCE FOR LOAN LOSSES The Company regularly evaluates the collectibility of its loans receivables based on a combination of factors. These factors include current economic conditions, historical loan charge-offs, financial strength of the borrower and guarantors, and value of the underlying property. If such factors indicate that there is greater risk of loan charge-offs, additional allowances may be required. POTENTIAL RISKS FROM BANKRUPTCIES The Company is exposed to the risk that its operators may not be able to meet the rent, or principal and interest payments due the Company, which may result in an operator bankruptcy or insolvency. Although the Company's operating lease agreements provide the Company the right to evict an operator, demand immediate payment of rent and exercise other remedies, and the Company's mortgage loans provide the Company the right to terminate an investment, demand immediate payment of principal and unpaid interest and foreclose on the collateral, the bankruptcy laws afford certain rights to a party that has filed for bankruptcy or reorganization. An operator in bankruptcy may be able to restrict or delay the Company's ability to collect unpaid rent in the case of a lease or to receive unpaid principal or interest in the case of a mortgage loan. The receipt of liquidation proceeds or the replacement of an operator that has defaulted on its lease or loan could be delayed by the approval process of any federal, state or local agency necessary for the transfer of the facility or the replacement of the operator licensed to manage the facility. In addition, the Company may be required to fund certain expenses (e.g., real estate taxes and maintenance) to retain control of a facility or to transition it to a new operator. In some instances, the Company has terminated its lease with an operator and relet the facility to another operator. In some of those situations, the Company provided working capital loans and limited indemnification of the new operator. If the Company cannot transition the facility to a new operator, it may take possession of a facility, which may expose the Company to successor liabilities. Should such events occur, the Company's revenue and operating cash flow may be adversely affected. IMPACT OF INFLATION During the past three years, inflation has not significantly affected the earnings of the Company because of the moderate inflation rate. Additionally, earnings of the Company are primarily long-term investments with fixed interest rates. These investments are mainly financed with a combination of equity, senior notes and borrowings under the revolving lines of credit. During inflationary periods, that generally are accompanied by rising interest rates, the Company's ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. Presuming the current inflation rate remains moderate and long-term interest rates do not increase significantly, the Company believes that inflation will not impact the availability of equity and debt financing. -21-
OTHER INFORMATION We have made and incorporated by reference statements in this Form 10-K that constitute "forward-looking statements" as that term is defined in the federal securities laws. These forward-looking statements concern: - - The possible expansion of our portfolio; - - The performance of our operators and properties; - - Our ability to obtain new viable tenants for properties which we take back from financially troubled tenants, if any; - - Our ability to make distributions; - - Our policies and plans regarding investments, financings and other matters; - - Our tax status as a real estate investment trust; - - Our ability to appropriately balance the use of debt and equity; and - - Our ability to access capital markets or other sources of funds. When we use words such as "believes," "expects," "anticipates," "estimates" or similar expressions, we are making forward-looking statements. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Our expected results may not be achieved and actual results may differ materially from our expectations. This may be a result of various factors, including: - - The status of the economy; - - The status of capital markets, including prevailing interest rates; - - Compliance with and changes to regulations and payment policies within the health care industry; - - Changes in financing terms; - - Competition within the health care and senior housing industries; and - - Changes in federal, state and local legislation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various market risks, including the potential loss arising from adverse changes in interest rates. The Company seeks to mitigate the effects of fluctuations in interest rates by matching the term of new investments with new long-term fixed rate borrowings to the extent possible. The following section is presented to provide a discussion of the risks associated with potential fluctuations in interest rates. The Company historically borrows on its revolving lines of credit to make acquisitions of, loans to, or to construct health care facilities. Then, as market conditions dictate, the Company will issue equity or long-term fixed rate debt to repay the borrowings under the revolving lines of credit. A change in interest rates will not affect the interest expense associated with our fixed rate debt. Interest rate changes, however, will affect the fair value of such debt. A 1% increase in interest rates would result in a decrease in fair value of the Company's Senior Unsecured Notes by approximately $16 million at December 31, 2001. Changes in the interest rate environment upon maturity of this fixed rate debt could have an effect on the future cash flows and earnings of the Company, depending on whether the debt is replaced with other fixed rate debt, with variable rate debt, with equity, or by the sale of assets. A change in interest rates will not affect the fair value of the Company's variable rate debt, including its unsecured and secured revolving credit arrangements. At December 31, 2001, the Company did not have any borrowings on its unsecured revolving credit arrangements. At that time, there was $33 million outstanding under the secured revolving credit arrangement at the interest rate of 7%, which is the minimum interest rate for borrowings under this agreement. As such, a 1% change in interest rates would have no effect on the Company's annual interest expense assuming no change in the outstanding balances at year-end. However, as an example, if borrowings under the unsecured credit arrangements totaled $50 million, a 1% increase in interest rates would result in increased annual interest expense of $500,000. The Company is subject to risks associated with debt financing, including the risk that existing indebtedness may not be refinanced or that the terms of such refinancing may not be as favorable as the terms of current indebtedness. The majority of the Company's borrowings were completed pursuant to indentures or contractual agreements that limit the amount of indebtedness the Company may incur. Accordingly, in the event that the Company is unable to raise additional equity or borrow money because of these limitations, the Company's ability to acquire additional properties may be limited. The Company may or may not elect to use financial derivative instruments to hedge variable interest rate exposure. Such decisions are principally based on the Company's policy to match its variable rate investments with comparable borrowings, but is also based on the general trend in interest rates at the applicable dates and the Company's perception of the future volatility of interest rates. -22-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA REPORT OF INDEPENDENT AUDITORS Stockholders and Directors Health Care REIT, Inc. We have audited the accompanying consolidated balance sheets of Health Care REIT, Inc. as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. Our audits also included the financial statement schedules listed in the Index at Item 14 (a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Health Care REIT, Inc. at December 31, 2001 and 2000, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. /S/ ERNST & YOUNG LLP Toledo, Ohio January 22, 2002 -23-
HEALTH CARE REIT, INC. CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> DECEMBER 31 2001 2000 ---------------------------- ASSETS (IN THOUSANDS) <S> <C> <C> Real estate investments: Real property owned Land $ 89,601 $ 74,319 Buildings & improvements 947,794 770,660 Construction in progress 11,976 ----------- ----------- 1,037,395 856,955 Less accumulated depreciation (80,544) (52,968) ----------- ----------- Total real property owned 956,851 803,987 Loans receivable Real property loans 240,126 301,321 Subdebt investments 23,448 21,972 ----------- ----------- 263,574 323,293 Less allowance for loan losses (6,861) (5,861) ----------- ----------- Net real estate investments 1,213,564 1,121,419 Other assets: Equity investments 6,498 5,450 Deferred loan expenses 7,190 2,939 Cash and cash equivalents 9,826 2,844 Receivables and other assets 32,765 24,252 ----------- ----------- 56,279 35,485 ----------- ----------- Total assets $ 1,269,843 $ 1,156,904 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Senior unsecured notes $ 412,250 $ 255,000 Borrowings under line of credit arrangements 119,900 Secured debt 78,966 64,852 Accrued expenses and other liabilities 20,757 18,545 ----------- ----------- Total liabilities 511,973 458,297 Stockholders' equity: Preferred Stock, $1.00 par value: Authorized - 10,000,000 shares Issued and outstanding - 6,000,000 shares in 2001 and 2000 at liquidation preference 150,000 150,000 Common Stock, $1.00 par value: Authorized - 75,000,000 shares Issued and outstanding - 32,739,826 shares in 2001 and 28,806,151 shares in 2000 32,740 28,806 Capital in excess of par value 608,942 528,138 Cumulative net income 512,837 452,288 Cumulative dividends (540,946) (455,676) Accumulated other comprehensive loss (923) (744) Unamortized restricted stock (4,780) (4,205) ----------- ----------- Total stockholders' equity $ 757,870 $ 698,607 ----------- ----------- Total liabilities and stockholders' equity $ 1,269,843 $ 1,156,904 =========== =========== </TABLE> See accompanying notes -24-
