===============================================================================SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549FORM
10-K/A (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) COMMISSION FILE NUMBER:10-K
(Mark One) þANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2003 OR oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 1-11314
LTC PROPERTIES, INC.
(Exact(Exact name of Registrant as specified in its charter)MARYLAND 71-0720518 (State or other jurisdiction of (I.R.S Employer incorporation or organization) Identification No.) 300 Esplanade Drive,
MARYLAND71-0720518 (State or other jurisdiction of
incorporation or organization)(I.R.S. Employer
Identification No.)22917 Pacific Coast Highway, Suite
1860 Oxnard,350Malibu, California93030 (Address90265(Address of principal executive offices)Registrant'sRegistrant’s telephone number, including area code:
(805) 981-8655(310) 455-6010Securities registered pursuant to Section 12(b) of the Act:
Title of StockName of each exchange Title of Stock on which registered - ---------------------------------------------------- -------------------------------------------Common stock, $.01 Par Value New York Stock Exchange 9.75% Convertible Subordinated Debentures due 20049.50% Series A Cumulative Preferred Stock, $.01 Par Value New York Stock Exchange 8.50% Convertible Subordinated Debentures due 20009.00% Series B Cumulative Preferred Stock, $.01 Par Value New York Stock Exchange 8.50% Series E Cumulative Convertible Subordinated Debentures due 2001Preferred Stock, $.01 Par ValueNew York Stock Exchange 7.75% Convertible Subordinated Debentures due 2002 New York Stock Exchange 8.25% Convertible Subordinated Debentures due 2001 New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:
NONEIndicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
Xþ No___ ---oIndicate 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'sthe Company’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.[X]Yes þ No oIndicate by check mark whether the Company is an accelerated filer. Yes þ No o
The aggregate market value of voting and non-voting stock held by
nonaffiliatesnon-affiliates of the Companyiswas approximately$400,532,793$150,679,375 as ofJanuary 31, 1997. 22,098,361 (NumberJune 30, 2003 (the last business day of the Company’s most recently completed second fiscal quarter).18,005,643
(Number of shares of common stock outstanding as ofJanuary 31, 1997) Part III is incorporatedMarch 5, 2004)STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain information contained in this annual report includes statements that are not purely historical and are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All statements other than historical facts contained in this annual report are forward looking statements. These forward looking statements involve a number of risks and uncertainties. All forward looking statements included in this annual report are based on information available to us on the date hereof, and we assume no obligation to update such forward looking statements. Although we believe that the assumptions and expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. The actual results achieved by
referenceus may differ materially from any forward looking statements due to theCompany's definitive proxy statement forrisks and uncertainties of such statements.We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the
Annual Meeting of Stockholders to be held on May 19, 1997. ===============================================================================ITEM 1. BUSINESS GENERALinformation presented in our filings and reports.
Item 1. BUSINESS General
LTC Properties, Inc.
(the "Company"), a health care real estate investment trust(a "REIT")(or REIT), was organized on May 12, 1992 in the State of Maryland and commenced operations on August 25, 1992.The Company investsWe invest primarily in long-term care and other health care relatedfacilitiesproperties through mortgage loans,facilityproperty lease transactions and other investments.TheOur primaryobjective of the Company isobjectives are to sustain and enhance stockholder equity value and provide current income for distribution to stockholders through real estate investments in long-term carefacilitiesproperties and other health care relatedfacilitiesproperties managed by experiencedoperators providing quality care.operators. To meetthis objective, the Company attemptsthese objectives, we attempt to invest in properties that provide opportunity for additional value and current returns toitsour stockholders and diversifyitsour investment portfolio by geographic location, operator and form of investment.The Company wasIn accordance with “plain English” guidelines provided by the Securities and Exchange Commission, whenever we refer to “our company” or to “us”, or use the terms “we” or “our”, we are referring to LTC Properties, Inc. and/or our subsidiaries.
We were organized to qualify, and
intendsintend to continue to qualify, as a REIT. So long asthe Company so qualifies,we qualify, with limited exceptions,the Company will not be taxed under federal income tax laws at the corporate level on itswe may deduct distributions, both preferred dividends and common dividends, to our stockholders from our taxableincome as long as it distributes at least 95 percent of that amount to its stockholders. The Company has distributed,income. We have made distributions, andintendsintend to continue to make distributions toitsour stockholders, in order to eliminate any federal tax liability.AtOwned Properties.As of December 31,
1996, the Company had investments2003, our investment in248owned properties consisted of 53 skilled nursingfacilitiesproperties with28,628a total of 6,047 beds,and 3588 assisted livingfacilitiesproperties with1,456a total of 4,182 units and one school in3223 states,operated by 84 healthcare providers. OWNED PROPERTIES During 1996, the Company acquired for approximately $113,858,000 22 assisted living facilities and 20 skilled nursing facilities. Sixteen of the skilled nursing facilities were acquired by six newly formed limited partnerships of which the Company, through certain of its subsidiaries, is the general partner and were purchased subject to mortgage loansrepresenting a gross investment of approximately$9,641,000. Under the partnership agreements, the Company has guaranteed payment$456.0 million. See Item 8. FINANCIAL STATEMENTS —Note 6. Real Estate Investmentsfor further description.The following operators accounted for more than 10% of
a 10% preferred return to the holders of $8,932,000 in limited partnership interests. Under certain circumstances, the limited partnership interests can be exchanged, at the option of the holders, into 628,511 shares of the Company's common stock at exercise prices ranging from $13.00 to $15.00 beginning in 1997. Also during 1996, the Company sold four assisted living facilities for their approximate net book value of $7,589,000. The Company's long-term facilities are leased to operators pursuant to long-term "triple net" leases and provide for increases in the rent based upon specified rent increases or, to a lesser extent, upon participation in revenue increases over defined base periods or increases based on consumer price indices. MORTGAGE LOANSour 2003 revenue:
Lessee Percent of Revenues Alterra Healthcare Corporation 21.7 % Assisted Living Concepts, Inc. 21.2 % Sunwest Management, Inc. 15.3 % Mortgage Loans. As part of
the Company'sour strategy of making long-term investments in properties used in the provision of long-term health care services,the Company provideswe provide mortgage financing on such properties based ontheour established investment underwritingcriteria established by the Company. (See "Investmentcriteria. See“Investment and OtherPolicies"Policies” in thisSection.)section for further discussion. We have also provided construction loans that by their terms converted into purchase/lease transactions or permanent financing mortgage loans upon completion of construction. See Item 8. FINANCIAL STATEMENTS —Note 6. Real Estate Investmentsfor further description.See Item 8. FINANCIAL STATEMENTS —Note 11. Debt Obligationsfor a description of our Senior Mortgage Participation Payable, which is secured by certain of our mortgage loans receivable.
1
REMIC Certificates. We have completed securitizations by transferring mortgage loans to newly created Real Estate Mortgage Investment Conduits (or REMIC) that, in turn, issued mortgage pass-through certificates aggregating approximately the same amount. A portion of the REMIC Certificates were then sold to third parties and a portion of the REMIC Certificates were retained by us. The
Company maintainsREMIC Certificates we retained are subordinated in right of payment to the REMIC Certificates sold to third parties and a portion of the REMIC Certificates we retained are interest only certificates which have no principal amount and entitle us to receive cash flows designated as interest. Since inception we have completed four REMIC pools. The first was in 1993 and was fully retired in 2003 without a realized loss within the pool. The last REMIC we completed was in 1998. We may again employ this type of financing in the future should we determine the financing environment was appropriate for this type of transaction. At December 31, 2003, we had investments in REMIC Certificates with a carrying value of $61.7 million and a fair market value of $48.2 million. See Item 8. FINANCIAL STATEMENTS —Note 6. Real Estate Investmentsfor further description of our investments in REMIC Certificates.We maintain a long-term investment interest in
itsmortgages we originate either through the direct retention of the mortgages or through the retention of REMICcertificatesCertificates originated in our securitizations. We are a REIT and, as such, make our investments with theCompany's securitizations. The Companyintent to hold them for long-term purposes. However, we mayfrom time-to-time,securitize a portion ofitsour mortgage loan portfolio when a securitization providesthe Companyus with the best available form ofraisingcapital tomakefund additional long-term investments. In addition,the Company believeswe believe that thecertificates retained by the Company in itsREMIC Certificates we retain from our securitizations provideits shareholdersour stockholders with a more diverse real estate investment while maintaining the returnsdesired by the Company. As of December 31, 1996, the Company had securitized $354,000,000 of mortgage loansthatwere originated by the Company. Because the Company anticipates securitizing 2additional portions of its mortgage loan portfolio in the future, its mortgage loan investments are carried at the lower of cost-or-market. REMIC CERTIFICATES On March 29, 1996, the Company securitized mortgage loans with an aggregate outstanding principal balance of approximately $112,487,000 by creating a Real Estate Mortgageprovide value to our stockholders.Investment
Conduit ("REMIC") which, in turn, issued mortgage pass-through certificates ("REMIC Certificates") aggregating approximately the same amount. A total of approximately $90,552,000 of REMIC Certificates were subsequently soldand Other PoliciesObjectives and Policies. Our investment policy is to
third parties by the Company. The Company retained the remaining $21,935,000 face amount of the REMIC Certificates, which are effectively subordinated in right of payment to the Certificates sold to third parties. A portion of the other REMIC Certificates the Company retained, which have no principal amount, are interest-only certificates and entitle the Company to receive cash flows designated as interest. The proceeds from the sale were used to pay down outstanding borrowings under the Company's lines of credit. At December 31, 1996, the Company had investments in REMIC Certificates with an estimated fair value of $98,934,000 approximately ($92,545,000 at amortized cost) secured by 148 long-term care facilities with a total of 16,064 beds in 24 states. (See "Part 1, Item 2 -- Properties -- REMIC Certificates.") FINANCING AND OTHER TRANSACTIONS In February 1996, the Company sold, through a public offering, $30,000,000 aggregate principal amount of 7.75% Convertible Subordinated Debentures due 2002. The debentures are convertible at any time prior to maturity into shares of the Company's common stock at a conversion price of $16.50 per share. The net proceeds were used to repay borrowings under the Company's lines of credit. In March 1996, the Company filed a shelf-registration statement with the Securities and Exchange Commission covering up to $125,000,000 of debt and equity securities to be sold from time to time in the future. The registration statement was declared effective on April 4, 1996. Pursuant to the shelf registration, the Company, in August 1996, completed the sale of $30,000,000 of 8.25% Convertible Subordinated Debentures due 2001. The debentures are convertible into shares of the Company's common stock at a price of $17.25 per share. Net proceeds from the offering were used to repay short-term borrowings. Also in 1996, the Company repurchased and retired 120,000 shares of common stock for an aggregate purchase price of approximately $1,831,000. INVESTMENT AND OTHER POLICIES OBJECTIVES AND POLICIES The Company currently investsinvest primarily in income-producing long-term carefacilities. The Company invests either (1) directly in mortgage loans secured by long-term care facilities (2)properties. Also see“Government Regulation” below. Primarily, as a result of obligations we had under our Secured Revolving Credit, we have made few investments in thefee ownershiplast five years. In the fourth quarter oflong-term care facilities2003 we retired the Secured Revolving Credit and signed a $45.0 million Unsecured Credit Agreement. Subsequent to December 31, 2003 we purchased for $3.4 million a 120 bed skilled nursing property in Texas. We have entered into a 20 year triple net lease with an operator whichare leased to operators (3) or may participatebegins March 3, 2004, and for an annual lease amount of $0.4 million insuch investments indirectly throughthe first year and increasing 2% every year thereafter. At this time, we anticipate completing some additional level of new investments inpartnerships, joint ventures or other entities2004; however, given the highly competitive environment for health care real estate acquisitions and mortgages, we can give no assurances thatthemselves make directwe will complete a significant level of new investments insuch loans or facilities.2004.Historically our investments have consisted of:
• mortgage loans secured by long-term care properties; • fee ownership of long-term care properties which are leased to providers; or • participation in such investments indirectly through investments in real estate partnerships or other entities that themselves make direct investments in such loans or properties. In evaluating potential investments,
the Company considerswe consider factors suchfactors as (i) type of property, (ii) the location, construction quality, condition and design of the property, (iii) the property's current and anticipated cash flow and its adequacy to meet operational needs and lease obligations or debt service obligations, (iv) the quality and reputation of the property's operator, (v) the growth, tax and regulatory environments of the communities in which the properties are located, (vi) the occupancy and demand for similar long-term care facilities in the area surrounding the property and (vii) the Medicaid reimbursement policies and plans of the state in which the property is located. 3The Company places primary emphasis on investingas:
• type of property; • the location; • construction quality, condition and design of the property; • the property’s current and anticipated cash flow and its adequacy to meet operational needs and lease obligations or debt service obligations; • the experience, reputation and solvency of the licensee providing services; • the payor mix of private, Medicare and Medicaid patients; • the growth, tax and regulatory environments of the communities in which the properties are located; 2
• the occupancy and demand for similar properties in the area surrounding the property; and • the Medicaid reimbursement policies and plans of the state in which the property is located. For investments in long-term care