HEALTH CARE REIT, INC. CONSOLIDATED STATEMENTS OF INCOME <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 -------------------------------------- 2001 2000 1999 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> Revenues: Rental income $ 98,988 $ 88,312 $ 72,700 Interest income 31,294 41,064 48,076 Commitment fees and other income 3,848 5,837 6,263 Prepayment fees 990 57 1,565 --------- --------- --------- 135,120 135,270 128,604 Expenses: Interest expense 32,028 34,622 26,916 Provision for depreciation 30,227 22,706 17,885 Loss on investment 2,000 General and administrative 8,078 7,405 7,359 Loan expense 1,775 1,165 909 Provision for loan losses 1,000 1,000 600 --------- --------- --------- 73,108 68,898 53,669 --------- --------- --------- Income before gain/(loss) on sales of properties and loss on extraordinary item 62,012 66,372 74,935 Net gain/(loss) on sales of properties (1,250) 1,684 703 --------- --------- --------- Income before extraordinary item 60,762 68,056 75,638 Extraordinary loss on extinguishment of debt (213) --------- --------- --------- Net income 60,549 68,056 75,638 Preferred stock dividends 13,505 13,490 12,814 --------- --------- --------- Net income available to common stockholders $ 47,044 $ 54,566 $ 62,824 ========= ========= ========= Average number of common shares outstanding: Basic 30,534 28,418 28,128 Diluted 31,027 28,643 28,384 Earnings per share: Basic: Income before extraordinary item $ 1.55 $ 1.92 $ 2.23 Extraordinary item (.01) Income available to common stockholders $ 1.54 $ 1.92 $ 2.23 Diluted: Income before extraordinary item $ 1.52 $ 1.91 $ 2.21 Extraordinary item Income available to common stockholders $ 1.52 $ 1.91 $ 2.21 </TABLE> See accompanying notes -25-
HEALTH CARE REIT, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY <TABLE> <CAPTION> CAPITAL IN PREFERRED COMMON EXCESS OF CUMULATIVE STOCK STOCK PAR VALUE NET INCOME ------------------------------------------------------------------ (In thousands, except per share data) <S> <C> <C> <C> <C> Balances at January 1, 1999 $ 75,000 $ 28,240 $520,692 $ 308,594 Comprehensive income: Net income 75,638 Other comprehensive income: Unrealized loss on marketable securities Foreign currency translation adjustment Total comprehensive income Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans 292 5,967 Amortization of restricted stock grants Net proceeds from sale of preferred stock 75,000 (2,455) Cash dividends: Common stock -- $2.27 per share Preferred stock, Series B -- $2.22 per share Preferred stock, Series C -- $2.19 per share ---------- --------- ----------- ----------- Balances at December 31, 1999 150,000 28,532 524,204 384,232 Comprehensive income: Net income 68,056 Other comprehensive income: Unrealized loss on marketable securities Foreign currency translation adjustment Total comprehensive income Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures 274 3,934 Amortization of restricted stock grants Cash dividends: Common stock -- $2.335 per share Preferred stock, Series B--$2.22 per share Preferred stock, Series C--$2.27 per share ---------- --------- ----------- ----------- Balances at December 31, 2000 150,000 28,806 528,138 452,288 Comprehensive income: Net income 60,549 Other comprehensive income: Unrealized loss on marketable securities Foreign currency translation adjustment Total comprehensive income Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures 484 10,070 Net proceeds from sale of common stock 3,450 70,734 Amortization of restricted stock grants Cash dividends: Common stock -- $2.34 per share Preferred stock, Series B--$2.22 per share Preferred stock, Series C--$2.28 per share ---------- --------- ---------- ----------- BALANCES AT DECEMBER 31, 2001 $ 150,000 $ 32,740 $ 608,942 $ 512,837 ========== ========= ========== =========== <CAPTION> ACCUMULATED OTHER UNAMORTIZED CUMULATIVE COMPREHENSIVE RESTRICTED DIVIDENDS LOSS STOCK TOTAL ----------------------------------------------------------------------- (In thousands, except per share data) <S> <C> <C> <C> <C> Balances at January 1, 1999 $ (298,160) $ 3,982 $ (4,589) $ 633,759 Comprehensive income: Net income 75,638 Other comprehensive income: Unrealized loss on marketable securities (3,242) (3,242) Foreign currency translation adjustment (147) (147) ------------ Total comprehensive income 72,249 ----------- Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans (1,707) 4,552 Amortization of restricted stock grants 1,080 1,080 Net proceeds from sale of preferred stock 72,545 Cash dividends: Common stock -- $2.27 per share (64,375) (64,375) Preferred stock, Series B -- $2.22 per share (6,656) (6,656) Preferred stock, Series C -- $2.19 per share (6,158) (6,158) ------------- -------- ---------- ------------ Balances at December 31, 1999 (375,349) 593 (5,216) 706,996 Comprehensive income: Net income 68,056 Other comprehensive income: Unrealized loss on marketable securities (733) (733) Foreign currency translation adjustment (604) (604) ------------ Total comprehensive income 66,719 ----------- Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures (79) 4,129 Amortization of restricted stock grants 1,090 1,090 Cash dividends: Common stock -- $2.335 per share (66,837) (66,837) Preferred stock, Series B--$2.22 per share (6,656) (6,656) Preferred stock, Series C--$2.27 per share (6,834) (6,834) ------------- --------- ---------- ------------ Balances at December 31, 2000 (455,676) (744) (4,205) 698,607 Comprehensive income: Net income 60,549 Other comprehensive income: Unrealized loss on marketable securities (52) (52) Foreign currency translation adjustment (127) (127) ------------ Total comprehensive income 60,370 ----------- Proceeds from issuance of common stock from dividend reinvestment and stock incentive plans, net of forfeitures (1,739) 8,815 Net proceeds from sale of common stock 74,184 Amortization of restricted stock grants 1,164 1,164 Cash dividends: Common stock -- $2.34 per share (71,765) (71,765) Preferred stock, Series B--$2.22 per share (6,656) (6,656) Preferred stock, Series C--$2.28 per share (6,849) (6,849) ------------- --------- ---------- ------------ BALANCES AT DECEMBER 31, 2001 $ (540,946) $ (923) $ (4,780) $ 757,870 ============= ========= ========== =========== </TABLE> See accompanying notes -26-
HEALTH CARE REIT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 2001 2000 1999 ---------------------------------------------------- (IN THOUSANDS) <S> <C> <C> <C> OPERATING ACTIVITIES Net income $ 60,549 $ 68,056 $ 75,638 Adjustments to reconcile net income to net cash provided from operating activities: Provision for depreciation 30,464 22,961 18,106 Amortization 2,977 2,255 1,998 Provision for losses 1,000 1,000 600 Loss on investment 2,000 Commitment fees earned greater than cash received (1,039) (1,960) (399) Rental income in excess of cash received (6,614) (6,732) (6,692) Equity in earnings of affiliated companies (332) (318) 378 (Gain) loss on sales of properties 1,250 (1,684) (703) Increase (decrease) in accrued expenses and other liabilities 3,249 (4,827) 5,045 Decrease (increase) in receivables and other assets (2,822) 264 1,394 ------------ --------- -------- Net cash provided from operating activities 88,682 81,015 95,365 INVESTING ACTIVITIES Investment in real property (147,081) (46,449) (215,491) Investment in loans receivable (48,284) (34,631) (56,089) Other investments, net of payments (913) (1,828) (2,024) Principal collected on loans 94,337 70,567 42,731 Proceeds from sale of properties 22,579 108,866 18,815 Other (262) (742) (379) ------------ --------- -------- Net cash provided by (used in) investing activities (79,624) 95,783 (212,437) FINANCING ACTIVITIES Net increase (decrease) under line of credit arrangements (119,900) (57,600) 5,950 Proceeds from issuance of senior notes and secured debt 175,000 114,000 Principal payments on senior notes and secured debt (48,840) (41,491) (87) Net proceeds from the issuance of Common Stock 82,999 4,129 4,552 Net proceeds from the issuance of Preferred Stock 72,545 Increase in deferred loan expense (6,065) (794) (1,839) Cash distributions to stockholders (85,270) (80,327) (77,189) ------------ --------- --------- Net cash provided from (used by) financing activities (2,076) (176,083) 117,932 ------------ --------- -------- Increase in cash and cash equivalents 6,982 715 860 Cash and cash equivalents at beginning of year 2,844 2,129 1,269 ------------ --------- -------- Cash and cash equivalents at end of year $ 9,826 $ 2,844 $ 2,129 ============ ========= ======== Supplemental Cash Flow Information-interest paid $ 29,014 $ 39,638 $ 32,826 ============ ========= ======== </TABLE> See accompanying notes -27-
Health Care REIT, Inc. Notes to Consolidated Financial Statements 1. ACCOUNTING POLICIES AND RELATED MATTERS INDUSTRY The Company is a self-administered real estate investment trust that invests primarily in long-term care facilities, which include skilled nursing and assisted living facilities. The Company also invests in specialty care facilities. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after the elimination of all significant intercompany accounts and transactions. USE OF ESTIMATES The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. LOANS RECEIVABLE Loans receivable consist of long-term mortgage loans, construction-period loans maturing in two years or less, working capital loans and subdebt investments. Interest income on loans is recognized as earned based upon the principal amount outstanding. The mortgage and construction loans are primarily collateralized by a first mortgage on or assignment of partnership interest in the related facilities, which consist of skilled nursing, assisted living and specialty care facilities. The working capital loans are generally secured by second mortgages or interests in receivables. Subdebt investments represent debt instruments to operators of facilities that have been financed by the Company. These obligations are generally secured by the operator's leasehold rights and corporate guaranties. REAL PROPERTY OWNED Substantially all of the properties owned by the Company are leased under operating leases and are recorded at cost. These properties are depreciated on a straight-line basis over their estimated useful lives which range from fifteen to forty years for buildings and five to twelve years for fixtures. The net book value of long-lived assets is reviewed quarterly on a property by property basis to determine if facts and circumstances suggest that the assets may be impaired or that the depreciable life may need to be changed. The Company considers external factors relating to each asset. If these external factors and the projected undiscounted cash flows of the asset over the remaining amortization period indicate that the asset will not be recoverable, the carrying value will be adjusted to the estimated fair value. The leases generally extend for a minimum 10-year period and provide for payment of all taxes, insurance and maintenance by the lessees. In general, operating lease income includes base rent payments plus fixed annual rent increases, which are recognized on a straight-line basis over the minimum lease period. This income is greater than the amount of cash received during the first half of the lease term. CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST The Company capitalizes interest costs associated with funds used to finance the construction of properties owned directly by the Company. The amount capitalized is based upon the borrowings outstanding during the construction period using the rate of interest which approximates the Company's cost of financing. The Company capitalized interest costs of $841,000, $3,079,000, and $8,578,000, during 2001, 2000 and 1999, respectively, related to construction of real property owned by the Company. The Company's interest expense reflected in the statement of income has been reduced by the amounts capitalized. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level believed adequate to absorb potential losses in the Company's loans receivable. The determination of the allowance is based on a quarterly evaluation of these loans, including general economic conditions and estimated collectibility of loan payments. -28-
1. ACCOUNTING POLICIES AND RELATED MATTERS (CONTINUED) DEFERRED LOAN EXPENSES Deferred loan expenses are costs incurred by the Company in connection with the issuance of short-term and long-term debt. The Company amortizes these costs over the term of the debt using the straight-line method, which approximates the interest yield method. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of all highly liquid investments with an original maturity of three months or less. EQUITY INVESTMENTS Management determines the appropriate classification of an equity investment at the time of acquisition and reevaluates such designation as of each balance sheet date. Included in equity investments are the common stock of a corporation, valued at historical cost, and ownership representing a 31% interest in Atlantic Healthcare Finance L.P., a property investment group that specializes in the financing, through sale and leaseback transactions, of nursing and care homes located in the United Kingdom. The ownership interest is accounted for under the equity method. Marketable securities available for sale are stated at market value with unrealized gains and losses reported in a separate component of stockholders' equity. Marketable securities reflect the market value of the common stock of two publicly owned corporations, which were obtained by the Company at no cost. COMMITMENT FEES Commitment fees are earned by the Company for its agreement to provide direct and standby financing to, and credit enhancement for, owners and operators of health care facilities. The Company amortizes commitment fees over the initial fixed term of the lease, the mortgage or the construction period related to such investments. FEDERAL INCOME TAX No provision has been made for federal income taxes since the Company has elected to be treated as a real estate investment trust under the applicable provisions of the Internal Revenue Code, and the Company believes that it has met the requirements for qualification as such for each taxable year. See Note 10. NET INCOME PER SHARE Basic earnings per share is computed by dividing income available to common stockholders by the weighted-average number of shares for the period adjusted for non-vested shares of restricted stock. The computation of diluted earnings per share is similar to basic earnings per share, except that the number of shares is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. COMPREHENSIVE INCOME Comprehensive income includes unrealized gains or losses on the Company's marketable securities ($78,000 and $130,000 at December 31, 2001 and 2000, respectively) and foreign currency translation adjustments (($1,001,000) and ($874,000) at December 31, 2001 and 2000, respectively). These items are included as components of stockholders' equity. NEW ACCOUNTING STANDARD In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, that the Company is required to adopt beginning January 1, 2002 with transition provisions for certain matters. The new rules on asset impairment supersede Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (FAS 121), and provide a single accounting model for long-lived assets to be disposed of. The Company does not expect the adoption of this statement to have a material impact on the consolidated financial statements. -29-
2. LOANS RECEIVABLE The following is a summary of loans receivable (in thousands): <TABLE> <CAPTION> DECEMBER 31 2001 2000 --------------------------------------------- <S> <C> <C> Mortgage loans $ 211,722 $ 275,312 Construction loans 4,052 Working capital 27,583 20,720 Mortgage loans to related parties 821 1,237 Subdebt investments 23,448 21,972 ------------------ ------------------ TOTALS $ 263,574 $ 323,293 ================== ================== </TABLE> Loans to related parties (an entity whose ownership includes one Company director) included above are at rates comparable to other third-party borrowers equal to or greater than the Company's net interest cost on borrowings to support such loans. The amount of interest income and commitment fees from related parties amounted to $108,000, $152,000, and $914,000 for 2001, 2000 and 1999, respectively. The following is a summary of mortgage loans at December 31, 2001 (in thousands): <TABLE> <CAPTION> Final Number Principal Payment of Amount at Carrying Due Loans Payment Terms Inception Amount - ---------- ---------- ------------------------------------------ ------------ ----------- <S> <C> <C> <C> 2002 16 Monthly payments from $20,400 to $100,715, $73,127 $69,741 including interest from 10.00% to 15.00% 2003 1 Monthly payment at $27,884, 3,718 3,718 including interest at 9.00% 2004 2 Monthly payments from $30,680 to $32,325, 7,108 6,682 including interest from 10.00% to 12.93% 2006 7 Monthly payments from $3,958 to $98,446, 27,537 25,518 including interest from 8.11% to 14.61% 2007 5 Monthly payments from $9,541 to $77,173, 25,933 20,343 including interest from 8.72% to 12.42% 2008 1 Monthly payment at $3,105, 175 164 including interest at 12.17% 2009 2 Monthly payments from $8,207 to $72,741, 8,635 7,591 including interest from 11.71% to 12.00% 2010 2 Monthly payments from $34,356 to $42,628, 7,663 7,519 including interest from 11.64% to 12.17% 2015 2 Monthly payments from $3,580 to $55,331, 5,795 5,567 including interest from 11.15% to 11.63% 2016 2 Monthly payments from $75,341 to $127,891, 20,810 19,124 including interest from 11.26% to 12.45% 2017 3 Monthly payments from $40,056 to $229,682, 31,875 28,697 including interest from 11.73% to 12.83% 2018 1 Monthly payment at $168,359, 21,000 17,879 including interest at 10.09% ------------ ------------ TOTALS $ 233,376 $ 212,543 ============ ============ </TABLE> -30-
3. REAL PROPERTY OWNED The following table summarizes certain information about the Company's real property owned as of December 31, 2001 (in thousands): <TABLE> <CAPTION> Number of Building & Total Accumulated Facilities Land Improvements Investment Depreciation --------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> SKILLED NURSING FACILITIES: Arizona 1 $ 180 $ 3,988 $ 4,168 $ 475 California 1 1,460 3,880 5,340 562 Colorado 1 370 6,051 6,421 705 Florida 8 4,382 56,296 60,678 4,689 Idaho 3 2,010 20,662 22,672 2,229 Illinois 2 1,010 11,446 12,456 925 Kentucky 1 130 4,870 5,000 999 Massachusetts 7 3,548 42,151 45,699 5,856 Ohio 5 4,286 62,592 66,878 1,434 Oklahoma 1 470 5,673 6,143 598 Oregon 1 300 5,316 5,616 598 Pennsylvania 3 669 17,567 18,236 2,886 Tennessee 10 3,450 56,853 60,303 535 Texas 1 663 12,588 13,251 3,067 - ----------------------------------------------------------------------------------------------------------------------------- 45 22,928 309,933 332,861 25,558 - ----------------------------------------------------------------------------------------------------------------------------- ASSISTED LIVING FACILITIES: Arizona 3 1,510 15,554 17,064 769 California 5 4,290 24,554 28,844 502 Connecticut 1 660 9,652 10,312 1,256 Florida 19 8,608 73,733 82,341 8,879 Georgia 2 3,166 24,541 27,707 2,398 Indiana 11 2,171 40,785 42,956 3,395 Louisiana 1 1,100 10,161 11,261 851 Maryland 4 2,670 33,791 36,461 2,004 Massachusetts 1 810 10,500 11,310 1,055 Minnesota 1 322 6,345 6,667 497 Montana 2 910 7,282 8,192 400 Nevada 3 2,086 26,170 28,256 2,265 New Jersey 3 5,037 28,096 33,133 2,595 New York 2 810 14,490 15,300 1,220 North Carolina 9 7,269 52,893 60,162 5,222 Ohio 8 4,253 39,934 44,187 3,562 Oklahoma 17 2,078 25,778 27,856 3,835 Oregon 2 1,077 8,757 9,834 657 Pennsylvania 4 1,951 17,199 19,150 1,253 South Carolina 5 2,072 19,072 21,144 1,163 Tennessee 4 1,521 12,461 13,982 894 Texas 17 5,048 64,587 69,635 7,251 Utah 1 1,059 6,141 7,200 131 Washington 1 1,400 5,476 6,876 399 Wisconsin 1 420 4,007 4,427 - ----------------------------------------------------------------------------------------------------------------------------- 127 62,298 581,959 644,257 52,453 - ----------------------------------------------------------------------------------------------------------------------------- SPECIALTY CARE: Florida 1 950 950 Massachusetts 4 3,425 55,902 59,327 2,533 - ----------------------------------------------------------------------------------------------------------------------------- 5 4,375 55,902 60,277 2,533 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL REAL PROPERTY OWNED 177 $ 89,601 $ 947,794 $ 1,037,395 $ 80,544 - ----------------------------------------------------------------------------------------------------------------------------- </TABLE> -31-