facilities that haveproperties we favor lowinvestmentcost per bedratios andopportunities, whether in fee simple properties or in mortgages. In addition, with respect to skilled nursing properties, we attempt to invest in properties that do not have to rely on a high percentage ofprivate pay patients or ancillary services to cover debt service or lease obligations. The Company seeksprivate-pay patients. We seek to invest infacilitiesproperties that are located in suburban and rural areas ofstates with improving reimbursement climates.states. Prior to every investment,the Company conductswe conduct afacilityproperty site review to assess the general physical condition of thefacility,property and the potential of additional sub-acuteservices and the quality of care the operator provides.services. In addition,the Company reviewswe review the environmental reports, state survey and financial statements of thefacilityproperty before the investment is made.The Company prefersWe prefer to invest infacilitiesa property thathavehas a significant market presence in its community and where state certificate of need and/or licensing procedures limit the entry of competingfacilities. To date, most of the Company's investments have been made in the form of mortgage loans secured by skilled nursing facilities. Due to management's beliefproperties. We believe that assisted living facilities are anincreasinglyimportant sector in the long-term care marketa larger portion of the Company's futureand our investmentswill be made in the form ofinclude direct ownership of assisted livingfacilities. Management believes thatproperties.For assisted living
facilities representinvestments we have attempted to diversify our portfolio both geographically and across product levels. Thus, we believe that although the majority of our investments are in affordably priced units, our portfolio also includes alower costsignificant number oflong-term care alternative for senior adults thanupscale units in appropriate markets with certain operators. As skilled nursingfacilities. The Company investsfacilities reimbursement cuts have created cost and pricing pressures in that industry, we have tended to emphasize fee simple investments in the assisted living sector where we believe facilitiesthat attract the moderate-income private pay patientstend to be both newer and less dependent, if at all, on any government reimbursement.Our new Unsecured Credit Agreement signed in
smaller communities, preferablyDecember 2003, includes no formal restrictions instates that have adopted Medicaid waiver programs or areour investment inthe processany single type ofadopting or reviewing their policies and reimbursement programproperty. At December 31, 2003, we had committed to providefunding for assisted living residences. The Company believes that locating residences in a state with a favorable regulatory reimbursement climate should provide a stable source of residents eligible for Medicaid reimbursement to the extent private-pay residents are not available, and should provide alternative sources of income for residents when their private funds are depleted and they become Medicaid eligible. There are no limitations on the amount or percentage of the Company's total assets that may be invested in any one property or joint venture, except for investments in assisted living facilities ("ALFs"). The Board of Directors authorized the CompanyAlterra Healthcare Corporation (or Alterra) $2.5 million over three years to investupin leasehold improvements to20%properties leased from us and an additional $2.5 million over three years to expand properties leased from us. Both ofthe Company's adjusted gross real estate investment portfolio (adjusted to include approximately $278,881,000 of mortgage loans to third parties underlying the December 31, 1996 balance of investment in REMIC Certificates ) in ALFs, withthese investments would be made at a 10%limit on investments in properties operated by Assisted Living Concepts, Inc. ("ALC"). ALC is an owner, operator and developer of assisted living facilities. Three executive officers of the Company own approximately 5.5% of ALC's common stock as of December 31, 1996 and two of the Company's executive officers serve as members of the Board of Directors of ALC. The Company has discussed with its Board of Directors and anticipates increasing the percentage of its adjusted gross real estate investment portfolio that can be invested in ALFs and properties operated by ALCannual return to30% and 15%, respectively during 1997. Except for ALFs, no other limits have been set on the number of properties in which the Company will seek to invest, or of the concentration of investments in any one facility or any one city or state, or the type or form of investment. BORROWING POLICIES The Companyus.Borrowing Policies. We may incur additional indebtedness when, in the opinion of
the directors,our Board of Directors, it is advisable.The CompanyWe may incur such indebtedness to make investments in additional long-term carefacilitiesproperties or to meet the distribution requirements imposed upon REITs under the Internal Revenue Code of 1986, asamended (the "Code") (see Taxation of the Company -- Requirements for Qualifications).amended. For other short-term purposes,the Companywe may, from time to time, negotiate lines of credit, or arrange for other short-term borrowings from banks or otherwise.The CompanyWe may also arrange for long-term borrowings through public offerings or from institutional investors.In addition,
the Companywe may incur mortgage indebtedness on real estate whichit haswe have acquired through purchase, foreclosure or otherwise.The CompanyWe may also obtain mortgage financing for unleveraged or underleveraged properties in whichit haswe have invested or may refinance properties acquired on a leveraged basis. There is no limitation on the number or amount of mortgageswhichthat may be placed on any4one property, and the Company haswe have no policy with respect to limitations on borrowing, whether secured or unsecured.PROHIBITED INVESTMENTS AND ACTIVITIES TheProhibited Investments and Activities. Our policies,
of the Company,which are subject to change bytheour Board of Directors without stockholder approval, impose certain prohibitions and restrictions onvariousour investment practices or activities including prohibitions against:
• acquiring any real property unless the consideration paid for such real property is based on the fair market value of the property; • investing in any junior mortgage loan unless by appraisal or other method, the Directors determine that
(a) the capital invested in any such loan is adequately secured on the basis of the equity of the borrower in the property underlying such investment and the ability of the borrower to repay the mortgage loan; or
(b) such loan is a financing device we enter into to establish the priority of our capital investment over the capital invested by others investing with us in a real estate project;
• investing in commodities or commodity futures contracts (other than interest rate futures, when used solely for hedging purposes); • investing more than 1% of our total assets in contracts for sale of real estate unless such contracts are recordable in the chain of title; 3
• holding equity investments in unimproved, non-income producing real property, except such properties as are currently undergoing development or are presently intended to be developed within one year, together with mortgage loans on such property (other than first mortgage development loans), aggregating to more than 10% of our assets. Competition
In the
Company including prohibition against: (i) acquiring anyhealth care industry, we compete for real propertyunless the consideration paid for such real property is based on the fair market value of the property; (ii) investing in any junior mortgage loan unless by appraisal orinvestments with health care providers, othermethod, the directors determine that (a) the capital invested in any such loan is adequately secured on the basis of the equity of the borrower in the property underlying such investment and the ability of the borrower to repay the mortgage loan or (b) such loan is a financing device entered into by the Company to establish the priority of its capital investment over the capital invested by others investing with the Company in a real estate project; (iii)investing in commodities or commodity futures contracts (other than interest rate futures, when used solely for hedging purposes); (iv) investing more than 1% of the Company's total assets in contracts for sale of real estate unless such contracts are recordable in the chain of title; (v) holding equity investments in unimproved, non-income producing real property, except such properties as are currently undergoing development or are presently intended to be developed within one year, together with mortgage loans on such property (other than first mortgage development loans), aggregating to more than 10% of the Company's assets. COMPETITION The Company competes with otherhealth care related REITs, real estate partnerships,health care providersbanks, insurance companies and otherinvestors, including commercial banks, institutional banksinvestors. Many of our competitors are significantly larger andinsurance companies, many of which willhave greater financial resources and lower cost offundscapital than we have available to us. Our ability to compete successfully for real property investments will be determined by numerous factors, including our ability to identify suitable acquisition targets, our ability to negotiate acceptable terms for any such acquisition and theCompany, in the acquisition, leasingavailability andfinancingcost oflong-term care facilities.capital.The
operatorslessees and borrowers of our properties compete on a local, regional and,regionalin some instances, national basis withoperatorsother health care providers. The ability offacilities that provide comparable services. Operatorsthe lessee or borrower to compete successfully for patientsbased on qualityor residents at our properties depends upon several factors, including the levels of carereputation, physical appearance of facilities,and servicesoffered, family preferences, physician referrals, staff and price. INSURANCE The Company obtains title insurance with respect to each of its investments. The Company generally requires: (i) with respect to each owned property, an American Land Title Association ("ALTA") Extended Coverage Owner's Policy of Title Insurance with an insured amount equal to the purchase price, insuring that the Company holds fee simple title to the property subject only to those liens and encumbrances approved by the Company; and (ii) with respect to each mortgaged property, an ALTA Extended Coverage Lender's Policy of Title Insurance with an insured amount equal to the loan amount, insuring the Company's first-lien security interest in the property subject only to those liens and encumbrances approved by the Company. However, ALTA Extended Coverage Policies of Title Insurance are not available in all 5states, in which event the Company requires the broadest form of title coverage available in the particular jurisdiction. In addition, the Company requires that its tenants (in the case of owned properties) and borrowers (in the case of mortgaged properties) maintain comprehensive liability insurance and casualty insurance with policy specifications and insured limits customarily carried for similar properties and cause their insurers to name the Company as an additional insured, loss payee and/or mortgagee, as appropriate depending on the particular type of policy. In the case of casualty insurance, the insured limits may not be less than the full replacement cost of the improvements constructed on the property, and coverage is typically provided in the form of an "all-risk" policy. However, there are certain types of losses which may either be uninsurable or not economically insurable. For example, the Company generally requires its tenants and borrowers to carry flood insurance if the property is located within a flood plain area as designated by the applicable governmental authority, and earthquake insurance if the property is located in a state, such as California, where the risk of earthquake damage is high. Such flood and earthquake coverage is not always an insurable risk or may not be obtainable in amounts at least equal to the full replacement cost of the improvements constructed on the property. Accordingly, there is no assurance that adequate coverage exists with respect to each investment should there be serious flooding, seismic activities or other uninsurable casualty in the areas where the properties constituting the Company's investments are located. Should an uninsured (or less than fully insured) loss occur, the Company could lose its investment in, and anticipated profits and cash flow from, a property. EMPLOYEES The Company currently employs 13 persons. GOVERNMENT FINANCING AND REGULATION OF HEALTH CARE GENERAL Medicaid programs or the equivalent are currently in existence in all of the states in which the Company has nursing facility investments. While these programs differ in certain respects from state to state, they are all subject to certain federally imposed requirements, as a substantial portion of the funds available under these programs isprovided by thefederal government. Medicaid programs provide for payments to participatinglessees or borrowers, the reputation of the providers, physician referral patterns, physical appearances of the properties, family preferences, financial condition of the operator and other competitive systems of health carefacilities on behalf ofdelivery within theindigentcommunity, population andcertain other eligible persons. California and Texas provide for reimbursement at flat daily rates, as determined by the responsible state agency and depending on certain levels of care. In all other states, payments are based upon specific cost reimbursement formulas established by the applicable state. Medicare and most state Medicaid programs utilize a cost-based reimbursement system for nursing facilities which reimburses facilities for the reasonable direct and indirect allowable costs incurred in providing routine services (as defined by the programs) plus, in certain states, a return on equity, subject to certain cost ceilings. These costs normally include allowances for administrative and general costs as well as the costs of property and equipment (depreciation and interest, fair rental allowance or rental expense). In certain states, cost-based reimbursement is typically subject to retrospective adjustment through cost report settlement, and for certain states, payments made to a facility on an interim basis that are subsequently determined to be less than or in excess of allowable costs may be adjusted through future payments to the affected facility and to other facilities owned by the same owner. State Medicaid reimbursement programs vary as to the methodology used to determine the level of allowable costs which are reimbursed to operators. 6The Medicaid and Medicare programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy, intermediary determinations and governmental funding restrictions, all of which may materially increase or decrease program reimbursement to health care facilities. No assurance can be given as to whether the future funding of such programs will remain at levels comparable to the present levels. Both the Medicaid and Medicare programs contain specific requirements which must be adhered to at all times by health care facilities in order to qualify under the programs. Based upon such information as periodically received by the Company from the operators over the term of the loan, the Company believes that the nursing facilities in which it has investments are in substantial compliance with the various regulatory requirements applicable to them, although there can be no assurance that the operators are in compliance or will be so at any time. In addition to the requirements to be met by the nursing facilities for participation in the Medicaid and Medicare programs, the nursing facilities are subject to regulatory and licensing requirements of federal, state and local authorities. The operator of each long-term care facility is licensed annually by the board of health or other applicable agency in each state. In granting and renewing licenses, regulatory agencies consider, among other things, the physical buildings and equipment, the qualifications of the administrative personnel and nursing staff, the quality of care and continuing compliance with the laws and regulations relating to the operation of the facilities. State licensing of facilities is a prerequisite to certification under Medicaid and Medicare programs. In the ordinary course of business, the operators receive notices of deficiencies for failure to comply with various regulatory requirements and take appropriate corrective and preventive actions. The Company believes that the nursing facilities in which it has investments are in compliance with the applicable licensing or other regulation although there can be no assurance that the operators are or will be in compliance at any time. The Company has increased its investments in ALFs during 1996. ALFs are subject to certain state regulations and licensing requirements. In order to qualify as a state licensed facility, ALFs must comply with regulations which address, among other things, staffing, physical design, required services and resident characteristics. ALFs are also subject to various local building codes and other ordinances, including fire safety codes. These requirements vary from state to state and are monitored to varying degrees by state agencies. Currently, ALFs are not regulated as such by the federal government. State standards required for ALF providers are less stringent than those required of other licensed health care operators. There can be no assurance that federal regulations governing the operation of ALFs will not be implemented in the future or that existing state regulations will not be expanded. In addition, only certain states have adopted laws or regulations permitting individuals with higher acuity levels to remain in assisted living communities who may otherwise qualify for placement in a nursing facility. While only certain states presently provide for any Medicaid reimbursement for assisted living residences, several states are currently reviewing their policies and reimbursement programs to provide funding for assisted living residences. There can be no assurance that such states will adopt the Medicaid waiver program. HEALTH CARE REFORMdemographics.Government Regulation