3. REAL PROPERTY OWNED (CONTINUED) At December 31, 2001, future minimum lease payments receivable under operating leases are as follows (in thousands): 2002 $ 102,636 2003 104,240 2004 103,362 2005 105,486 2006 107,273 Thereafter 812,595 ------------- TOTAL $ 1,335,592 ============= The Company converted $13,683,000, $60,648,000, and $16,309,000 of mortgage loans into operating lease properties in 2001, 2000 and 1999, respectively. In 2001, the Company acquired properties which included the assumption of mortgages totaling $45,202,000. These noncash activities are appropriately not reflected in the accompanying statements of cash flows. 4. CONCENTRATION OF RISK As of December 31, 2001, long-term care facilities, which include skilled nursing and assisted living facilities, comprised 93% (92% at December 31, 2000) of the Company's real estate investments and were located in 33 states. Investments in assisted living facilities comprised 63% (66% at December 31, 2000) of the Company's real estate investments. The Company's investments with the three largest operators totaled approximately 28% (27% at December 31, 2000). No single operator has a real estate investment balance, which exceeds 12% (11% at December 31, 2000) of total real estate investments, including credit enhancements. 5. ALLOWANCE FOR LOAN LOSSES The following is a summary of the allowance for loan losses (in thousands): <TABLE> <CAPTION> 2001 2000 1999 --------------- ---------------- ---------------- <S> <C> <C> <C> Balance at beginning of year $ 5,861 $ 5,587 $ 4,987 Provision for loan losses 1,000 1,000 600 Charge-offs (726) ----------- ------------ ----------- Balance at end of year $ 6,861 $ 5,861 $ 5,587 =========== ============ =========== </TABLE> In addition, the Company recorded a $2,000,000 loss during 2000 related to an investment in the preferred stock of a private corporation that became substantially diluted as a result of a recapitalization of that corporation. 6. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS AND RELATED ITEMS The Company has an unsecured credit arrangement with a consortium of nine banks providing for a revolving line of credit ("revolving credit") in the amount of $150,000,000, which expires on March 31, 2003. The agreement specifies that borrowings under the revolving credit are subject to interest payable in periods no longer than three months on either the agent bank's base rate of interest or 1.5% over LIBOR interest rate (based at the Company's option). In addition, the Company pays a commitment fee ranging from an annual rate of 0.20% to 0.375% and an annual agent's fee of $50,000. Principal is due upon expiration of the agreement. The Company has another unsecured line of credit with a bank for a total of $25,000,000, which expires April 30, 2002. Borrowings under this line of credit are subject to interest at the bank's prime rate of interest (4.75% at December 31, 2001) and are due on demand. At December 31, 2001, there were no borrowings under either of the unsecured lines of credit. -32-
6. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS AND RELATED ITEMS (CONTINUED) The following information relates to aggregate borrowings under the unsecured line of credit arrangements (in thousands, except percentages): <TABLE> <CAPTION> YEAR ENDED DECEMBER 31 2001 2000 1999 -------------------------------------------------------------- <S> <C> <C> <C> Balance outstanding at December 31 $ $ 119,900 $ 177,500 Maximum amount outstanding at any month end 140,800 185,000 180,950 Average amount outstanding (total of daily principal balances divided by days in year) 66,217 140,981 153,318 Weighted average interest rate (actual interest expense divided by average borrowings outstanding) 7.67% 7.77% 6.61% </TABLE> 7. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS The Company has $412,250,000 of Unsecured Senior Notes with interest ranging from 7.39% to 8.34%. During the year ended December 31, 2001, the Company repurchased $7,750,000 of Unsecured Senior Notes due March 2002. The Company incurred expenses of $213,000 related to this repurchase, which was recorded as an extraordinary item. The Company has five mortgage notes payable, collateralized by health care facilities with interest ranging from 7.69% to 12.00%. The Company has a $60,000,000 secured line of credit, collateralized by 16 health care facilities, with interest at 2% over LIBOR, with a floor of 7% (7.00% at December 31, 2001). The Company had $33,000,000 in borrowings outstanding at December 31, 2001. The carrying values of the health care properties securing the mortgages and secured debt totaled $204,603,000 at December 31, 2001. At December 31, 2001, the annual principal payments on these long-term obligations are as follows (in thousands): SECURED LINE OF SENIOR NOTES CREDIT MORTGAGES ----------------- ----------------------- -------------- 2002 $ 12,250 $ $ 368 2003 35,000 400 2004 40,000 33,000 475 2005 860 2006 50,000 398 2007 175,000 430 2008 100,000 464 Thereafter 42,571 --------- --------- --------- Totals $ 412,250 $ 33,000 $ 45,966 ========= ========= ========= 8. STOCK INCENTIVE PLANS AND RETIREMENT ARRANGEMENTS The Company's 1995 Stock Incentive Plan authorizes up to 3,464,000 shares of Common Stock to be issued at the discretion of the Board of Directors. The 1995 Plan replaced the 1985 Incentive Stock Option Plan. The options granted under the 1985 Plan continue to vest through 2005 and expire ten years from the date of grant. Officers and key salaried employees of the Company are eligible to participate in the 1995 Plan. The 1995 Plan allows for the issuance of stock options, restricted stock grants and Dividend Equivalency Rights. In addition, the Company has a Stock Plan for Non-Employee Directors, which authorizes up to 336,000 shares to be issued. -33-
8. STOCK INCENTIVE PLANS AND RETIREMENT ARRANGEMENTS (CONTINUED) The following summarizes the activity in the Plans for the years ended December 31 (shares in thousands): <TABLE> <CAPTION> 2001 2000 1999 ---- ---- ---- AVERAGE Average Average SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- ------ -------------- <S> <C> <C> <C> <C> <C> <C> STOCK OPTIONS Options at beginning of year 1,953 $20.34 1,813 $21.62 1,418 $22.06 Options granted 515 23.89 507 16.79 410 20.17 Options exercised (111) 18.63 (6) 21.81 Options terminated (20) 17.73 (367) 21.76 (9) 23.90 --------- ----------- -------- ----------- -------- ----------- 2,337 $21.23 1,953 $20.34 1,813 $21.62 ========= =========== ======== =========== ======== =========== At end of year: Options exercisable 1,161 $21.27 949 $21.32 733 $21.17 Weighted average fair value of options granted during the year $ 1.43 $ .63 $ 2.11 </TABLE> The stock options generally vest over a five-year period and expire ten years from the date of grant. The Company issued 77,275, 77,250, and 86,250 restricted shares during 2001, 2000 and 1999, respectively, including 8,000, 8,000, and 9,000 shares for directors in 2001, 2000 and 1999, respectively. Vesting periods range from six months for directors to five years for officers and key salaried employees. Expense, which is recognized as the shares vest based on the market value at the date of the award, totaled $1,164,000, $1,090,000, and $1,080,000, in 2001, 2000 and 1999, respectively. The following table summarizes information about stock options outstanding at December 31, 2001 (shares in thousands): <TABLE> <CAPTION> Options Outstanding Options Exercisable --------------------------------------------------------- ----------------------------------- Weighted Average Weighted Range of Per Share Number Weighted Average Remaining Number Average Exercise Prices Outstanding Exercise Price Contract Life Exercisable Exercise Price --------------- ----------- -------------- ------------- --------------- -------------- <S> <C> <C> <C> <C> <C> $16-$20 1,086 $ 18.44 8.3 536 $ 18.11 $20-$25 1,101 23.10 8.0 498 23.64 $25-$30 150 26.07 7.2 127 26.08 ------ -------- ----- ----- ------- 2,337 $ 21.23 8.0 1,161 $ 21.27 ====== ======== ===== ===== ======= </TABLE> The Company has elected to follow APB Opinion No. 25, Accounting for Stock Issued to Employees in accounting for its employee stock options as permitted under FASB Statement No. 123 ("FASB 123"), Accounting for Stock-Based Compensation, and, accordingly, recognizes no compensation expense for the stock option grants when the market price on the underlying stock on the date of grant equals the exercise price of the Company's employee stock option. Pro forma information has been determined as if the Company had accounted for its employee stock options and restricted shares under the fair value method. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following range of assumptions: risk-free interest rates from 3.44% to 7.60%, dividend yields of 8% to 12%, expected lives of seven years, and expected volatility of .18% to .244%. Had compensation cost for the stock-based compensation plans been determined in accordance with FASB 123, net income would have been reduced by $465,000, $267,000, and $621,000, in 2001, 2000 and 1999, respectively, and net income per common share would have been lower by $.01, $.01 and $.02, in 2001, 2000 and 1999, respectively. The Company has a 401(k) Profit Sharing Plan and Money Purchase Pension Plan ("the Plans") covering all eligible employees. Under the Plans, eligible employees may make contributions, and the Company may make matching contributions and a profit sharing contribution. Company contributions to these Plans totaled $175,000, $171,000, and $144,000, in 2001, 2000 and 1999, respectively. The Company has a non-qualified senior executive retirement plan designed to provide pension benefits for certain officers. Pension benefits are based on compensation and length of service and the plan is unfunded. The accrued liability for the plan was $41,000 at December 31, 2001. -34-
9. PREFERRED STOCK In January 1999, the Company sold 3,000,000 shares of Series C Cumulative Convertible Preferred Stock. These shares have a liquidation value of $25.00 per share and will pay dividends equivalent to the greater of (i) the annual dividend rate of $2.25 per share (a quarterly dividend rate of $0.5625 per share); or (ii) the quarterly dividend then payable per common share on an as converted basis. The preferred shares are convertible into common stock at a conversion price of $25.625 per share. The Company has the right to redeem the preferred shares after five years. The Company has 3,000,000 shares of 8.875% Series B Cumulative Redeemable Non-Voting Preferred Stock with a liquidation preference of $25.00 per share. Dividends are payable quarterly in arrears. On and after May 1, 2003, the Preferred Stock may be redeemed for cash at the option of the Company, in whole or in part, at $25.00 per share, plus accrued and unpaid dividends thereon to the redemption date. 10. INCOME TAXES AND DISTRIBUTIONS To qualify as a real estate investment trust for federal income tax purposes, 90% of taxable income (including capital gains) must be distributed to stockholders. Real estate investment trusts that do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The principal reasons for the difference between undistributed net income for federal income tax purposes and financial statement purposes are the recognition of straight-line rent for reporting purposes, different useful lives and depreciation methods for real property and the provision for losses for reporting purposes versus bad debt expense for tax purposes. Cash distributions paid to stockholders, for federal income tax purposes, are as follows: YEAR ENDED DECEMBER 31 2001 2000 1999 ------- ------- --------- Per Share: Ordinary income $ 1.673 $ 2.330 $ 2.217 Return of capital .648 .000 .000 Capital gains .019 .005 .053 ------- ------- --------- TOTALS $ 2.340 $ 2.335 $ 2.270 ======= ======= ========= 11. COMMITMENTS AND CONTINGENCIES The Company has agreements to purchase two health care facilities, or the loans with respect thereto, in the event that the present owners default upon their obligations. In consideration for these agreements, the Company receives and recognizes fees annually related to these agreements. Although the terms of these agreements vary, the purchase prices are equal to the amount of the outstanding obligations financing the facility. These agreements expire through the year 2005. In addition, the Company has an outstanding letter of credit relating to one assisted living project. At December 31, 2001, obligations under these agreements for which the Company was contingently liable aggregated approximately $11,425,000. 12. STOCKHOLDER RIGHTS PLAN Under the terms of a Stockholder Rights Plan approved by the Board of Directors in July 1994, a Preferred Share Right ("Right") is attached to and automatically trades with each outstanding share of Common Stock. The Rights, which are redeemable, will become exercisable only in the event that any person or group becomes a holder of 15% or more of the Common Stock, or commences a tender or exchange offer, which, if consummated, would result in that person or group owning at least 15% of the Common Stock. Once the Rights become exercisable, they entitle all other stockholders to purchase one one-thousandth of a share of a new series of junior participating preferred stock for an exercise price of $48.00. The Rights will expire on August 5, 2004, unless exchanged earlier or redeemed earlier by the Company for $.01 per Right at any time before public disclosure that a 15% position has been acquired. -35-
13. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data): <TABLE> <CAPTION> 2001 2000 1999 ---------- --------- ------ <S> <C> <C> <C> Numerator for basic and diluted earnings per share - income available to common stockholders $ 47,044 $ 54,566 $ 62,824 ========= ========= ========= Denominator for basic earnings per share - weighted average shares 30,534 28,418 28,128 Effect of dilutive securities: Employee stock options 238 15 Nonvested restricted shares 255 225 241 --------- --------- --------- Dilutive potential common shares 493 225 256 --------- --------- --------- Denominator for diluted earnings per share - adjusted weighted average shares 31,027 28,643 28,384 ====== ====== ========= Basic earnings per share $ 1.54 $ 1.92 $ 2.23 ========= ========= ========= Diluted earnings per share $ 1.52 $ 1.91 $ 2.21 ========= ========= ========= </TABLE> The diluted earnings per share calculation excludes the dilutive effect of 1,301,000, 1,954,000, and 1,813,000 options for 2001, 2000 and 1999, respectively, because the exercise price was greater than the average market price. The Series C Cumulative Convertible Preferred Stock was not included in this calculation as the effect of the conversion was anti-dilutive. 14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Real Property Loans--The fair value of all real property loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Working Capital Loans, Construction Loans and Subdebt Investments--The carrying amount is a reasonable estimate of fair value based on the interest rates received, which approximates current market rates. Cash and Cash Equivalents--The carrying amount approximates fair value. Marketable Securities--Marketable securities are recorded at their fair market value. Borrowings Under Line of Credit Arrangements --The carrying amount of the lines of credit and secured debt approximates fair value because the borrowings are interest rate adjustable. Senior Unsecured Notes --The fair value of the senior unsecured notes payable was estimated by discounting the future cash flow using the current borrowing rate available to the Company for similar debt. Mortgage Notes Payable--Mortgage notes payable is a reasonable estimate of fair value based on the interest rates paid, which approximates current market rates. -36-
The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2001 and 2000, are as follows (in thousands): <TABLE> <CAPTION> DECEMBER 31, 2001 December 31, 2000 -------------------------------------- ------------------------------------ CARRYING Carrying AMOUNT FAIR VALUE Amount Fair Value ----------------- ----------------- ----------------- ---------------- <S> <C> <C> <C> <C> Financial Assets: Real property loans $ 212,543 $ 229,422 $276,549 $283,244 Working capital loans 27,583 27,583 20,720 20,720 Construction loans 4,052 4,052 Subdebt investments 23,448 23,448 21,972 21,972 Cash and cash equivalents 9,826 9,826 2,844 2,844 Marketable securities 78 78 130 130 Financial Liabilities: Borrowings under line of credit arrangements 119,900 119,900 Senior unsecured notes 412,250 418,179 255,000 234,987 Secured debt 33,000 33,000 64,000 64,000 Mortgage notes payable 45,966 45,966 852 852 </TABLE> 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations of the Company for the years ended December 31, 2001 and 2000 (in thousands, except per share data): <TABLE> <CAPTION> YEAR ENDED DECEMBER 31, 2001 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenues $ 32,577 $ 32,765 $ 34,834 $ 34,944 Net Income Available to Common Stockholders 11,827 11,747 13,591 9,879 Net Income Available to Common Stockholders Per Share: Basic .41 .41 .42 .30 Diluted .41 .40 .41 .30 </TABLE> <TABLE> <CAPTION> Year ended December 31, 2000 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Revenues $ 34,828 $ 33,927 $ 33,351 $ 33,164 Net Income Available to Common Stockholders 14,758 14,587 13,786 11,435 Net Income Available to Common Stockholders Per Share: Basic .52 .52 .48 .40 Diluted .52 .51 .48 .40 </TABLE> -37-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item is incorporated herein by reference to the information under the heading "Election of Three Directors" and "Executive Officers of the Company" in the definitive proxy statement of the Company which will be filed with the Commission prior to April 5, 2002. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated herein by reference to the information under the heading "Remuneration" in the definitive proxy statement of the Company which will be filed with the Commission prior to April 5, 2002. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated herein by reference to the information under the heading "Security Ownership of Directors and Management" in the definitive proxy statement of the Company which will be filed with the Commission prior to April 5, 2002. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated herein by reference to the information under the heading "Certain Relationships and Related Transactions" in the definitive proxy statement of the Company which will be filed with the Commission prior to April 5, 2002. -38-