The health care industry is
facing various challenges, including increased governmentheavily regulated by the government. Our borrowers andprivate payor pressure onlessees who operate health careproviders to control costs, the migration of patients from acute carefacilitiesinto extended care and home care settings and the vertical and horizontal consolidation of health care providers. The pressure to control health care costs intensified during 1993 and 1994 as a result of the national health care 7reform debate and will continue with renewed efforts in 1997 to balance the federal budget. The need to slow the growth rate in federal health care expenditures will be a priority. President Clinton's current budget proposal, for example, seeks $138 billion dollars in reductions in Medicare expenditures needed to address the short term solvency of the federal program, including significant limitations on growth in provider reimbursement. It is anticipated that further debate on overall structural reform of federal health care programs will affect additional legislative action on cost-containment. The Company believes that government and private efforts to contain and reduce health care costs will continue. These trendsarelikely to lead to reduced or slower growth in reimbursement for certain services provided by some of the Company's borrowers and lessees. The Company believes that the vast nature of the health care industry, the financial strength and operating flexibility of its operators and the diversity of its portfolio will mitigate against the impact of any such diminution in reimbursement. However, the Company cannot predict whether any of the above proposals or any other proposals will be adopted and, if adopted, no assurance can be given that the implementation of such reforms will not have a material adverse effect on the Company's financial condition or results of operations. TAXATION OF THE COMPANY GENERAL The Company has made an election to be taxed as a REIT under Sections 856 through 860 of the Code commencing with its taxable year ended December 31, 1992. The Company believes, that commencing with such taxable year, it has been organized and has operated in such a manner as to qualify for taxation as a REIT under the Code, and the Company intends to continue to operate in such a manner. However, no assurance can be given that the Company has operated or will be able to continue to operate in a manner to so qualify or remain qualified. If the Company qualifies for taxation as a REIT, it will generally not besubject tofederal corporate income taxes on its net income that is currently distributed to stockholders. This treatment substantially eliminates the "double taxation" (at the corporate and stockholder levels) that generally results from investment in a regular corporation. However, under certain circumstances, the Company will continue to be subject to federal income tax. The following is a general summary of the provisions that govern the federal income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof. REQUIREMENTS FOR QUALIFICATIONS The Code defines a REIT as a corporation, trust or association (i) which is managed by one or more trustees or directors; (ii) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (iii) which would be taxable as a domestic corporation but for Sections 856 through 859 of the Code; (iv) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (v) the beneficial ownership of which is held by 100 or more persons; (vi) during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals (as defined in the Code to include certain entities); and (vii) which meets certain other tests, described below. The Code provides that conditions (i) to (iv), inclusive, must be met during the entire taxable year and that condition (v) 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. 8To qualify as a REIT for a taxable year under the Code, the Company must elect or previously have elected to be so treated and must meet other requirements, certain of which are summarized below, including percentage tests relating to the sources of its gross income, the nature of the Company's assets and the distribution of its income to stockholders. INCOME TESTS In order to maintain its qualification as a REIT, the Company annually must satisfy three gross income requirements. First, at least 75% of the Company's gross income (excluding gross income from certain sales of property held primarily for sale) for each taxable year must be derived directly or indirectly from investments in real property (other than gains from property held primarily for sale), mortgages on real property, or certain qualified temporary investment income. Second, at least 95% of the Company's gross income (excluding gross income form certain sales of property held primarily for sale) for each taxable year must be derived from such real property investments described with respect to the 75% test, dividends, interest and gain from the sale or disposition of stock or securities (other than gains from certain sales of property held primarily for sale). Third, short-term gain from the sale or other disposition of stock or securities, gain from certain sales of property held primarily for sale, and gain from the sale or other disposition of real property held for less than four years (apart from involuntary conversions and sales of foreclosure property) must represent less than 30% of the Company's gross income for each taxable year. ASSET TEST At the close of each quarter of its taxable year, the Company must also satisfy three tests relating to the nature of its assets. First, at least 75% of the value of the Company's total assets (including the assets held by its subsidiaries and its allocable share of the assets held by partnerships in which it or its subsidiaries is a partner) must be represented by real estate assets (including interests in a qualifying REMIC and shares in a REIT), cash, cash items and government securities. Second, no more than 25% of the Company's total assets (including the assets held by its subsidiaries and its allocable share of the assets held by partnerships in which it or its subsidiaries is a partner) may be represented by securities other than those includable in the 75% asset class. Third, of the investments included in the 25% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets and the Company may not own more than 10% of any one issuer's outstanding voting securities. DISTRIBUTION REQUIREMENTS The Company, in order to qualify as a REIT, is required to distribute dividends (other than capital gain dividends) to its stockholders in an amount at least equal to (A) the sum of (i) 95% of the Company's "REIT taxable income" (computed without regard to the dividends paid deduction and by excluding the Company's net capital gain) and (ii) 95% of the net income (after tax), if any, from foreclosure property, minus (B) the excess of the sum of certain items of non-cash income over 5% of "REIT taxable income" as described in clause (A)(i) above. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year, if paid on or before the first regular dividend payment date after such declaration and if the Company so elects and specifies the dollar amount in its tax return. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income", as adjusted, it will be subject to tax thereon at regular corporate tax rates. Furthermore, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, the Company would 9be generally subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. FAILURE TO QUALIFY If the Company should fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. However, it is not possible to state whether in all circumstances the Company would be entitled to such statutory relief. If the relief provisions do not apply, the Company would be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to stockholders in any year in which the Company fails to qualify will not be deductible by the Company nor will they be required to be made. Unless entitled to relief under specific statutory provisions, the Company would also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification is lost. Failure to qualify for even one year could result in the Company's incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes. TAXATION OF STOCKHOLDERS - GENERAL As long as the Company qualifies as a REIT, distributions made to the Company's stockholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by them as ordinary income (which will not be eligible for the dividends received deduction for corporations). Distributions that are designated as capital gain dividends will be taxed as long-term capital gains to the extent they do not exceed the Company's actual net capital gain for the taxable year, although corporate stockholders may be required to treat up to 20% of any such capital gain dividend as ordinary income. Distributions in excess of current or accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder's common stock, but rather will reduce the adjusted basis of such shares. To the extent such distributions exceed the adjusted basis of a stockholder's common stock, they will be included in income as long-term capital gain (or short-term capital gain if the shares have been held for one year or less) assuming the shares are held as a capital asset in the hands of the stockholder. Under special tax rules for REITs, dividends declared in the last quarter of the calendar year and paid by January 31 of the following year are treated as paid on December 31 of the year declared. Stockholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. The Company and its stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. Other federal, state and local tax considerations may apply depending on the Company's and its stockholders' circumstances. FACTORS THAT MAY AFFECT FUTURE RESULTS Many of the statements herein are forward-looking in nature, and, accordingly, whether they prove to be accurate is subject to many risks and uncertainties. The actual results that the Company achieves may differ materially from many forward-looking statements herein. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and those contained in "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as those discussed elsewhere herein. 10GOVERNMENT REGULATION Health Care Reform. The health care industry is facing various challenges, including increased government and private payor pressure on health care providers to control costs, the migration of patients from acute care facilities into extended care and home care settings and the vertical and horizontal consolidation of health care providers. The pressure to control health care costs intensified during 1993 and 1994 as a result of the national health care reform debate and will continue with renewed efforts in 1997 to balance the federal budget. The need to slow the growth rate in federal health care expenditures will be a priority. President Clinton's current budget proposal, for example, seeks $138 billion in reductions in Medicare expenditures needed to address the short term solvency of the federal program, including significant limitations on growth in provider reimbursement. It is anticipated that further debate on overall structural reform of federal health care programs will affect additional legislative action on cost-containment. The Company believes that government and private efforts to contain and reduce health care costs will continue. These trends are likely to lead to reduced or slower growth in reimbursement for certain services provided by some of the Company's borrowers and lessees. The Company believes that the vast nature of the health care industry, the financial strength and operating flexibility of its operators and the diversity of its portfolio will mitigate against the impact of any such diminution in reimbursement. However, the Company cannot predict whether any of the above proposals or any other proposals will be adopted, and if adopted, no assurance can be given that the implementation of such reforms will not have a material adverse effect on the Company's financial condition or results of operations. Potential Operator Loss of Licensure or Certification. The health care industry is highly regulatedheavy regulation by federal, state and locallaw, and is directly affected by state and local licensure, fines, and loss of certification to participate in the Medicare and Medicaid programs, as well as potential criminal penalties. The failure of any borrower or lessee to comply with suchgovernments. These lawsrequirementsand regulationscould affect its ability to operate the facility or facilities and could adversely affect such borrower's or lessee's ability to make debt or lease payments to the Company. In the past several years, due to rising health care costs, there has been an increased emphasis on detecting and eliminating fraud and abuse in the Medicare and Medicaid programs. Payment of any consideration in exchange for referral of Medicare and Medicaid patients is generally prohibited by federal statute, which subjects violators to severe penalties, including exclusion from the Medicare and Medicaid programs, fines, and even prison sentences. In recent years, both federal and state governments have significantly increased investigation and enforcement activity to detect and punish wrongdoers. In addition, legislation has been adopted at both state and federal levels that severely restricts the ability of physicians to refer patients to entities in which they have a financial interest. It is anticipated that the trend toward increased investigation and informant activity in the area of fraud and abuse, as well as self-referral, will continue in future years. In the event that any borrower or lessee were to be found in violation of laws regarding fraud, abuse or self-referral, that borrower's or lessee's ability to operate a health care facility could be jeopardized, which could adversely affect the borrower's or lessee's ability to make debt or lease payments to the Company and, thereby, adversely affect the Company. Reliance on Government Reimbursement. A significant portion of the revenue of the Company's borrowers and lessees is derived from governmentally-funded reimbursement programs, such as Medicare and Medicaid. These programsarehighly regulated andsubject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations11of existing law. These changes may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by both government and other third-party payors. These changes may be applied retroactively. The ultimate timing or effect of these changes cannot be predicted. The failure of any borrower of funds from us or lessee of any of our properties to comply with such laws, requirements and regulations could result in sanctions or remedies such as denials of payment for new Medicare and Medicaid admissions, civil monetary penalties, state oversight and loss of Medicare and Medicaid participation or licensure. Such action could affect its ability to operate its facility or facilities and could adversely affect such borrower’s or lessee’s ability to make debt or lease payments to us. The properties owned by us and the manner in which they are operated are affected by changes in the reimbursement, licensing and certification policies of federal, state and local governments. Properties may also be affected by changes in accreditation standards or procedures of accrediting agencies that are recognized by governments in the certification process. In addition, expansion (including the addition of new beds or services or acquisition of medical equipment) and occasionally the discontinuation of services of health care facilities are, in some states, subjected to state and regulatory approval through “certificate of need” laws and regulations.
The ability of our borrowers and lessees to generate revenue and profit determines the underlying value of that property to us. Revenues of our borrowers and lessees are generally derived from payments for patient care. Sources of such payments for skilled nursing facilities include the federal Medicare program, state Medicaid programs, private insurance carriers, health care service plans, health maintenance organizations, preferred provider arrangements, self-insured employers, as well as the patients themselves.
A significant portion of the revenue of our skilled nursing facility borrowers and lessees is derived from governmentally-funded reimbursement programs, such as Medicare and Medicaid. Because of significant health care costs paid by such government programs, both federal and state governments have adopted and continue to consider various health care reform proposals to control health care costs. In recent years, there have been fundamental changes in the Medicare program
which havethat resulted in reduced levels of payment for a substantial portion of health care services.Moreover, health care facilities have experienced increasing pressures from private payers attempting to control health care costs, and reimbursement from private payers has in many cases effectively been reduced to levels approaching those of government payers.In many instances, revenues from Medicaid programs are already insufficient to cover the actual costs incurred in providing care to those patients. According to a report issued by Kaiser Family Foundation in January 2003, 19 states have reduced, or are considering reducing, nursing facility payment rates. Moreover, health care facilities have experienced increasing pressures from private payors attempting to control health care costs, and4
reimbursement from private payors has in many cases effectively been reduced to levels approaching those of government payors.Governmental and
popularpublic concern regarding health care costs may result in significant reductions in payment to health care facilities, and there can be no assurance that future payment rates for either governmental or privatehealth care planspayors will be sufficient to cover cost increases in providing services to patients. Any changes in reimbursement policies which reduce reimbursement to levels that are insufficient to cover the cost of providing patient care could adversely affect revenues ofthe Company'sour skilled nursing facility borrowers and lessees and to a much lesser extent our assisted living facilities borrowers and lessees and thereby adversely affect thoseborrowers'borrowers’ andlessees'lessees’ abilities to make their debt or lease payments tothe Company.us. Failure of the borrowers or lessees to make their debt or lease payments would have a direct and material adverse impact on us.On August 4, 2003, Centers for Medicare & Medicaid Services, commonly known as CMS, published a final rule announcing that it will implement a 3.0% market basket increase in skilled nursing facility prospective payment system rates for fiscal year 2004, which began October 1, 2003. In addition, the
Company. COMPETITIONrule will adjust fiscal year 2004 rates by an additional 3.26% to reflect cumulative forecast errors since the start of the skilled nursing facility prospective payment system on July 1, 1998.The
Company competesfederal physician self-referral law, commonly known as Stark II (or Stark Law), prohibits certain types of practitioners (including a medical doctor, doctor of osteopathy, optometrist, dentist or podiatrist) from making referrals for certain designated health services paid in whole or in part by Medicare and Medicaid to entities withother REITs, real estate partnerships,which the practitioner or a member of the practitioner’s immediate family has a financial relationship, unless the financial relationship fits within an applicable exception to the Stark Law. The Stark Law also prohibits the entity receiving the referral from seeking payment under the Medicare and Medicaid programs for services rendered pursuant to a prohibited referral. If an entity is paid for services rendered pursuant to a prohibited referral, it may incur civil penalties of up to $15,000 per prohibited claim and may be excluded from participating in the Medicare and Medicaid programs.Legislative Developments
Each year, legislative proposals are introduced or proposed in Congress and in some state legislatures that would affect major changes in the health care
providerssystem, either nationally or at the state level. Among the proposals under consideration are cost controls on state Medicaid reimbursements, health care provider cost-containment initiatives by public andother investors, including but not limitedprivate payors, health care coverage for uninsured, increased scrutiny of medical errors, limits on damages claimed in physician malpractice lawsuits, and a “Patient Bill of Rights” tobanks andincrease the liability of insurance companiesmanyas well as the ability ofwhich will have greater financial resources than the Company,patients to sue in theacquisition, leasing and financingevent ofhealth care facilities. There can be no assurance that suitable investmentsa wrongful denial of claim. We cannot predict whether any proposals will beidentifiedadopted or,that investments can be consummatedif adopted, what effect, if any, such proposals would have oncommercially reasonable terms. ENVIRONMENTAL MATTERSour business.Environmental Matters
Under various federal, state and local environmental laws, ordinances and regulations, an owner of real property or a secured lender (such as
the Company)us) may be liablein certain circumstancesfor the costs of removal or remediation ofcertainhazardous or toxic substances at, under or disposed of in connection with such property, as well ascertainother potential costs relating to hazardous or toxic substances (including government fines and damages for injuries to persons and adjacent property). Such laws often impose such liability without regard to whether the owner or secured lender knew of, or was responsible for, the presence or disposal of such substances and may be imposed on the owner or secured lender in connection with the activities of an operator of the property. The cost of any required remediation, removal, fines or personal or property damages and theowner'sowner’s or secured lender’s liability therefore could exceed the value of the property, and/or the assets of theowner.owner or secured lender. In addition, the presence of such substances, or the failure to properly dispose of or remediate such substances, may adversely affect theowner'sowner’s ability to sell or rent such property or to borrow using such property as collateral which, in turn, would reducethe Company'sour revenues.Although the
Company'smortgage loans that we provide and leases covering our properties require the borrower and the lessee to indemnifythe Companyus for certain environmental liabilities, the scope of such obligations may be limited andthere can be no assurancewe cannot assure that any such borrower or lessee would be able to fulfill its indemnification obligations.HEALTH CARE REAL ESTATE INVESTMENT RISKS Volatility5
Insurance
It is our current policy and we intend to continue this policy that all borrowers of
Valuefunds from us and lessees ofReal Estate. Realany of our properties secure adequate comprehensive propertyinvestments inand general and professional liability insurance that covers us as well as thehealthborrower and/or lessee. Even though that is our policy, certain borrowers and lessees have been unable to obtain general and professional liability insurance because the cost of such insurance has increased substantially and some insurers have stopped offering such insurance for long term careindustryfacilities. Additionally, insurance companies have filed for bankruptcy protection leaving certain of our borrowers and/or lessees without coverage for periods that were believed to be covered prior to such bankruptcies. The unavailability and associated exposure as well as increased cost of such insurance could have a material adverse effect on the lessees and borrowers, including their ability to make lease or mortgage payments. Although we contend that as a non-possessory landlord we aresubject to varying degrees of risk. The economic performance and values of health carenot generally responsible for what takes place on real estatecanwe do not possess, claims including general and professional liability claims, may still beaffected by many factors including governmental regulation, economic conditions,asserted against us which may result in costs anddemandexposure forhealth care services. Therewhich insurance is not available. Certain risks may be uninsurable, not economically insurable or insurance may not be available and there can be no assurance that we, a borrower or lessee will have adequate funds to cover all contingencies. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could be subject to an adverse claim including claims for general or professional liability, could lose the capital that we have invested in the properties, as well as the anticipated future revenue for the properties and, in the case of debt which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the properties. Certain losses such as losses due to floods or seismic activity if insurance is available may be insured subject to certain limitations including large deductibles or co-payments and policy limits.Employees
We currently employ 16 people. The employees are not members of any labor union, and we consider our relations with our employees to be excellent.
Taxation of Our Company
General. We believe that we have been organized and have operated in such a manner as to qualify for taxation as a REIT under Sections 856 to 860 of the Internal Revenue Code of 1986, as amended, commencing with our taxable year ended December 31, 1992. We intend to continue to operate in such a manner, but no assurance can be given that we have operated or will be able to continue to operate in a manner so as to qualify or to remain qualified. This summary is qualified in its entirety by the applicable Internal Revenue Code provisions, rules and regulations, and administrative and judicial interpretations.
If we continue to qualify for taxation as a REIT, we will generally not be subject to federal corporate income taxes as long as we distribute all of our taxable income as dividends. This treatment substantially eliminates the “double taxation” (i.e., at the corporate and stockholder levels) that generally results from investment in a corporation. However, we will continue to be subject to federal income tax as follows:
First, we will be taxed at regular corporate rates on any undistributed taxable income, including undistributed net capital gains. Second, under certain circumstances, we may be subject to the alternative minimum tax, if our dividend distributions are less than our alternative minimum taxable income. Third, if we have (i) net income from the sale or other disposition of foreclosure property which is held primarily for sale to customers in the ordinary course of business or (ii) other non-qualifying income from foreclosure property, we may elect to be subject to tax at the highest corporate rate on such income, if necessary to maintain our REIT status. Fourth, if we have net income from prohibited transactions (which are, in general, certain sales or other dispositions of property (other than foreclosure property) held primarily for sale to customers in the ordinary course of business), such income will be subject to a 100% tax. Fifth, if we fail to satisfy the 75% gross income test or the 95% gross income test, but nonetheless maintain our qualification as a REIT because certain other requirements have been met, we will be subject to a 100% tax on an amount equal to (a) the gross income attributable to the greater of the amount by which we fail the 75% or 95% test multiplied by (b) a fraction intended to reflect our profitability. 6
Sixth, if we fail to distribute during each calendar year at least the sum of (i) 85% of our ordinary income for such year, (ii) 95% of our REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. Seventh, if we acquire an asset which meets the definition of a built-in gain asset from a corporation which is or has been a C corporation (i.e., generally a corporation subject to full corporate-level tax) in certain transactions in which the basis of the built-in gain asset in our hands is determined by reference to the basis of the asset in the hands of the C corporation, and if we subsequently recognize gain on the disposition of such asset during the ten-year period, called the recognition period, beginning on the date on which we acquired the asset, then, to the extent of the built-in gain (i.e., the excess of (a) the fair market value of such asset over (b) our adjusted basis in such asset, both determined as of the beginning of the recognition period), such gain will be subject to tax at the highest regular corporate tax rate, pursuant to IRS regulations. Requirements for Qualification. The Internal Revenue Code defines a REIT as a corporation, trust or association:
(1) which is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) which would be taxable, but for Sections 856 through 860 of the Internal Revenue Code, as a domestic corporation; (4) which is neither a financial institution; nor, an insurance company subject to certain provisions of the Internal Revenue Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) during the last half of each taxable year not more than 50% in value of the outstanding stock of which is owned, actually or constructively, by five or fewer individuals (including specified entities); and (7) which meets certain other tests, described below, regarding the amount of its distributions and the nature of its income and assets. The Internal Revenue Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months.
Income Tests. There presently are two gross income requirements that we must satisfy to qualify as a REIT:
• First, at least 75% of our gross income (excluding gross income from “prohibited transactions,” as defined below) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property, including rents from real property, or from certain types of temporary investment income. • Second, at least 95% of our gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from income that qualifies under the 75% test or from dividends, interest and gain from the sale or other disposition of stock or securities. Cancellation of indebtedness income generated by us is not taken into account in applying the 75% and 95% income tests discussed above. A “prohibited transaction” is a sale or other disposition of property (other than foreclosure property) held for sale to customers in the ordinary course of business. Any gain realized from a prohibited transaction is subject to a 100% penalty tax.
Asset Tests. We, at the close of each quarter of our taxable year, must also satisfy four tests relating to the nature of our assets.
• First, at least 75% of the value of our total assets must be represented by real estate assets (including stock or debt instruments held for not more than one year purchased with the proceeds of a stock offering or long-term (at least five years) public debt offering of our company), cash, cash items and government securities. • Second, not more than 25% of our total assets may be represented by securities other than those in the 75% asset class. 7
• Third, of the investments included in the 25% asset class, the value of any one issuer’s securities owned by us may not exceed 5% of the value of our total assets and we may not own more than 10% of any one issuer’s outstanding voting securities. • Fourth, the Tax Relief Extension Act of 1999 (or 99 Act), provides that, subject to certain exceptions, for taxable years commencing after December 31, 2000, we may not own more than 10% of the total value of the securities of any issuer. See the 99 Act description beginning on page 9. • Fifth, the 99 Act also provides that not more than 20% of our value may be represented by securities of one or more taxable REIT subsidiaries. Ownership of a Partnership Interest or Stock in a Corporation. We own interests in various partnerships. In the case of a REIT that is a partner in a partnership, Treasury regulations provide that for purposes of the REIT income and asset tests the REIT will be deemed to own its proportionate share of the assets of the partnership, and will be deemed to be entitled to the income of the partnership attributable to such share. The ownership of an interest in a partnership by a REIT may involve special tax risks, including the challenge by the Internal Revenue Service of the allocations of income and expense items of the partnership, which would affect the computation of taxable income of the REIT, and the status of the partnership as a partnership (as opposed to an association taxable as a corporation) for federal income tax purposes.
We also own interests in a number of subsidiaries which are intended to be treated as qualified real estate investment trust subsidiaries. The Internal Revenue Code provides that such subsidiaries will be ignored for federal income tax purposes and all assets, liabilities and items of income, deduction and credit of such subsidiaries will be treated as assets, liabilities and such items of ours.
If any partnership or qualified real estate investment trust subsidiary in which we own an interest were treated as a regular corporation (and not as a partnership or qualified real estate investment trust subsidiary) for federal income tax purposes, we would likely fail to satisfy the REIT asset test prohibiting a REIT from owning greater than 10% of the voting power of the stock or value of securities of any issuer, as described above, and would therefore fail to qualify as a REIT. We believe that each of the partnerships and subsidiaries in which we own an interest will be treated for tax purposes as a partnership or qualified real estate investment trust subsidiary, respectively, although no assurance can be given that the Internal Revenue Service will not successfully challenge the status of any such organization.
REMIC. A regular or residual interest in a REMIC will be treated as a real estate asset for purposes of the REIT asset tests, and income derived with respect to such interest will be treated as interest on an obligation secured by a mortgage on real property,
acquiredassuming that at least 95% of the assets of the REMIC are real estate assets. If less than 95% of the assets of the REMIC are real estate assets, only a proportionate share of the assets of and income derived from the REMIC will be treated as qualifying under the REIT asset and income tests. All of our REMIC Certificates are secured by real estate assets, therefore we believe that our REMIC interests fully qualify for purposes of the REIT income and asset tests.Annual Distribution Requirements. In order to qualify as a REIT, we are required to distribute dividends (other than capital gain dividends) to our stockholders annually in an amount at least equal to:
(1) the sum of:
(A) 90% (95% for taxable years ending prior to January 1, 2001) of our “real estate investment trust taxable income” (computed without regard to the dividends paid deduction and our net capital gain); and
(B) 90% (95% for taxable years ending prior to January 1, 2001) of the net income, if any (after tax), from foreclosure property; minus
(2) the excess of certain items of non-cash income over 5% of our real estate investment trust taxable income. These annual distributions are paid in the taxable year to which they relate. Alternatively, they must be declared and payable to stockholders of record in either October, November, or December and paid during January of the following year. In addition, if we elect, the dividends may be declared before the due date of the tax return (including extensions) and paid on or before the first regular dividend payment date after such declaration, and we must specify the dollar amount in our tax returns.
8
Amounts distributed must not be preferential; that is, every stockholder of the class of stock with respect to which a distribution is made must be treated the same as every other stockholder of that class, and no class of stock may be treated otherwise than in accordance with its dividend rights as a class.
To the extent that we do not distribute all of our net long-term capital gain or distribute at least 90% (95% for taxable years ending prior to January 1, 2001), but less than 100%, of our “real estate investment trust taxable income,” as adjusted, it will be subject to tax on such amounts at regular corporate tax rates. Furthermore, if we should fail to distribute during each calendar year (or, in the case of distributions with declaration and record dates in the last three months of the calendar year, by the
Companyend of the following January) at least the sum of:
(1) 85% of our real estate investment trust ordinary income for such year; (2) 95% of our real estate investment trust capital gain net income for such year; and (3) any undistributed taxable income from prior periods; we would be subject to a 4% excise tax on the excess of such required distributions over the amounts actually distributed. Any real estate investment trust taxable income and net capital gain on which this excise tax is imposed for any year is treated as an amount distributed during that year for purposes of calculating such tax.
Failure to Qualify. If we fail to qualify for taxation as a REIT in any taxable year, and certain relief provisions do not apply, we will
appreciate 12be subject to tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Distributions to stockholders in any year in which we fail to qualify as a REIT will not be deductible by us, nor will any distributions be required to be made. Unless entitled to relief under specific statutory provisions, we will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances we would be entitled to the statutory relief. Failure to qualify for even one year could substantially reduce distributions to stockholders and could result in our incurring substantial indebtedness (to the extent borrowings are feasible) or liquidating substantial investments in order to pay the resulting taxes. 99 Act.The 99 Act has made a number of substantial changes to the qualification and tax treatment of REITs. The REIT changes are generally effective for taxable years commencing after December 31, 2000. The following is a brief summary of certain of the significant REIT provisions contained in the 99 Act.