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K <TABLE> <S> <C> (a) 1. The following Consolidated Financial Statements of the Company are included in Part II, Item 8: Report of Independent Auditors.......................................................................23 Consolidated Balance Sheets - December 31, 2001 and 2000.............................................24 Consolidated Statements of Income - Years ended December 31, 2001, 2000 and 1999.....................25 Consolidated Statements of Stockholders' Equity - Years ended December 31, 2001, 2000 and 1999...............................................................26 Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999...............................................................27 Notes to Consolidated Financial Statements ..........................................................28 2. The following Financial Statement Schedules are included in Item 14 (d): III - Real Estate and Accumulated Depreciation IV - Mortgage Loans on Real Estate All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted. 3. Exhibit Index: 3.1 Second Restated Certificate of Incorporation of the Company. 3.2 Certificate of Designation, Preferences and Rights of Junior Participating Preferred Stock, Series A, of Health Care REIT, Inc. 3.3 Certificate of Designation of 8 7/8% Series B Cumulative Redeemable Preferred Stock of Health Care REIT, Inc. 3.4 Certificate of Designations, Preferences and Rights of Series C Cumulative Convertible Preferred Stock of Health Care REIT, Inc. 3.5 Certificate of Amendment of Second Restated Certificate of Incorporation of the Company. 3.6 By-Laws of the Company. 4.1 The Company, by signing this Report, agrees to furnish the Securities and Exchange Commission upon its request a copy of any instrument which defines the rights of holders of long-term debt of Company and which authorizes a total amount of securities not in excess of 10% of the total assets of the Company. 4.2 Series A Junior Participating Preferred Share Purchase Rights Agreement, dated as of July 19, 1994. 4.3 Indenture dated as of April 17, 1997 by and between Health Care REIT, Inc. and Fifth Third Bank. 4.4 First Supplemental Indenture dated as of April 17, 1997 by and between Health Care REIT, Inc. and Fifth Third Bank. 4.5 Second Supplemental Indenture dated as of March 13, 1998 between Health Care REIT, Inc. and Fifth Third Bank. 4.6 Third Supplemental Indenture dated as of March 18, 1999 between Health Care REIT, Inc. and Fifth Third Bank. </TABLE> -39-
<TABLE> <S> <C> 4.7 Fourth Supplemental Indenture dated as of August 10, 2001 between Health Care REIT, Inc. and Fifth Third Bank. 4.9 Form of Indenture for Senior Debt Securities. 4.10 Form of Indenture for Senior Subordinated Debt Securities. 4.11 Form of Indenture for Junior Subordinated Debt Securities. 4.12 Form of Warrant Agreement. 10.1 Loan Agreement dated as of March 28, 1997 by and among Health Care REIT, Inc., its subsidiaries, the banks signatory thereto, KeyBank National Association, as Administrative Agent, and Fleet Bank N.A., as Syndication Agent. 10.2 Amended and Restated Note Purchase Agreement among Health Care REIT, Inc. and each of the Purchasers a Party Thereto dated as of March 28, 1997 (the $52,000,000 Note Purchase Agreement). 10.3 Amended and Restated Note Purchase Agreement among Health Care REIT, Inc. and each of the Purchasers a Party Thereto dated as of March 28, 1997 (the $30,000,000 Note Purchase Agreement). 10.4 The 1985 Incentive Stock Option Plan of Health Care REIT, Inc. as amended.* 10.5 The Health Care REIT, Inc. 1995 Stock Incentive Plan. * 10.6 Second Amendment to the Health Care REIT, Inc. 1995 Stock Incentive Plan effective May 3, 2001.* 10.7 Credit Agreement by and among Health Care REIT, Inc., and certain subsidiaries, Bank United and other lenders party thereto, dated as of February 24, 1999. 10.8 Amendment No. 1 to Loan Agreement dated as of October 1, 1998 by and among Health Care REIT, Inc., its subsidiaries, the Banks signatory thereto and Key Corporate Capital Inc. 10.9 Amendment No. 2 to Loan Agreement dated as of January 29, 2001 by and among Health Care REIT, Inc., its subsidiaries, the Banks signatory thereto and Key Corporate Capital Inc. 10.10 Amendment No. 3 to Loan Agreement, made as of October 5, 2001, by and among Health Care REIT, Inc., its subsidiaries, the Banks signatory thereto and Key Corporate Capital, as Agent for the Banks. 10.11 Amendment No. 1 to Credit Agreement by and among Health Care REIT, Inc. and certain subsidiaries, Bank United and other lenders party thereto, dated as of April 5, 1999. 10.12 Amended and Restated Employment Agreement, effective January 1, 2000, by and between Health Care REIT, Inc. and George L. Chapman.* 10.13 Amended and Restated Employment Agreement, effective January 1, 2000, by and between Health Care REIT, Inc. and Raymond W. Braun.* 10.14 Amended and Restated Employment Agreement, effective January 1, 2000, by and between Health Care REIT, Inc. and Erin C. Ibele.* 10.15 Amended and Restated Employment Agreement, effective January 1, 2000, by and between Health Care REIT, Inc. and Michael A. Crabtree.* </TABLE> -40-
<TABLE> <S> <C> 10.16 Amended and Restated Employment Agreement, effective August 1, 2000, by and between Health Care REIT, Inc. and Charles J. Herman, Jr.* 21. Subsidiaries of the Company. 23. Consent of Ernst & Young LLP, independent auditors. 24. Powers of Attorney. 99.1 Press Release dated January 15, 2002. 99.2 Press Release dated January 17, 2002. 99.3 Press Release dated February 4, 2002. 99.4 Press Release dated February 26, 2002. </TABLE> (b) Reports on Form 8-K filed in the fourth quarter of 2001: None. (c) Exhibits: The exhibits listed in Item 14(a)(3) above are either filed with this Form 10-K or incorporated by reference in accordance with Rule 12b-32 of the Exchange Act. (d) Financial Statement Schedules: Financial statement schedules are included in pages 43 through 50. * Management Contract or Compensatory Plan or Arrangement. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTH CARE REIT, INC. By: /S/GEORGE L. CHAPMAN ----------------------------------- Chairman, Chief Executive Officer, President and Director -41-
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 22, 2002 by the following persons on behalf of the Company and in the capacities and on the dates indicated. <TABLE> <S> <C> /S/ WILLIAM C. BALLARD, JR.* /S/ R. SCOTT TRUMBULL* - ----------------------------------------------------- ----------------------------------------------------- William C. Ballard, Jr., Director R. Scott Trumbull, Director /S/ PIER C. BORRA* /S/ RICHARD A. UNVERFERTH* - ----------------------------------------------------- ----------------------------------------------------- Pier C. Borra, Director Richard A. Unverferth, Director /S/ JEFFREY H. DONAHUE* /S/GEORGE L. CHAPMAN - ----------------------------------------------------- ----------------------------------------------------- Jeffrey H. Donahue, Director George L. Chapman, Chairman, Chief Executive Officer, President and Director (Principal Executive Officer) /S/ PETER J. GRUA* /S/ RAYMOND W. BRAUN* - ----------------------------------------------------- ----------------------------------------------------- Peter J. Grua, Director Raymond W. Braun, Executive Vice President, Chief Operating Officer and Chief Financial Officer (Principal Financial Officer) /S/ SHARON M. OSTER* - ----------------------------------------------------- /S/ MICHAEL A. CRABTREE* Sharon M. Oster, Director ----------------------------------------------------- Michael A. Crabtree, Treasurer & Controller (Principal Accounting Officer) /S/ BRUCE G. THOMPSON* - ----------------------------------------------------- *By: /S/GEORGE L. CHAPMAN Bruce G. Thompson, Director ----------------------------------------------------- George L. Chapman, Attorney-in-Fact </TABLE> -42-
SCHEDULE III - Continued HEALTH CARE REIT, INC. SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2001 <TABLE> <CAPTION> Initial Cost Gross Amount at Which to Company Carried at Close of Period ---------------------- -------------------------------- Cost Capitalized Buildings & Subsequent to Buildings & Accumulated Year Year Description Encumbrances Land Improvements Acquisition Land Improvements Depreciation Acquired Built ----------- ------------ ---- ------------ ------------ ---- ------------ ------------ -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> ASSISTED LIVING FACILITIES: - --------------------------- Lake Havasu, AZ $ $ 110 $ 2,244 $ $ 110 $ 2,244 $ 199 1998 1998 Lake Havasu, AZ 450 4,223 450 4,223 288 1999 1999 Mesa, AZ 950 9,087 950 9,087 282 2000 2000 Alhambra, CA 420 2,534 420 2,534 53 2001 2001 Azusa, CA 570 3,141 570 3,141 69 2001 2001 Encinitas, CA 1,460 7,721 1,460 7,721 263 2000 2000 Marysville, CA 450 4,172 44 450 4,216 117 2000 2000 San Juan Capistrano, CA 1,390 6,942 1,390 6,942 0 2001 2001 Litchfield, CT 660 9,652 660 9,652 1,256 1998 1998 Bradenton, FL 251 3,298 251 3,298 572 1996 1995 Bradenton, FL 25 450 25 450 50 1997 1992 Bradenton, FL 25 400 25 400 45 1997 1988 Bradenton, FL 50 850 50 850 95 1997 1996 Bradenton, FL 50 850 50 850 95 1997 1996 Clermont, FL 350 5,232 200 350 5,432 602 1997 1997 Ft. Myers, FL 1,230 13,098 1,230 13,098 1,069 1999 1999 Haines City, FL 80 1,937 80 1,937 146 1999 1999 Lake Wales, FL 80 1,939 80 1,939 147 1999 1999 Lauderhill, FL 20 1,535 20 1,535 1,155 1998 1995 Leesburg, FL 70 1,170 37 70 1,207 133 1998 1972 Margate, FL 500 7,303 246 500 7,549 1,073 1998 1972 Naples, FL 1,716 17,306 1,716 17,306 2,067 1999 1999 North Miami Beach, FL 300 5,708 310 300 6,018 785 1998 1987 Orange City, FL 80 2,239 80 2,239 224 1998 1998 Plantation, FL 2,746 0 2,746 0 0 1999 1999 Sarasota, FL 475 3,175 475 3,175 550 1996 1995 Vero Beach, FL 263 3,187 263 3,187 35 2001 1998 Vero Beach, FL 297 3,263 297 3,263 36 2001 1998 Atlanta, GA 2,059 14,914 2,059 14,914 1,253 1999 1999 Roswell, GA 1,107 9,627 1,107 9,627 1,145 1999 1999 Auburn, IN 145 3,511 145 3,511 362 1999 1999 Avon, IN 170 3,504 170 3,504 286 1999 1999 Kokomo, IN 195 3,709 195 3,709 382 1999 1999 Laporte, IN 165 3,674 165 3,674 378 1999 1999 Marion, IN 175 3,504 175 3,504 263 1999 1999 Merrilville, IN 643 7,084 390 643 7,474 844 1999 1999 Shelbyville, IN 165 3,497 165 3,497 314 1999 1999 Terre Haute, IN 175 3,499 175 3,499 263 1999 1999 </TABLE> -43-