(1) Investment limitations and taxable REIT subsidiaries. The 99 Act modifies the REIT asset test by adding a requirement that except for (I) “Safe Harbor Debt” and (II) the ownership of stock in “taxable REIT subsidiaries”, a REIT cannot own more than 10% of the total value of the securities of any issuer (or 10% Rule). The 10% Rule becomes effective for taxable years commencing after December 31, 2000. “Safe Harbor Debt” is non-contingent, non-convertible debt (or straight-debt) which satisfies one of the following three requirements: (a) the straight-debt is issued by an individual, or (b) all of the securities of the issuer owned by the REIT is straight debt or (c) the issuer is a partnership in which the REIT owns at least 20% of its profits. (2) For a corporation to qualify as a taxable REIT subsidiary the following requirements must be satisfied.
(1) The REIT must own stock in the subsidiary corporation. (2) Both the REIT and the subsidiary corporation must join in an election that the subsidiary corporation be treated as a “taxable REIT subsidiary” of the REIT. (3) The subsidiary corporation cannot directly or indirectly operate or manage either a lodging or health care facility. (4) The subsidiary corporation generally cannot provide to any person rights to any brand name under which lodging or health care facilities are operated.
A taxable REIT subsidiary can provide a limited amount of services to tenants of REIT property (even if such services were not considered customarily furnished in connection with the rental of real property) and can manage or operate properties, generally for third parties, without causing the rents received by the REIT from such parties not to be treated as rent from real properties. The rule that rents paid to a REIT do not qualify as rental from real property if the REIT owns more than 10% of the corporation paying the rent is modified by excepting rents paid by taxable REIT subsidiaries provided that 90% of the space is leased to third parties at comparable rents for comparable space. 9
Interest paid by a taxable REIT subsidiary to the related REIT is subject to the earnings stripping rules contained in Section 163(j) of the Code and therefore the taxable REIT subsidiary cannot deduct interest in any year that it would exceed 50% of the subsidiary’s adjusted gross income. If any amount of interest, rent, or other deductions of the taxable REIT subsidiary to be paid to the REIT is determined not to be at arm’s length, an excise tax of 100% is imposed on the portion that is determined to be excessive. However, rent received by a REIT shall not fail to qualify as rents from real property by reason of the fact that all or any portion of such rent is redetermined for purposes of the excise tax. The Act permits a REIT to own up to 100% of the stock of a “taxable REIT subsidiary.” However, the value of all of the securities of taxable REIT subsidiaries owned by the REIT cannot exceed 20% of the value of the REIT’s assets. The 10% Rule generally will not apply to securities owned by a REIT on July 12, 1999 (or Transition Rule). However, the Transition Rule would cease to apply to securities of an issuer if, after July 12, 1999, the REIT acquires additional securities of such issuer or if such issuer engages in a substantial new line of business, or acquires any substantial assets, other than in a reorganization or in a transaction qualifying under Section 1031 or 1033 of the Code.
(3) Ownership of health care facilities. The 99 Act permits a REIT to own and operate a health care facility for at least two years, and treat it as permitted “foreclosure” property, if the facility is acquired as the result of a default (or imminent default) of a lease or indebtedness. (4) REIT distribution requirements. The 99 Act reduces the requirement that a REIT must distribute at least 95% of its income as deductible dividends to 90% of its income. (5) Rents from personal property. A REIT may treat rent from personal property as rent from real property so long as the rent from personal property does not exceed 15% of the total rent from both real and personal property for the taxable year. The Act provides that this determination will be made by comparing the fair market value of the personal property to the fair market value of the real and personal property. State and local taxation.We may be subject to state or local taxation in various state or local jurisdictions, including those in which we transact business or reside. Our state and local tax treatment may not conform to the federal income tax consequences discussed above.
Investor Information
We make available to the public free of charge through our internet website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after we electronically file such reports with, or furnish such reports to, the Securities and Exchange Commission. Our internet website address iswww.ltcproperties.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this Annual Report on Form 10-K.
Corporate Governance Guidelines
We have adopted Corporate Governance Policies. The Corporate Governance Policies are posted on our website (www.ltcproperties.com) and are available in print to any stockholder who requests a copy.
Committee Charters
The Board of Directors has an Audit Committee, Compensation Committee and Nominating/ Corporate Governance Committee. The Board of Directors has adopted written charters for each committee, and we have posted them on our website (www.ltcproperties.com) and they are available in print to any stockholder who requests a copy.
Cautionary Statements
Certain information contained in this annual report includes statements that are not purely historical and are “forward looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All statements other than historical facts contained in this annual report are forward looking statements. These forward looking statements involve a number of risks and
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uncertainties. All forward looking statements included in this annual report are based on information available to us on the date hereof, and we assume no obligation to update such forward looking statements. Although we believe that thevalueassumptions and expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. The actual results achieved by us may differ materially from any forward looking statements due to the risks and uncertainties ofproperty securingsuch statements.We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the
Company's mortgage loans or any property acquired byinformation presented in our filings and reports.Such risks and uncertainties include, among other things, the
Companyfollowing risks including those described in more detail below:
• 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. Recently Enacted Tax Legislation Could have an Adverse Effect on the Market Price of our Equity Securities.On May 28, 2003, President Bush signed into law legislation that, for individual taxpayers, will generally reduce the tax rate on corporate dividends to a maximum of 15% for tax years 2003 to 2008. REIT dividends generally will not
depreciate. Volatilityqualify for this reduced tax rate because a REIT’s income generally is not subject to corporate level tax. This new law could cause stock in non-REIT corporations to be a more attractive investment to individual investors than stock in REITs and could have an adverse effect on the market price or our equity securities.A Failure to Maintain or Increase our Dividend Could Reduce the Market Price of Our Stock. During calendar 2002 we paid a quarterly dividend of $.10 per common share of stock. During calendar 2003, we paid a $.10 dividend in the first quarter, a $.15 dividend in the second and third quarter and a $.25 dividend in the fourth quarter on our common stock. The ability to maintain or raise our common dividend is dependent, to a large part, on growth of funds from operations. This growth in turn depends upon increased revenues from additional investments and loans, rental increases and mortgage rate increases.
At Times, We May Have Limited Access to Capital Which Will Slow Our Growth. A REIT is required to make dividend distributions and retains little capital for growth. As a result, a REIT is required to grow through the steady investment of new capital in real estate assets. Presently, we believe capital is readily available to us. However, there will be times when we will have limited access to capital from the equity and/or debt markets. During such periods, virtually all of our available capital will be required to meet existing commitments and to reduce existing debt. We may not be able to obtain additional equity or debt capital or dispose of assets on favorable terms, if at all, at the time we require additional capital to acquire health care properties on a competitive basis or meet our obligations.
Income and
Returns.Returns from Health Care Facilities Can be Volatile. The possibility that the health carefacilitiesproperties in which we invest will not generate income sufficient to meet operating expenses, will generate income and capital appreciation, if any, at rates lower than those anticipated or will yield returns lower than those available through investments in comparable real estate or other investments are additional risks of investing in health care related real estate. Income from properties and yields from investments in such properties may be affected by many factors, including changes in governmental regulation (such as zoninglaws)laws and government payment), general or local economic conditions (such as fluctuations in interest rates and employment conditions), the available local supply of and demand for improved real estate, a reduction in rental income as the result of an inability to maintain occupancy levels, natural disasters (such as earthquakes and floods) or similar factors.Illiquidity of Real Estate Investments. Real estate investments are relatively illiquid and, therefore, tend to limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions. All of the Company's properties are "special purpose" properties that could not be readily converted to general residential, retail or office use. Transfers of operations of nursing homes and other health care-related facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and other types of real estate. Thus, if the operation of any of the Company's properties becomes unprofitable due to competition, age of improvements or other factors such that the borrower or lessee becomes unable to meet its obligations on the debt or lease, the liquidation value of the property may be substantially less -- relative to the amount owing on the mortgage loan -- than would be the case if the property were readily adaptable to other uses. The receipt of liquidation proceeds could be delayed by the approval process of any state agency necessary for the transfer of the property. In addition, certain significant expenditures associated with real estate investment (such as real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment. Should such events occur, the Company's income and funds available for distribution would be adversely affected. Uninsured Loss. The Company currently requires, and it is the intention of the Company to continue to require, all borrowers and lessees to secure adequate comprehensive property and liability insurance that covers the Company as well as the borrower and/or lessee. Certain risks may, however, be uninsurable or not economically insurable and there can be no assurance the Company or a lessee will have adequate funds to cover all contingencies itself. Should such an uninsured loss occur, the Company could lose its invested capital. DependenceWe Depend on Lease Income and Mortgage Payments from Real Property. Since a substantial portion of
the Company'sour income is derived from mortgage payments and lease income from real property,the Company'sour income would be adversely affected if a significant number ofthe Company'sour borrowers or lessees were unable to meet their obligations tothe Companyus or ifthe Companywe were unable to leaseitsour properties or make mortgage loans on economically favorable terms. There can be no assurance that any lessee will exercise its option to renew its lease upon the expiration of the initial term or that if such failure to renew were to occur,the Companywe could lease the property to others on favorable terms.13Item 2. PROPERTIES PORTFOLIO As11
We Rely on a Few Major Operators.
Assisted Living Concepts, Inc. (or ALC) leases 37 assisted living properties with a total of 1,434 units owned by us representing approximately 12.6%, or $72.5 million, of our total assets. In October 2001, ALC filed for reorganization under Chapter 11 of the federal bankruptcy laws. The filing was pre-negotiated with sufficient debt holders to allow ALC to reorganize its debt and equity and emerge from bankruptcy as of 12:01 a.m. on January 1, 2002. At the request of our Board of Directors, we agreed to reduce total rents under the 37 leases by $0.9 million a year, beginning January 1, 2002. Our Chairman, CEO and President, Mr. Andre C. Dimitriadis, became a Board member of ALC as of January 1, 2002.
ALC is a publicly traded company, and as such is subject to the filing requirements of the Securities and Exchange Commission.
Alterra Healthcare Corporation (or Alterra) leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 12.4%, or $71.3 million, of our total assets at December 31,
1996,2003. Alterra announced on January 22, 2003 that it had filed a voluntary petition with theCompany`s real estate investment portfolio consistedU.S. Bankruptcy Court for the District ofinvestmentsDelaware to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Alterra’s Plan of Reorganization was approved in November 2003 and Alterra emerged from bankruptcy in December 2003 as a non-publicly traded company. All of our leases with Alterra were assumed, without change, by the reorganized Alterra.Our financial position and ability to make distributions may be adversely affected by further financial difficulties experienced by ALC and Alterra or any of our other lessees and borrowers, including additional bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with us or our borrowers when it expires.
Our Borrowers and Lessees Face Competition in the Healthcare Industry. The long-term care industry is highly competitive and we expect that it may become more competitive in the future. Our borrowers and lessees are competing with numerous other companies providing similar long-term care services or alternatives such as home health agencies, hospices, life care at home, community-based service programs, retirement communities and convalescent centers. There can be no assurance that our borrowers and lessees will not encounter increased competition in the future which could limit their ability to attract residents or expand their businesses and therefore affect their ability to make their debt or lease payments to us.
The Healthcare Industry is Heavily Regulated by the Government. Our borrowers and lessees who operate health care facilities are subject to heavy regulation by federal, state and local governments. These laws and regulations are subject to frequent and substantial changes resulting from legislation, adoption of rules and regulations, and administrative and judicial interpretations of existing law. These changes may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by both government and other third-party payors. These changes may be applied retroactively. The ultimate timing or effect of these changes cannot be predicted. The failure of any borrower of funds from us or lessee of any of our properties to comply with such laws, requirements and regulations could affect its ability to operate its facility or facilities and could adversely affect such borrower’s or lessee’s ability to make debt or lease payments to us.
Our Borrowers and Lessees Rely on Government and Third Party Reimbursement. The ability of our borrowers and lessees to generate revenue and profit determines the underlying value of that property to us. Revenues of our borrowers and lessees are generally derived from payments for patient care. Sources of such payments include the federal Medicare program, state Medicaid programs, private insurance carriers, health care service plans, health maintenance organizations, preferred provider arrangements, self-insured employers, as well as the patients themselves.
A significant portion of the revenue of our borrowers and lessees is derived from governmentally-funded reimbursement programs, such as Medicare and Medicaid. Because of significant health care costs paid by such government programs, both federal and state governments have adopted and continue to consider various health care reform proposals to control health care costs. In recent years, there have been fundamental changes in the Medicare program that resulted in reduced levels of payment for a substantial portion of health care services. In many instances, revenues from Medicaid programs are already insufficient to cover the actual costs incurred in providing care to those patients, and several states have reduced, or are considering reducing, nursing facility payment rates. Moreover, health care facilities have experienced increasing pressures from private payors attempting to control
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health care costs, and reimbursement from private payors has in many cases effectively been reduced to levels approaching those of government payors.Governmental and public concern regarding health care costs may result in significant reductions in payment to health care facilities, and there can be no assurance that future payment rates for either governmental or private payors will be sufficient to cover cost increases in providing services to patients. Any changes in reimbursement policies which reduce reimbursement to levels that are insufficient to cover the cost of providing patient care could adversely affect revenues of our borrowers and lessees and thereby adversely affect those borrowers’ and lessees’ abilities to make their debt or lease payments to us. Failure of the borrowers or lessees to make their debt or lease payments would have a direct and material adverse impact on us.
On August 4, 2003, Centers for Medicare & Medicaid Services, commonly known as CMS, published a final rule announcing that it will implement a 3.0% market basket increase in skilled nursing facility prospective payment system rates for fiscal year 2004, which began October 1, 2003. In addition, the rule will adjust fiscal year 2004 rates by an additional 3.26% to reflect cumulative forecast errors since the start of the skilled nursing facility prospective payment system on July 1, 1998.
Congress and the States Have Enacted Healthcare Reform measures. The health care industry is facing various challenges, including increased government and private payor pressure on health care providers to control costs. While the Bush Administration has proposed expanded funding for Medicare prescription drug coverage, it has stated that it intends to offset the cost of this benefit in part from savings from overpayments to other Medicare providers. In addition, the Medicare Payment Advisory Commission, known as the MedPAC, an independent federal body established to advise Congress on issues affecting the Medicare program, recommended in a March 2003 report that Congress adopt additional reductions in skilled nursing facility reimbursement. While the MedPAC recommendations are not binding on Congress, they may affect congressional consideration of future Medicare reimbursement legislation. In June 2003, the U.S. House of Representatives and Senate adopted separate Medicare reform bills, neither of which would reduce Medicare skilled nursing facility rates. Nevertheless, no assurances can be given that legislation ultimately enacted by Congress, if any, would not reduce Medicare reimbursement to skilled nursing facilities or result in additional costs for operators of skilled nursing facilities.
The Balanced Budget Act enacted significant changes to the Medicare and Medicaid programs designed to modernize payment and health care delivery systems while achieving substantial budgetary savings. In seeking to limit Medicare reimbursement for long term care services, Congress established the prospective payment system for skilled nursing facility services to replace the cost-based reimbursement system. Skilled nursing facilities needed to restructure their operations to accommodate the new Medicare prospective payment system reimbursement. Since the skilled nursing facility prospective payment system was enacted, several publicly held operators of long-term care facilities and at least two publicly held operators of assisted living facilities have filed for reorganization under Chapter 11 of the federal bankruptcy laws. While certain long-term care operators and both assisted living operators have emerged from bankruptcy, during their reorganizations and in some instances subsequent thereto, they reduced their operations by rejecting leases and/or defaulting on loans resulting in properties being returned to lessors or lenders. There can be no assurances given that the remainder of 2004 and future years will not include additional bankruptcies of skilled nursing and assisted living operators.
In addition, comprehensive reforms affecting the payment for and availability of health care services have been proposed at the federal and state levels and major reform proposals have been adopted by certain states. Congress and state legislatures can be expected to continue to review and assess alternative health care delivery systems and payment methodologies. Changes in the law, new interpretations of existing laws, or changes in payment methodology may have a dramatic effect on the definition of permissible or impermissible activities, the relative costs associated with doing business and the amount of reimbursement by the government and other third party payors.
Moreover, many states are facing significant budget shortfalls, and most states are taking steps to implement cost controls within their Medicaid programs. On May 28, 2003, President Bush signed into law legislation providing $20.0 billion in temporary assistance to the states, $10.0 billion of which is earmarked for state Medicaid programs. However, in light of forthcoming regulations and continuing state Medicaid program reform and budget cuts, no assurance can be given that the implementation of such regulations and reform will not have a material adverse effect on our financial condition or results of operations.
We Could Incur More Debt.We operate with a policy of incurring debt when, in the opinion of our directors, it is advisable. We may incur additional debt by issuing debt securities in a public offering or in a private transaction.
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Accordingly, we could become more highly leveraged. The degree of leverage could have important consequences to stockholders, including affecting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, development or other general corporate purposes and making us more vulnerable to a downturn in business or the economy generally.A Failure to Reinvest Cash Available to Us Could Adversely Affect Our Future Revenues and Our Ability to Increase Dividends to Stockholders; There is Considerable Competition in Our Market for Attractive Investments. From time to time, we will have cash available from (1) proceeds of sales of shares of securities, (2) proceeds from new debt issuances, (3) principal payments on our mortgages and other investments, (4) sale of properties, and (5) funds from operations. We may reinvest this cash in health care investments in accordance with our investment policies, repay outstanding debt or invest in qualified short-term investments. We compete for real estate investments with a broad variety of potential investors. The competition for attractive investments negatively affects our ability to make timely investments on acceptable terms. Delays in acquiring properties or making loans will negatively impact revenues and perhaps our ability to increase distributions to our stockholders.
Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences to Our Stockholders. We intend to operate so as to qualify as a REIT under the Code. We believe that we have been organized and have operated in a manner which would allow us to qualify as a REIT under the Code beginning with our taxable year ended December 31, 1992. However, it is possible that we have been organized or have operated in a manner which would not allow us to qualify as a REIT, or that our future operations could cause us to fail to qualify. Qualification as a REIT requires us to satisfy numerous requirements (some on an annual and quarterly basis) established under highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations, and involves the determination of various factual matters and circumstances not entirely within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must be derived from qualifying sources, and we must pay dividends to stockholders aggregating annually at least 90% (95% for taxable years ending prior to January 1, 2001) of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding capital gains). Legislation, new regulations, administrative interpretations or court decisions could significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. However, we are not aware of any pending tax legislation that would adversely affect our ability to operate as a REIT.
If we fail to qualify as a REIT in any taxable year, we will be subject to federal income tax (including any applicable alternative minimum tax) on our taxable income at regular corporate rates. Unless we are entitled to relief under statutory provisions, we would be disqualified from treatment as a REIT for the four taxable years following the year during which we lost qualification. If we lose our REIT status, our net earnings available for investment or distribution to stockholders would be significantly reduced for each of the years involved. In addition, we would no longer be required to make distributions to stockholders.
Our Properties are Subject to Licensing, Certification and Accreditation. In addition to the requirements to be met by skilled nursing facilities
(described below)for participation in32the Medicare and Medicaid programs, skilled nursing facilities are subject to regulatory and licensing requirements of federal, state and local authorities. We have no direct control over our borrowers’ or tenants’ ability to meet the numerous state and federal regulatory requirements. If a borrower or tenant does not continue to meet all regulatory requirements, such borrower or tenant may lose its ability to provide or bill for health care services. If we cannot attract another health care provider on a timely basis or on acceptable terms, our revenues would be adversely impacted. In addition, our properties are special purpose properties that may not be easily adaptable to uses unrelated to health care. Transfers of operations of health care facilities are subject to regulatory approvals not required for transfers of other types of commercial operations and real estate.Our Remedies May Be Limited When Mortgage Loans Default. To the extent we invest in mortgage loans, such mortgage loans may or may not be recourse obligations of the borrower and generally will not be insured or guaranteed by governmental agencies or otherwise. In the event of a default under such obligations, we may have to foreclose on the property underlying the mortgage or protect our interest by acquiring title to a property and thereafter make substantial improvements or repairs in order to maximize the property’s investment potential. Borrowers may contest enforcement of foreclosure or other remedies, seek bankruptcy protection against such enforcement and/or bring claims for lender liability in response to actions to enforce mortgage obligations. If a borrower seeks bankruptcy protection, the Bankruptcy Court may impose an automatic stay that would preclude us from enforcing foreclosure or other remedies against the borrower. Relatively high “loan to value” ratios and declines in the value of the property may prevent us from realizing an amount equal to our mortgage loan upon foreclosure.
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Investments in Commercial Mortgage Backed Securities are Subject to Real Estate Risks Relating to the Underlying Properties. We retain subordinated portions of the REMIC Certificates issued in our securitizations. These REMIC Certificates are a form of mortgage backed securities and as such, we are subject to the same risks associated with investing directly in the underlying mortgage loans. This is especially true in our case due to the nature of the collateral properties securing the underlying mortgages in our securitizations. All of these properties are special purpose properties used for the delivery of long-term care services. Any risks associated with investing in these types of properties could impact the value of our investment in the REMIC Certificates we retain.
Investments in Commercial Mortgage-Backed Securities are Subject to Risks Associated with Prepayment of the Underlying Mortgages. As with many interest bearing mortgage-backed instruments, prepayments of the underlying mortgages may expose us to the risk that an equivalent rate of return is not available in the current market and that new investment of equivalent risk will have lower rates of return. Certain types of investments in commercial mortgage-backed securities may be interest only securities which expose the holder to the risk that the underlying mortgages may prepay at a faster rate than anticipated at acquisition. Faster than anticipated prepayments may cause the investment in interest only commercial mortgage-backed securities to have a lower than anticipated rate of return and could result in a loss of the initial investment under extreme prepayment scenarios.
Subordinated Securities may not be Repaid Upon Default. We invest in subordinated tranches of commercial mortgage backed securities (our retained REMIC Certificates). In general, subordinated tranches of commercial mortgage backed securities are entitled to receive repayment of principal only after all principal payments have been made on more senior tranches and also have subordinated rights as to receipt of interest distributions. In addition, an active secondary market for such subordinated securities is not as well developed as the market for other mortgage backed securities. Accordingly, such subordinated commercial mortgage backed securities may have limited marketability and there can be no assurance that a more efficient secondary market will develop.
We are Subject to Risks and Liabilities in Connection with Properties Owned Through Limited Liability Companies and Partnerships. We have ownership interests in limited liability companies and/or partnerships. We may make additional investments through these ventures in the future. Partnership or limited liability company investments may involve risks such as the following:
• our partners or co-members might become bankrupt (in which event we and any other remaining general partners or members would generally remain liable for the liabilities of the partnership or limited liability company); • our partners or co-members might at any time have economic or other business interests or goals which are inconsistent with our business interests or goals; • our partners or co-members may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT; and • agreements governing limited liability companies and partnerships often contain restrictions on the transfer of a member’s or partner’s interest or “buy-sell” or other provisions which may result in a purchase or sale of the interest at a disadvantageous time or on disadvantageous terms. We will, however, generally seek to maintain sufficient control of our partnerships and limited liability companies to permit us to achieve our business objectives. Our organizational documents do not limit the amount of available funds that we may invest in partnerships or limited liability companies. The occurrence of one or more of the events described above could have a direct and adverse impact on us.
Item 2. PROPERTIES
Investment Portfolio
At December 31, 2003, our “direct real estate investment portfolio” (properties that we own or on which we hold promissory notes secured by first mortgages) consisted of investments in 83 skilled nursing properties with 9,728 beds, 96 assisted living properties with 4,551 units and one school in 30 states.
The CompanyWe had approximately$223,578,000$456.0 million (before accumulated depreciation of$11,640,000)$73.4 million) invested inlong-term care facilities owned by the Companyproperties we own andleasedlease tooperators,lessees, approximately$178,262,000$72.7 million invested in mortgage loans (before allowance for doubtful accounts of$1,000,000)$1.3 million), and investments in REMIC Certificates with a carrying value of approximately$98,934,000, at estimated fair value,$61.7 million ($92,545,00063.1 million at amortizedcost) invested in REMIC Certificates. Skilled nursing facilities (SNFs). At December 31, 1996, the Company had investments in 248 skilled nursing facilities with a totalcost, prior to any adjustment of28,628 beds, in the form of direct ownership or mortgage loan interests, including interests in mortgages underlying the Company's investment in REMIC certificates.available-for-sale certificates to fair market value).15
Skilled nursing facilities provide restorative, rehabilitative and nursing care for people not requiring the more extensive and sophisticated treatment available at acute care hospitals. Many
of theskilled nursing facilities provide ancillary serviceswhichthat include occupational, speech, physical, respiratory and IV therapies, as well as provide sub-acute careservices. Suchservices which are paid either by the patient,orthepatient'spatient’s family, or throughthefederal Medicare or state Medicaid programs.Assisted living facilities (ALFs). At December 31, 1996, the Company had investments in 35 assisted living facilities with 1,456 units.Assisted living facilities serve elderly persons who require assistance with activities of daily living, butwhodo not require the constant supervision skilled nursing facilities provide. Services aregenerallyusually available 24-hours a day and include personal supervision and assistance with eating, bathing, grooming and administering medication. The facilities provide a combination of housing, supportive services, personalized assistance and health care designed to respond to individual needs.OWNED PROPERTIESThe school in our real estate investment portfolio is a charter school. Charter schools provide an alternative to the traditional public school. Charter schools are generally autonomous entities authorized by the state or locality to conduct operations independent from the surrounding public school district. Laws vary by state, but generally charters are granted by state boards of education either directly or in conjunction with local school districts or public universities. Operators are granted charters to establish and operate schools based on the goals and objectives set forth in the charter. Upon receipt of a charter, schools receive an annuity from the state for each student enrolled.