SCHEDULE III - Continued <TABLE> <CAPTION> Initial Cost Gross Amount at Which to Company Carried at Close of Period ---------------------- -------------------------------- Cost Capitalized Buildings & Subsequent to Buildings & Accumulated Year Year Description Encumbrances Land Improvements Acquisition Land Improvements Depreciation Acquired Built ----------- ------------ ---- ------------ ------------ ---- ------------ ------------ -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Valparaiso, IN $ $ 112 $ 2,558 $ $ 112 $ 2,558 $ 28 2001 1998 Valparaiso, IN 108 2,962 108 2,962 32 2001 1998 Vincennes, IN 118 2,893 118 2,893 243 1999 1999 Kenner, LA 1,100 10,036 125 1,100 10,161 851 2000 2000 Attleboro, MA 810 10,500 810 10,500 1,055 1998 1998 Ellicott City, MD 1,320 13,641 1,320 13,641 1,553 1999 1999 Harmans, MD 0 3,000 0 3,000 63 2001 1997 Satyr Hill, MD 730 8,770 730 8,770 199 2001 1998 St. Charles, MD 620 8,380 620 8,380 189 2001 1998 Rochester, MN 322 6,345 322 6,345 497 1999 1999 Butte, MT 550 3,957 550 3,957 110 2000 1999 Kalispell, MT 360 3,282 43 360 3,325 290 1998 1998 Asheville, NC 204 3,489 204 3,489 279 1999 1999 Cary, NC 1,500 4,350 1,500 4,350 424 1998 1996 Durham, NC 1,476 10,659 133 1,476 10,792 1,252 1999 1999 Elizabeth City, NC 200 2,760 200 2,760 221 1999 1999 Hendersonville, NC 2,270 11,771 2,270 11,771 1,120 1998 1998 Morehead City, NC 200 3,104 200 3,104 190 2000 2000 Pineville, NC 1,009 10,554 79 1,009 10,633 1,241 1999 1999 Wake Forest, NC 200 3,003 200 3,003 273 1999 1999 Wilmington, NC 210 2,991 210 2,991 222 1999 1999 Brick, NJ 1,300 9,394 1,300 9,394 690 2000 2000 Cranford, NJ 3,297 14,233 3,297 14,233 1,905 1996 1993 Hamilton , NJ 440 4,469 440 4,469 0 2001 1998 Gardnerville, NV 1,326 12,549 1,326 12,549 1,392 1999 1999 Henderson, NV 380 4,360 41 380 4,401 120 1998 1998 Henderson, NV 380 9,220 380 9,220 753 2000 2000 Albany, NY 400 10,528 400 10,528 1,220 1997 1997 Manlius, NY 410 3,962 410 3,962 0 2001 1997 Canton, OH 300 2,098 300 2,098 186 1998 1998 Cincinnati, OH 1,728 10,272 1,728 10,272 1,400 1997 1995 Findlay, OH 200 1,800 200 1,800 237 1997 1997 Newark, OH 410 5,711 410 5,711 544 1998 1997 Piqua, OH 204 1,885 204 1,885 199 1998 1998 Sagamore Hills, OH 470 7,881 470 7,881 365 2000 2000 Troy, OH 200 2,000 200 2,000 256 1997 1997 Westerville, OH 741 8,287 741 8,287 375 2001 2001 Bartlesville, OK 100 1,380 100 1,380 233 1994 1995 Chickasha, OK 85 1,395 85 1,395 229 1995 1996 Claremore, OK 155 1,428 155 1,428 210 1996 1996 Duncan, OK 103 1,347 103 1,347 213 1995 1996 Edmond, OK 175 1,564 175 1,564 243 1995 1996 Enid, OK 90 1,390 90 1,390 235 1995 1996 Lawton, OK 144 1,456 144 1,456 228 1995 1996 </TABLE> -44-
SCHEDULE III - Continued <TABLE> <CAPTION> Initial Cost Gross Amount at Which to Company Carried at Close of Period ---------------------- -------------------------------- Cost Capitalized Buildings & Subsequent to Buildings & Accumulated Year Year Description Encumbrances Land Improvements Acquisition Land Improvements Depreciation Acquired Built ----------- ------------ ---- ------------ ------------ ---- ------------ ------------ -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Midwest City, OK $ $ 95 $ 1,385 $ $ 95 $ 1,385 $ 234 1996 1996 Muskogee, OK 150 1,432 150 1,432 211 1996 1996 Norman, OK 55 1,484 55 1,484 278 1995 1996 N. Oklahoma City, OK 87 1,508 87 1,508 217 1995 1996 Oklahoma City, OK 130 1,350 130 1,350 220 1995 1996 Oklahoma City, OK 220 2,943 220 2,943 145 2000 2000 Owasso, OK 215 1,380 215 1,380 201 1996 1996 Ponca City, OK 114 1,536 114 1,536 267 1995 1995 Shawnee, OK 80 1,400 80 1,400 235 1995 1996 Stillwater, OK 80 1,400 80 1,400 236 1995 1996 Portland OR 628 3,585 628 3,585 258 1999 1999 Salem, OR 449 5,172 449 5,172 399 1999 1999 Lebanon, PA 400 3,799 400 3,799 248 1999 1999 Saxonburg, PA 677 4,669 677 4,669 386 1999 1994 Seven Fields, PA 484 4,663 484 4,663 365 1999 1999 Williamsport, PA 390 4,068 390 4,068 254 1999 1999 Bluffton, SC 700 5,598 700 5,598 185 2000 2000 Florence, SC 380 2,881 380 2,881 218 1999 1999 Hilton Head, SC 510 6,037 510 6,037 391 1999 1999 N Augusta, SC 332 2,558 332 2,558 200 1999 1999 Walterboro, SC 150 1,838 160 150 1,998 169 1999 1992 Clarksville, TN 330 2,292 330 2,292 201 1998 1998 Columbia, TN 341 2,295 341 2,295 182 1999 1999 Morristown, TN 400 3,808 400 3,808 248 1999 1999 Oakridge, TN 450 4,066 450 4,066 263 1999 1999 Austin, TX 880 9,520 880 9,520 785 1999 1999 Cedar Hill, TX 171 1,490 171 1,490 213 1997 1997 Corpus Christi, TX 420 4,796 420 4,796 818 1997 1989 Corpus Christi, TX 155 2,935 155 2,935 355 1997 1997 Desoto, TX 205 1,383 205 1,383 195 1997 1997 Ft. Worth, TX 210 3,790 210 3,790 594 1992 1994 Georgetown, TX 200 2,100 200 2,100 267 1997 1997 Grand Prairie, TX 400 5,160 400 5,160 470 1998 1998 Harlingen, TX 92 2,057 92 2,057 247 1997 1989 Houston, TX 550 10,751 550 10,751 1,117 1999 1989 Houston, TX 261 3,139 261 3,139 472 1994 1995 Kingwood, TX 300 3,309 300 3,309 244 1999 1999 N Richland Hills, TX 330 5,355 330 5,355 439 1999 1999 Palestine, TX 173 1,410 173 1,410 208 1996 1996 San Marcos, TX 355 4,560 355 4,560 413 1998 1998 Texarkana, TX 192 1,403 192 1,403 204 1996 1996 Waxahachie, TX 154 1,429 154 1,429 210 1996 1996 Salt Lake City, UT 1,059 6,141 1,059 6,141 131 2001 2001 Everett, WA 1,400 5,476 1,400 5,476 399 1990 1990 </TABLE> -45-
SCHEDULE III - Continued <TABLE> <CAPTION> Initial Cost Gross Amount at Which to Company Carried at Close of Period ---------------------- -------------------------------- Cost Capitalized Buildings & Subsequent to Buildings & Accumulated Year Year Description Encumbrances Land Improvements Acquisition Land Improvements Depreciation Acquired Built ----------- ------------ ---- ------------ ------------ ---- ------------ ------------ -------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Middleton, WI $ $ 420 $ 4,007 $ $ 420 $ 4,007 $ 0 2001 1991 ------ ----------- -------- -------- --------- ------- TOTAL ASSISTED LIVING FACILITIES: $62,298 $ 580,151 $1,808 $ 62,298 $ 581,959 $ 52,453 SKILLED NURSING FACILITIES: - --------------------------- Payson, AZ 180 3,988 180 3,988 475 1998 1995 Santa Rosa, CA 1,460 3,880 1,460 3,880 562 1998 1968 Pueblo, CO 370 6,051 370 6,051 705 1998 1989 Brevard, FL 360 4,117 360 4,117 96 2001 1970 Hilliard, FL 150 6,990 150 6,990 605 1999 1994 Lakeland, FL 696 4,843 696 4,843 513 1998 1984 New Port Richey, FL 624 7,307 624 7,307 757 1998 1984 North Fort Myers, FL 636 6,027 636 6,027 630 1998 1984 Sarasota, FL 560 8,474 560 8,474 413 2001 2001 Vero Beach, FL 660 9,040 1,461 660 10,501 845 1998 1984 West Palm Beach, FL 696 8,037 696 8,037 830 1998 1984 Boise, ID 600 7,383 600 7,383 773 1998 1985 Boise, ID 810 5,401 810 5,401 640 1998 1996 Coeur D'Alene, ID 600 7,878 600 7,878 816 1998 1996 Granite City, IL 610 7,143 610 7,143 614 1999 1964 Granite City, IL 400 4,303 400 4,303 311 1998 1973 Owensboro, KY 130 4,870 130 4,870 999 1993 1967 Braintree, MA 170 7,157 833 170 7,990 1,254 1997 1973 Braintree, MA 80 4,849 624 80 5,473 758 2001 1973 Fall River, MA 620 5,829 1,276 620 7,105 861 1996 1966 Falmouth, MA 670 3,145 670 3,145 516 1996 1966 South Boston, MA 385 2,002 4,089 385 6,091 652 1995 1961 Webster, MA 570 9,639 230 570 9,869 1,422 1995 1982 Worcester, MA 1,053 2,266 212 1,053 2,478 393 1996 1973 Beachwood, OH 19,880 1,260 23,478 1,260 23,478 0 2001 1990 Broadview Heights, OH 9,370 920 12,400 920 12,400 0 2001 1984 Kent, OH 215 3,367 215 3,367 827 1989 1983 Westlake, OH 571 5,411 571 5,411 607 1998 1972 Westlake, OH 15,952 1,320 17,936 1,320 17,936 0 2001 1980 Midwest City, OK 470 5,673 470 5,673 598 1998 1958 </TABLE> -46-
SCHEDULE III - Continued <TABLE> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Eugene, OR $ $ 300 $ 5,316 $ $ 300 $ 5,316 $ 598 1998 1996 Bloomsburg, PA 0 3,918 0 3,918 273 1999 1982 Cheswick, PA 384 6,041 1,293 384 7,334 754 1998 1959 Easton, PA 285 6,315 285 6,315 1,859 1993 1978 Cleveland, TN 350 5,000 350 5,000 12 2001 1987 Elizabethton, TN 310 4,604 310 4,604 90 2001 1980 Erin, TN 440 8,060 440 8,060 19 2001 1981 Harriman, TN 590 8,060 590 8,060 20 2001 1972 Mountain City, TN 220 5,896 220 5,896 116 2001 1976 Pigeon Forge, TN 320 4,180 320 4,180 11 2001 1986 Ridgely, TN 300 5,700 300 5,700 14 2001 1990 Rockwood, TN 500 7,116 500 7,116 134 2001 1979 Spring City, TN 420 6,085 420 6,085 115 2001 1987 Westmoreland, TN 0 2,152 0 2,152 4 2001 1994 San Antonio, TX 663 12,588 663 12,588 3,067 1993 1978 ------- ------- ---------- -------- -------- --------- -------- TOTAL SKILLED NURSING FACILITIES: $45,202 $22,928 $ 299,915 $ 10,018 $ 22,928 $ 309,933 $ 25,558 SPECIALTY CARE FACILITIES: - -------------------------- Clearwater, FL 950 0 950 0 0 2000 Braintree ,MA 350 9,304 292 350 9,596 559 1997 1968 Springfield, MA 2,100 14,978 995 2,100 15,973 500 2000 1996 Stoughton, MA 975 20,021 973 975 20,994 944 2000 1996 Waltham, MA 0 9,339 0 9,339 530 2000 1958 ------- ---------- -------- -------- --------- -------- TOTAL SPECIALTY CARE FACILITIES $ 4,375 $ 54,637 $ 1,265 $ 4,375 $ 55,902 $ 2,533 TOTAL INVESTMENT IN PROPERTIES $45,202 $89,601 $ 934,703 $ 13,091 $ 89,601 $ 947,794 $ 80,544 ======= ======= ========== ======== ======== ========= ======== </TABLE> -47-
<TABLE> <CAPTION> Year ended December 31 2001 2000 1999 ---- ---- ---- <S> <C> <C> <C> Investment in Real Estate: Balance at Beginning of year $ 856,955 $ 862,525 $ 639,613 Additions: Acquisitions 181,420 0 81,109 Improvements 10,863 46,449 138,694 Other(1) 14,637 60,648 16,309 ----------- ----------- ----------- Total Additions 206,920 107,097 236,112 Deductions: Cost of real estate sold (26,480) (112,667) (13,200) Other ----------- ----------- ----------- Total deductions (26,480) (112,667) (13,200) ----------- ----------- ----------- Balance at end of year $ 1,037,395 $ 856,955 $ 862,525 =========== =========== =========== Accumulated depreciation: Balance at beginning of year $ 52,968 $ 35,746 $ 19,624 Additions: Depreciation expense 30,227 22,707 17,885 Deductions: Sale of properties (2,651) (5,485) (1,763) ----------- ----------- ----------- Balance at end of year $ 80,544 $ 52,968 $ 35,746 =========== =========== =========== </TABLE> (1) Represents mortgage loans converted to operating leases and $954,000 of land reclassed from other assets in 2001. (2) The aggregate cost for tax purposes for real property equals $1,035,650,000 at December 31, 2001. -48-