Owned Properties.At December 31,
1996, the Company2003, we ownedand leased to health care operators 4953 skilled nursingfacilitiesproperties with a total of6,5206,047 beds,and 2488 assisted livingfacilitiesproperties with a total of8684,182 units and one school in1723 states, representing anetgross investment of approximately$211,938,000. These long-term care facilities$456.0 million. The properties are leased pursuant to non-cancelable leases generally with an initial term often10 totwelve30 years.Many of the leases contain renewal options and some contain options that permit the operators to purchase the facilities. The following table sets forth certain information regarding the Company's owned properties as of December 31, 1996:
Average No. of Remaining No. of No. of Beds Lease Term Purchase Current Annual Location SNFs ALFs /Units Encumbrances (in Months) Price Rent Payments - -----------------------------------------------------------------------------------------------------------------Alabama 8 1 912 $14,608,044 95 $ 29,287,996 $ 3,274,779 Arizona 3 587 18,909,717 44 18,486,509 2,335,600 California 3 473 52 7,378,468 896,172 Florida 9 1,116 102 39,064,291 4,061,847 Georgia 1 100 137 2,500,000 248,750 Idaho 1 39 144 2,550,000 266,220 Illinois 1 148 96 6,627,159 746,640 Iowa 6 448 8,748,149 36 9,401,943 1,073,564 Kansas 4 134 5,739,360 108 6,700,000 633,820 Montana 1 278 4,335,297 72 3,830,608 420,36514
Average Remaining No. of No. of Beds No. of Lease Term Purchase Current Annual Location SNFs ALFs /Units Encumbrances (in Months) Price Rent Payments - -----------------------------------------------------------------------------------------------------------------New Mexico 2 236 72 6,898,696 785,951 Oklahoma 1 37 120 1,750,000 168,525 Oregon 2 71 144 4,550,000 463,410 Tennessee 2 224 137 5,550,000 552,225 Texas 8 8 1,685 4,974,739 93 45,630,908 4,980,779 Virginia 3 443 105 11,012,655 1,211,748 Washington 2 7 457 10,928,853 198 22,358,630 2,185,380 - ----------------------------------------------------------------------------------------------------------------- TOTAL 49 24 7,388 $68,244,159 (1) $223,577,863 (2) $24,305,775 =================================================================================================================(1) The amounts comprising the $68,244,159 of encumbrances include 1) $54,205,000 of non-recourse mortgages payable by the Company secured by 22 skilled nursing facilities containing a total of 2,634 beds, 2) $8,300,000 of tax-exempt bonds secured by 5 assisted living facilities in Washington with 184 units, and 3) $5,739,159 of capital lease obligations on 4 assisted living facilities in Kansas with 134 units. (2) Of the total purchase price, $175,969,598 relates to investments in 49 SNFs with 6,520 beds and $47,608,265 relates to investments in 24 ALFs with 868 units.The leases provide for a fixed minimum base rent during the initial and renewal periods. Most of the leases provide for annual fixed rent increases or increases based on consumer price indices over the term of the lease. In addition, certain ofthe Company'sour leases provide for additional rent through revenue participation (as defined in the lease agreement) in incremental revenues generated by the facilities over a defined base period, effective at various times during the term of the lease. Each lease is a triple net lease which requires the lessee to pay additional charges including all taxes, insurance, assessments, maintenance and repair (capital and non-capital expenditures), and other costs necessary in the operation of the facility.MORTGAGE LOANS At December 31, 1996, the Company had 67 mortgage loans secured by first mortgages on 73 skilled nursing facilities with a total of 8,672 beds and 11 assisted living residences with 588 units located in 23 states. The mortgage loans, which individually range from $302,500 to $11,240,000 in principal amount, have current interest rates ranging from 9.16% to 13.2% generally have 25-year amortization schedules, have balloon payments due from 1997 to 2017 and provide for certain facility fees. Almost allMany of themortgage loans provide for annual increases inleases contain renewal options and one contains a limited period option that permits theinterest rate based upon a specified increase of 10operator to12.5 basis points. Approximately $9,825,000 ofpurchase theloans due in 1997 will be paid off once the Company completes a sale leaseback transaction for the same amount on assisted living facilities that are being constructed.property.16
The following table sets forth certain information regarding
the Company'sour owned properties as of December 31, 2003 (dollar amounts in thousands):
No. of No. of No. of No. of Lease Current Location SNFs ALFs Schools Beds/Units(1) Encumbrances Term(2) Investment Alabama 3 1 — 458 $ 3,587 93 $ 16,228 Arizona 4 3 — 1,026 12,827 152 45,854 California 1 3 — 436 17,513 97 36,713 Colorado 1 6 — 325 6,625 189 20,383 Florida 3 6 — 776 2,243 197 31,597 Georgia 3 1 — 364 5,002 84 7,113 Idaho — 4 — 148 — 63 9,756 Indiana — 2 — 78 — 72 5,070 Iowa 7 1 — 645 8,933 321 16,380 Kansas 4 4 — 447 8,907 236 16,597 Nebraska — 4 — 156 — 64 9,332 New Jersey — 1 1 39 — 117 12,195 New Mexico 6 1 — 604 11,157 101 30,913 N. Carolina — 5 — 210 — 204 13,096 Ohio — 11 — 487 20,983 126 44,718 Oklahoma — 6 — 221 4,476 204 12,315 Oregon 1 4 — 324 3,961 65 17,812 Pennsylvania — 1 — 69 5,440 172 8,327 South Carolina — 3 — 128 — 204 7,610 Tennessee 3 — — 201 — 238 3,866 Texas 12 13 — 2,147 19,706 172 55,521 Virginia 3 — — 443 — 358 9,467 Washington 2 8 — 497 6,640 114 25,138 TOTAL 53 88 1 10,229 $ 138,000 (3) $ 456,001 (4)
1. Number of beds/ units applies to skilled nursing properties and assisted living residences only. 2. Weighted average remaining months in lease term. 3. Consists of: i) $123,314 of non-recourse mortgages payable by us secured by 22 skilled nursing properties containing a total of 2,691 beds, 18 assisted living properties with 961 units, ii) $6,640 of tax-exempt bonds secured by five assisted living properties in Washington with 188 units, iii) $4,085 of non-recourse capital lease obligations on four assisted living properties in Kansas with 134 units, and iv) $3,961 of multi-unit housing non-recourse tax-exempt revenue bonds on one assisted living property in Oregon with 112 units. As of December 31, 2003 our gross investment in properties encumbered by mortgage loans, bonds and capital leases was $171,429. 4. Of the total, $165,785 relates to investments in skilled nursing properties, $280,946 relates to investments in assisted living properties and $9,270 relates to an investment in a school. 17
Mortgage Loans.At December 31, 2003, we had 37 mortgage loans secured by first mortgages on 30 skilled nursing properties with a total of 3,681 beds and eight assisted living residences with 369 units located in 19 states. See Item 8. FINANCIAL STATEMENTS —Note 6. Real Estate Investmentsfor further description.
The following table sets forth certain information regarding our mortgage loans as of December 31,
1996:2003 (dollar amounts in thousands):
Average Current No. of No. of No. of Interest Months to Face Amount of Current Amount of Annual Debt Location SNFs ALFs Beds/Units Rate % Maturity Mortgage Loans Mortgage Loans Service(1) Alabama 1 — 40 10.63 175 $ 500 $ 450 $ 61 Arizona 1 — 144 12.40 10 2,400 2,186 315 Arkansas 2 — 274 10.88-11.08 87 3,400 2,811 418 California 5 — 756 10.40-12.40 125 11,371 9,926 1,417 Colorado 3 — 263 11.00-12.00 27 7,042 6,685 892 Florida 2 1 384 10.52-12.55 73 9,990 8,064 1,269 Georgia 1 — 63 11.80 37 1,200 1,126 150 Illinois 1 — 120 10.21 51 1,950 1,829 217 Iowa 1 1 143 11.91-12.50 47 4,400 4,218 557 Missouri 1 — 90 9.51 173 1,500 1,312 167 Montana — 1 34 12.15 118 2,346 2,284 292 Nebraska — 4 163 10.73-11.91 58 10,911 10,521 1,314 Nevada 1 — 100 11.25 79 1,200 970 150 Ohio 1 — 150 10.89 27 5,200 4,761 610 Oklahoma 1 — 161 11.78 90 1,300 1,101 168 S. Dakota — 1 34 11.91 63 2,346 2,290 287 Texas 5 — 780 10.90-12.32 107 7,995 7,097 1,036 Washington 3 — 236 11.90-12.38 58 3,500 3,185 454 Wisconsin 1 — 115 11.00 158 2,200 1,929 272 TOTAL 30 8 4,050 $ 80,751 $ 72,745 (2) $ 10,046
Average No.1. Includes principal and interest payments. 2. Of the total current principal balance, $52,242 and $20,503 relate to investments in skilled nursing properties and assisted living properties, respectively. This balance is gross of Number of No. of No. of Beds Interest Months to Face Amount of Current Amount of Current Annual Location SNFs ALFs /Units Rate % Maturity Mortgage Loans Mortgage Loans Debt Service (1) - ------------------------------------------------------------------------------------------------------------------------------------Alabama 1 142 11.18% 100 $ 4,100,000 $ 4,060,562 $ 489,706 Arizona 2 1 479 10.58-11.70% 87 10,650,000 10,599,851 1,238,740 Arkansas 2 274 10.00-10.20% 171 3,400,000 3,361,692 396,918 California 11 1,587 10.00-13.20% 107 22,805,000 23,501,020 2,888,344 Colorado 4 373 10.00-11.92% 108 6,330,000 5,284,620 615,460 Florida 8 1 1,106 9.16-11.85% 96 30,944,862 31,726,985 3,644,254 Georgia 1 2 287 9.75% 116 8,050,000 8,030,186 929,512allowance for doubtful accounts.15
Average No. of Number of No. of No. of Beds Interest Months to Face Amount of Current Amount of Current Annual Location SNFs ALFs /Units Rate % Maturity Mortgage Loans Mortgage Loans Debt Service (1) - ------------------------------------------------------------------------------------------------------------------------------------Illinois 2 322 9.76-11.10% 107 6,200,000 6,185,008 643,244 Iowa 3 214 11.62-11.70% 95 4,000,000 3,940,365 493,338 Kansas 4 233 9.90-11.87% 108 4,320,000 3,995,045 474,810 Louisiana 1 127 10.89% 239 1,600,000 1,600,000 196,745 Mississippi 3 400 10.32% 117 11,250,000 11,240,003 1,216,767 Missouri 1 174 10.75% 45 2,801,000 2,872,520 375,658 Nebraska 1 4 266 9.00-14.32% 59 5,348,980 5,434,382 601,749 Nevada 1 100 10.38% 163 1,200,000 1,173,996 142,523 North Carolina 2 201 10.70-11.85% 66 3,770,000 3,728,490 449,556 Ohio 1 150 10.19% 111 5,200,000 5,173,773 575,408 Oklahoma 1 161 10.90% 174 1,300,000 1,292,252 159,961 Oregon 1 3 261 9.76-9.90% 33 8,160,000 8,157,238 810,999 South Carolina 5 509 11.70% 73 11,250,000 11,229,957 1,357,532 Tennessee 3 201 10.73% 105 5,861,000 4,826,639 561,609 Texas 11 1,383 10.00-11.60% 115 16,650,000 16,364,741 1,998,690 Washington 4 310 11.00-11.70% 168 4,500,000 4,482,365 551,282 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL 73 11 9,260 $179,690,842 $178,261,690 (2) $20,812,805 ==================================================================================================================================(1) Includes principal and interest payments. (2) Of the total current principal balance, $159,698,336 relates to investments in 73 SNFs with 8,672 beds and $18,563,354 relates to investments in 11 ALFs with 588 units.In general, the
Company'smortgage loans may not be prepaid except in the event of the sale of thefacilitycollateral property to a third party that is not affiliated with the borrower, although partial prepayments (including the prepayment premium) are often permitted where a mortgage loan is secured by more than one property upon a sale of one or more, but not all, of the collateral properties to a third party which is not an affiliate of the borrower. TheCompany'sterms of the mortgage loans generally impose apenaltypremium upon prepayment of the loans depending upon the period in which the prepayment occurs, whether such prepayment was permitted or required, and certain other conditions such as upon the sale of thefacilityproperty under a pre-existing purchase option, destruction or condemnation, or other circumstances as approved bythe Company. Suchus. On certain loans, such prepayment amount is based upon a percentage of the then outstanding balance of the loan, usually declining ratably each year. For other loans, the prepayment premium is based on a yield maintenance formula. In addition to a lien on the mortgaged property, the loans are generally secured by certain non-real estate assets of thefacilitiesproperties and contain certain other security provisions in the form of letters of credit, pledged collateral accounts, security deposits, cross-default and cross-collateralization features and certain guarantees.During 1996, the Company receivedSee Item 8. FINANCIAL STATEMENTS —Note 11. Debt Obligationsfor a
$941,000 payment with respect to the prepaymentdescription ofone loan. 16our Senior Mortgage Participation Payable which is secured by certain of our mortgage loans receivable. REMIC
CERTIFICATESCertificates. At December 31,1996, the estimated fair2003, we had investments in REMIC Certificates with a carrying value ofthe Company's REMIC Certificate investments was $98,934,000$61.7 million ($92,545,000,63.1 million at amortizedcost)cost prior to any adjustment of available-for-sale certificates to fair market value).The REMIC Certificates
retained by the Companywe retain are subordinate in rank and right of payment to the REMIC Certificates sold to third-party investors and as such would bear the first risk of loss in the event of an impairment to any of the18
underlying mortgages.Management believes it employs conservative underwriting policies and to date there have been no credit losses on any of the mortgages underlying the Certificates nor are any credit losses currently anticipated.The REMIC Certificates are collateralized by three pools consisting of8569 first mortgage loans secured by148103 skilled nursingfacilitiesproperties with a total of16,06411,823 beds in2419 states. Each mortgage loan, all of whichwerewe originated,by the Company,is evidenced by a promissory note and secured by a mortgage, deed of trust, or other similar instrument that creates a first mortgage lien on a fee simple estate in realproperty (a "Mortgaged Property").property. The$278,881,000$213.3 million current principal amount of mortgage loans represented by the REMIC Certificates haveindividual principal balances ranging from approximately $297,000 to $13,760,000, havea weighted average interest rate of approximately11.21%11.0%, andhave remaining terms toscheduled maturities ranging from28 months2004 to220 months.2028.The following table sets forth certain information regarding the
three pools ofmortgage loans securing the REMIC Certificates as of December 31,1996: 172003 (dollar amounts in thousands):