SCHEDULE IV - MORTGAGE LOANS ON REAL ESTATE HEALTH CARE REIT, INC. DECEMBER 31, 2001 <TABLE> <CAPTION> (IN THOUSANDS) -------------------------- PRINCIPAL AMOUNT OF LOANS SUBJECT FINAL PERIODIC CARRYING TO DELINQUENT INTEREST MATURITY PAYMENT PRIOR FACE AMOUNT AMOUNT OF PRINCIPAL OR DESCRIPTION RATE DATE TERMS LIENS OF MORTGAGES MORTGAGES INTEREST - -------------------- ------- -------- ------- ----- ------------ --------- --------------- <S> <C> <C> <C> <C> <C> <C> <C> Sun Valley, CA 12.83% 01/01/17 Monthly 21,500 18,797 None (Specialty Care Payments Facility) $229,682 Briarcliff, NY 11.26% 08/01/16 Monthly 12,810 12,471 None (Assisted Living Payments Facility) $127,891 New York City, NY 10.09% 03/01/18 Monthly 21,000 17,879 None (Assisted Living Facility) Payments $168,359 Oklahoma City, OK 9.88% 06/01/06 Monthly 12,204 12,204 None (Nursing Home) Payments $98,446 Five nursing homes in Texas 10.78% 12/01/07 Monthly 12,198 7,733 None Payments $77,173 Bala, PA 14.61% 1/01/06 Monthly 7,400 7,145 None (Nursing Home) Payments $86,987 St. Louis, MO 11.71% 6/01/09 Monthly 7,072 6,771 None (Nursing Home) Payments $72,741 Chestnut Ridge, NY 12.45% 12/01/16 Monthly 8,000 6,652 None (Assisted Living Facility) Payments $75,341 Tucson, AZ 15.00% 3/1/02 Monthly 8,057 8,057 None (Assisted Living Facility) Payments $100,715 35 mortgage loans relating to 4 From From 123,135 114,834 None nursing homes, 29 assisted living 8.11% to 3/01/02- facilities and 2 specialty care 12.93% 12/01/17 facilities ------------ ----------- --------- TOTALS $233,376 $212,543 $-0- ============ =========== ========= </TABLE> -49-
SCHEDULE IV - Continued (in thousands) Year Ended December 31 ----------------------------------- 2001 2000 1999 -------- -------- -------- Reconciliation of mortgage loans: Balance at beginning of period $280,601 $384,298 $398,682 Additions during period: New mortgage loans 17,791 28,244 44,656 -------- -------- -------- $298,392 412,542 443,338 Deductions during period: Collections of principal(1) 72,166 70,567 42,731 Charge-offs 726 Other(2) $ 13,683 60,648 16,309 -------- -------- -------- Balance at end of period $212,543 $280,601 $384,298 ======== ======== ======== (1) Includes collection of negative principal amortization. (2) Includes properties originally financed with mortgage loans that were purchased during the periods indicated. -50-
EXHIBIT INDEX ------------- The following documents are included in this Form 10-K as an Exhibit: <TABLE> <CAPTION> DESIGNATION NUMBER UNDER EXHIBIT ITEM 601 OF EXHIBIT PAGE NUMBER REGULATION S-K DESCRIPTION NUMBER ------ -------------- ----------- ------ <S> <C> <C> 3.1(1) 3(i) Second Restated Certificate of Incorporation of the Company. 3.2(1) 3(i) Certificate of Designation, Preferences and Rights of Junior Participating Preferred Stock, Series A, of Health Care REIT, Inc. 3.3(1) 3(i) Certificate of Designation of 8 7/8% Series B Cumulative Redeemable Preferred Stock of Health Care REIT, Inc. 3.4(1) 3(i) Certificate of Designations, Preferences and Rights of Series C Cumulative Convertible Preferred Stock of Health Care REIT, Inc. 3.5(1) 3(i) Certificate of Amendment of Second Restated Certificate of Incorporation of the Company. 3.6(2) 3(ii) By-Laws of the Registrant. 4.1 4 The Company, by signing this Report, agrees to furnish the Securities and Exchange Commission upon its request a copy of any instrument which defines the rights of holders of long-term debt of Company authorizes a total amount of securities not in excess of 10% of the total assets of the Company. 4.2(3) 4 Series A Junior Participating Preferred Share Purchase Rights Agreement, dated as of July 19, 1994. 4.3(4) 4 Indenture dated as of April 17, 1997 by and between Health Care REIT, Inc. and Fifth Third Bank. 4.4(5) 4 First Supplemental Indenture dated as of April 17, 1997 by and between Health Care REIT, Inc. and Fifth Third Bank. 4.5(6) 4 Second Supplemental Indenture dated as of March 13, 1998 between Health Care REIT, Inc. and Fifth Third Bank. 4.6(7) 4 Third Supplemental Indenture dated as of March 18, 1999 between Health Care REIT, </TABLE> -51-
<TABLE> <S> <C> <C> Inc. and Fifth Third Bank. 4.7(8) 4 Fourth Supplemental Indenture dated as of August 10, 2001 between Health Care REIT, Inc. and Fifth Third Bank. 4.8(9) 4 Form of Indenture for Senior Debt Securities. 4.9(10) 4 Form of Indenture for Senior Subordinated Debt Securities. 4.10(11) 4 Form of Indenture for Junior Subordinated Debt Securities. 4.11(12) 4 Form of Warrant Agreement. 10.1(13) 10 Loan Agreement dated as of March 28, 1997 by and among Health Care REIT, Inc., its subsidiaries, the banks signatory thereto, KeyBank National Association, as Administrative Agent, and Fleet Bank N.A., as Syndication Agent. 10.2(14) 10 Amended and Restated Note Purchase Agreement among Health Care REIT, Inc. and each of the Purchasers a Party Thereto dated as of March 28, 1997 (the $52,000,000 Note Purchase Agreement). 10.3(15) 10 Amended and Restated Note Purchase Agreement among Health Care REIT, Inc. and each of the Purchasers a Party Thereto dated as of March 28, 1997 (the $30,000,000 Note Purchase Agreement). 10.4(16) 10 The 1985 Incentive Stock Option Plan of Health Care REIT, Inc. as amended.* 10.5(17) 10 The Health Care REIT, Inc. 1995 Stock Incentive Plan.* 10.6(18) 10 Second Amendment to the Health Care REIT, Inc. 1995 Stock Incentive Plan effective May 3, 2001.* 10.7(19) 10 Credit Agreement by and among Health Care REIT, Inc., and certain subsidiaries, Bank United and other lenders party thereto, dated as of February 24, 1999. 10.8(20) 10 Amendment No. 1 to Loan Agreement dated as of October 1, 1998 by and among Health Care REIT, Inc., its subsidiaries, the banks signatory thereto and Key Corporate Capital Inc. 10.9(21) 10 Amendment No. 2 to Loan Agreement dated as </TABLE> -52-
<TABLE> <S> <C> <C> of January 29, 2001 by and among Health Care REIT, Inc., its subsidiaries, the banks signatory thereto and Key Corporate Capital Inc. 10.10 10 Amendment No. 3 to Loan Agreement, made as of October 5, 2001, by and among Health Care REIT, Inc., the Banks that its subsidiaries, signatory thereto and Key Corporate Capital, as Agent for the Banks. 10.11(22) 10 Amendment No. 1 to Credit Agreement by and among Health Care REIT, Inc. and certain subsidiaries, Bank United and other lenders party thereto, dated as of April 5, 1999. 10.12 10 Amended and Restated Employment Agreement, effective January 1, 2000, by and between Health Care REIT, Inc. and George L. Chapman.* 10.13 10 Amended and Restated Employment Agreement, effective January 1, 2000, by and between Health Care REIT, Inc. and Raymond W. Braun.* 10.14 10 Amended and Restated Employment Agreement, effective January 1, 2000, by and between Health Care REIT, Inc. and Erin C. Ibele.* 10.15 10 Amended and Restated Employment Agreement, effective January 1, 2000, by and between Health Care REIT, Inc. and Michael A. Crabtree.* 10.16 10 Amended and Restated Employment Agreement, effective January 1, 2000, by and between Health Care REIT, Inc. and Charles J. Herman, Jr.* 21. 21 Subsidiaries of the Company. 23. 23 Consent of Ernst & Young LLP, independent auditors. 24. 24 Powers of Attorney. 99.1 99 Press Release dated January 15, 2002. 99.2 99 Press Release dated January 17, 2002. 99.3(23) 99 Press Release dated February 4, 2002. 99.4 99 Press Release dated February 26, 2002. </TABLE> - -------------------- * Management Contract or Compensatory Plan or Arrangement. -53-
<TABLE> <S> <C> (1) Incorporated by reference to Exhibit 3.1 to the Company's Form 10-K filed March 20, 2000. (2) Incorporated by reference to Exhibit 3.1 to the Company's Form 8-K filed October 24, 1997. (3) Incorporated by reference to Exhibit 2 to the Company's Form 8-A filed on August 3, 1994 (File No. 1-8923). (4) Incorporated by reference to Exhibit 4.1 to the Company's Form 8-K filed on April 21, 1997. (5) Incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed on April 21, 1997. (6) Incorporated by reference to Exhibit 4.2 to the Company's Form 8-K filed on March 11, 1998. (7) Incorporated by reference to Exhibit 4.2 to the Company's Form 8-A filed on March 17, 1999. (8) Incorporated by reference to Exhibit 4.2 of the Company's Form 8-K filed on August 9, 2001. (9) Incorporated by reference to Exhibit 4.8 to the Company's Form S-3 (File No. 333-73936) filed on November 21, 2001. (10) Incorporated by reference to Exhibit 4.9 of the Company's Form S-3 (File No. 333-73936) filed on November 21, 2001. (11) Incorporated by reference to Exhibit 4.10 of the Company's Form S-3 (File No. 333-73936) filed on November 21, 2001. (12) Incorporated by reference to Exhibit 4.11 of the Company's Form S-3 File No. 333-73936) filed on November 21, 2001. (13) Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed on April 8, 1997. (14) Incorporated by reference to Exhibit 10.2 to Company's Form 8-K filed on April 8, 1997. (15) Incorporated by reference to Exhibit 10.3 to Company's Form 8-K filed on April 8, 1997. (16) Incorporated by reference to Exhibit 4.4 to the Company's Registration Statement on Form S-8 (File No. 333-1237) filed on February 27, 1996. (17) Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement on Form S-8 (File No. 333-1239) filed on February 27, 1996. (18) Incorporated by reference to Exhibit 4.3 to Registration Statement on Form S-8 (File No. 333-73936) filed November 21, 2001. (19) Incorporated by reference to Exhibit 10.7 to the Company's Form 10-K filed March 26, 2001. (20) Incorporated by reference to Exhibit 10.8 to the Company's Form 10-K filed March 26, 2001. (21) Incorporated by reference to Exhibit 10.9 to the Company's Form 10-K filed March 26, 2001. (22) Incorporated by reference to Exhibit 10.10 to the Company's Form 10-K filed March 26, 2001. (23) Incorporated by reference to Exhibit 99.1 to the Company's Form 8-K filed on February 4, 2002. </TABLE> -54-