Original Principal Current Principal Number of Number of Amount of Remaining Amount of Remaining Current Annual Location Properties Beds Mortgage Loans Mortgage Loans (1) Debt Service Alabama 3 405 $ 8,100 $ 7,328 $ 1,028 Arizona 3 587 18,305 16,622 1,981 California 18 1,816 36,545 23,831 3,863 Colorado 1 177 2,000 1,852 247 Florida 7 945 32,310 27,846 3,658 Georgia 11 1,203 24,472 22,312 3,088 Iowa 7 508 10,938 10,685 1,204 Louisiana 1 127 1,600 1,394 208 Michigan 1 236 3,000 2,481 386 Mississippi 3 400 14,050 10,124 1,209 Missouri 1 100 1,500 1,398 164 Montana 2 163 5,600 5,226 697 Nebraska 2 256 4,700 4,433 576 New Mexico 4 443 15,821 14,764 1,526 Ohio 1 50 1,100 700 155 Oklahoma 1 112 1,300 1,088 173 Tennessee 6 550 16,827 15,450 2,123 Texas 29 3,645 52,858 43,993 6,115 Washington 2 100 1,900 1,764 227 TOTAL 103 11,823 $ 252,926 $ 213,291 $ 28,628
Original Principal Current Principal Amount Number of Number of Amount of Remaining of Remaining Mortgage Current Annual Location Facilities Beds Mortgage Loans Loans (1) Debt Service - --------------------------------------------------------------------------------------------------------------------------------Alabama 8 1,069 $ 18,425,800 $ 18,074,641 $ 2,253,561 Arizona 5 955 26,018,000 25,708,985 2,863,918 California 16 1,705 27,404,786 25,753,046 3,588,009 Connecticut 4 499 10,656,000 10,478,251 1,297,858 Florida 3 330 13,160,000 12,875,952 1,533,085 Georgia 10 1,078 20,822,000 20,566,473 2,498,370 Illinois 6 679 12,426,000 12,150,073 1,495,306 Iowa 10 750 13,531,000 13,782,238 1,493,545 Kansas 1 66 1,200,000 1,191,133 140,033 Kentucky 1 67 726,000 711,348 88,862 Michigan 3 444 6,800,000 6,698,413 828,043 Mississippi 1 120 2,800,000 2,773,733 332,810 Missouri 5 545 9,489,000 9,297,497 1,161,454 Montana 5 658 14,278,000 14,073,620 1,536,239 Nebraska 4 378 6,614,000 6,545,787 770,105 New Mexico 5 350 9,007,000 8,757,245 1,127,306 North Carolina 2 256 5,350,000 5,217,532 649,726 Ohio 3 243 7,000,000 6,732,363 815,867 Oklahoma 1 112 1,300,000 1,262,522 167,409 S. Dakota 1 50 585,000 574,982 64,189 Tennessee 4 297 6,952,000 6,884,490 822,951 Texas 45 5,020 64,280,000 62,341,306 7,773,876 Washington 4 289 4,583,000 4,502,040 544,601 Wisconsin 1 104 2,075,000 1,927,543 264,000 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL 148 16,064 $285,482,586 $278,881,213 $34,111,123 ================================================================================================================================(1)1. Included in the balances of the mortgages underlying the REMIC Certificates are $56,457 of non-recourse mortgages payable by our subsidiaries. We originated these mortgages, which were subsequently transferred to the REMIC. The properties and the mortgage debt are reflected in our balance sheet. The mortgage loans underlying the REMIC Certificates
are $54,205,000 of non-recourse mortgages payable by the Company. These mortgages were originated by the Company and were transferred to the REMIC. Subsequently, the properties securing the mortgages were acquired by the Company in unrelated transactions, subject to the related mortgage debt. The properties and the mortgage debt are reflected in the Company's balance sheet. Such mortgage loansgenerally have 25-year amortization schedules withballoon payments duefinal maturities ranging from19992004 to2015, unless prepaid prior thereto.2028. Contractual principal and interest distributions with respect to the $63.1 million amortized cost basis,$92,545,000of REMIC Certificates (excluding unrealized losses on changes in estimated fair value of $1.4 million) we retainedby the Companyare subordinated to distributions of interest and principal with respect to the$192,210,000$150.4 million of REMIC Certificates held by third parties. Thus, based on the terms of the underlying mortgages and assuming no unscheduled prepayments occurcontractualnor are any maturities extended as a result of the inability of the borrower to refinance, scheduled principalreductionsdistributions on the REMIC Certificates we retainedby the Companywill commence inAugustMarch 2004 with finalmaturitydistributions in April2015.2028. Distributions on any of the REMIC Certificates will depend, in large part, on the amount and timing of payments, collections, delinquencies and defaults with respect to the mortgage loans represented by the REMIC Certificates, including the exercise of certain purchase options under existingfacilityproperty leases or the sale of theMortgaged Properties.mortgaged properties. Each of the mortgage loans securing the REMIC Certificatescontaincontains similar prepayment andcertainsecurity provisionswith respect to the Company'sas our mortgage loans.18As part of the REMIC transactions discussed above,
the Company serveswe serve as the sub-servicer and, in such capacity,isare responsible for performing substantially all of the servicing duties relating to the mortgage loans represented by the REMIC Certificates.The Company receivesWe receive monthly fees equal to a fixed percentage of the then outstanding mortgageloansloan balance in the REMIC, which inmanagement'sour opinionrepresent currentlyrepresented then prevailing terms for similartransactions. Because the fees received for such servicing result in only adequate compensation after considering the costs to service the loans, the Company does not recognize a separate asset for servicing rights.transactions at that time.19
In addition,the Companywe will act as the special servicer to restructure any mortgage loans in the REMIC thatbecome indefault. As noted previously, we assume the first dollar of any losses on the defaulted loans.At December 31,
1996,2003, the REMIC Certificates we heldby the Company havehad an effective interest rate of approximately15.84%15.4% based on the expected future cash flows with no unscheduled prepayments.MAJOR OPERATORS As
Item 3. LEGAL PROCEEDINGS We are a party from time to time to various general and professional liability claims and lawsuits asserted against the lessees or borrowers of
December 31, 1996, Retirement Care Associates ("RCA"), Horizon Healthcare Corporation ("HHC"), Sun Healthcare Group, Inc. ("Sun") and Assisted Living Concepts, Inc. ("ALC") operated, on a combined basis, 115 facilities representing 43.6% ($273.2 million) of the Company's adjusted gross real estate investment portfolio (adjusted to include the mortgage loans to third parties underlying the $92.5 million--amortized cost basis--investmentour properties, which inREMIC Certificates). At December 31, 1996, RCA, HHC, Sun and ALC operated 34, 36, 26 and 19, facilities, respectively, representing approximately 14.3% ($89.8 million), 13.8% ($86.2 million), 9.0% ($56.6 million) and 6.5% ($40.6 million), respectively, of the Company's adjusted gross portfolio. RCA, HHC, Sun and ALCour opinion arepublicly traded companies, and other information regarding these operators is on file with the Securities and Exchange Commission. The financial position of the Company and its ability to make distributions may be adversely affected by financial difficulties experienced by any of such operators, or any other major operator of the Company, including bankruptcy, insolvency or general downturn in business of any such operator,not singularly or in theevent any such operator doesaggregate material to our results of operations or financial condition. These types of claims and lawsuits may include matters involving general or professional liability, which we believe under applicable legal principles are notrenew and/our responsibility as a non-possessory landlord orextend its relationship with the Company or its borrowers as it expires. 19Item 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4a. EXECUTIVE OFFICERS
NAME Age Position - ----------------------- ------- -----------------------------------------------------Andre C. Dimitriadis 56 Chairman, Chief Executive Officer and Director William McBride III 36 President, Chief Operating Officer and Director James J. Pieczynski 33 Senior Vice President and Chief Financial OfficerMr. Dimitriadis co-founded the Company in 1992 and was employed by Beverly Enterprises, Inc., an owner/operator of long-term care facilities, retirement living facilities and pharmacies, from October 1989 to May 1992, where he served as Executive Vice President and Chief Financial Officer. Prior tomortgage holder. We believe thathe was employed by American Medical International, Inc., an owner/operator of hospitals, from 1985 to 1989, where he served as Executive Vice President - Finance, Chief Financial Officer and Director. Mr. Dimitriadis serves as Chairman of the board of directors of Health Management, Inc. and a member of the board of directors of Assisted Living Concepts, Inc. and Magellan Health Services. Mr. McBride co-founded the Company in 1992 and was employed by Beverly Enterprises, Inc., an owner/operator of long-term care facilities, retirement living facilities and pharmacies, from April 1988 to July 1992, where he served as Vice President, Controller and Chief Accounting Officer from April 1988. Prior to that, he was employed by Ernst & Young LLP, an international accounting firm, from 1982 to 1988. Mr. McBride serves as Chairman of the board of directors of Assisted Living Concepts, Inc. and a member of the board of directors of Malan Realty Investors, Inc. Mr. Pieczynski has served as Senior Vice President and Chief Financial Officer of the Company since May 1994. He joined the Company in December 1993 as Vice President and Treasurer. Prior to that, he was employed by American Medical International, Inc., an owner/operator of hospitals, from May 1990 to December 1993, where he served as Assistant Controller and Director of Development. From 1984 to 1990, he was employed by Arthur Andersen & Co. LLP, an international accounting firm. 20ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) The Company's common stock is listed on the New York Stock Exchange. Set forth belowthese matters are thehighresponsibility of our lessees andlow reported sale prices forborrowers pursuant to general legal principles and pursuant to insurance and indemnification provisions in theCompany'sapplicable leases or mortgages. We intend to continue to vigorously defend such claims.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None.
Item 5. MARKET FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Our common stock is listed on the New York Stock Exchange (or NYSE). Set forth below are the high and low reported sale prices for our common stock as reported on the NYSE.
2003 2002 High Low High Low First Quarter $ 7.170 $ 5.250 $ 7.950 $ 6.050 Second Quarter $ 9.550 $ 6.000 $ 8.540 $ 7.450 Third Quarter $ 11.760 $ 9.130 $ 8.700 $ 5.470 Fourth Quarter $ 15.000 $ 11.500 $ 8.500 $ 5.850
(b) As of December 31, 2003 we had approximately 552 stockholders of record of our common stock.
(c) We declared total cash distributions on common stock as set forth below:
2003 2002 First Quarter $ 0.10 $ 0.10 Second Quarter 0.15 0.10 Third Quarter 0.15 0.10 Fourth Quarter 0.25 0.10 $ 0.65 $ 0.40 On March 10, 2004, we declared a $0.25 per common
stock as reportedshare dividend payable onthe New York Stock Exchange.
PRICE PER SHARE High Low ------------------------ -----------------------1995 - ---- First Quarter 13.625 12.500 Second Quarter 13.750 12.625 Third Quarter 15.250 13.125 Fourth Quarter 15.500 14.000 1996 - ---- First Quarter 17.125 14.875 Second Quarter 16.625 15.125 Third Quarter 17.250 15.875 Fourth Quarter 18.875 16.250 1997 - ---- First Quarter 18.250 17.750 (through February 1, 1997)(b) As of JanuaryMarch 31,1997, there were approximately 6752004, to stockholders of recordof the Company's common stock. At the date of filing of this Annual ReportonForm 10-K/A, the Company is unable to estimate the number of additional stockholders whose shares are held for them in street name or nominee accounts. (c) The Company has declared total cash distributions for the two years 1995 and 1996 as set forth below:
Distributions Declared Per Share -------------------------------- 1995 - ----Quarter ended March 31 $ .29 Quarter ended June 30 .29 Quarter ended September 30 .315 Quarter ended December 31 .315 ------ $ 1.21 ====== 1996 - ---- Quarter ended March 31 $ .315 Quarter ended June 30 .34 Quarter ended September 30 .34 Quarter ended December 31 .34 ------ $1.335 ======The Company intendsMarch 19, 2004. We intend to distribute toitsour stockholdersa majority of its funds from operations and, in any event,an amount at least sufficient to satisfy the distribution requirements of a REIT. Cash flows from operating activities available for distribution to stockholders will be derived primarily from interest and rental payments fromitsour real estate investments. All distributions will be madeby the Companysubject to approval of the Board of Directors and will depend ontheour earnings,of the Company, itsour financial condition and such other factors as the Board of Directors deem relevant. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Internal Revenue Code,the Company iswe are required to make distributions to holders ofitsour shares equal to at least95%90% (95% for years ending prior to January 1, 2001) ofthe Company's "REITour REIT taxable income."(See “Annual Distribution Requirements” beginning on page 8.)20
(d) Securities authorized for issuance under equity compensation plans as of December 31, 2003 is as follows:
Equity Compensation Plan Information (a) (b) (c) Number of securities remaining Number of securities to Weighted-average available for future issuance be issued upon exercise exercise price of under equity compensation plans of outstanding options outstanding options, (excluding securities reflected Plan Category warrants and rights warrants and rights in column (a)) Equity compensation plans approved by security holders 285,871 $ 5.63 53,176 Equity compensation plans not approved by security holders — — — Total 285,871 $ 5.63 53,176 21
ITEM 6. SELECTED FINANCIAL INFORMATION
Item 6. SELECTED FINANCIAL INFORMATION The following table of selected financial information
for the twelve months ended December 31, 1996, 1995, 1994 and 1993 and for the period from August 25, 1992 (commencement of operations) to December 31, 1992should be read in conjunction withthe Company'sour financial statements and related notes thereto included elsewhere in this Annual Report on Form10-K/A.10-K.
2003 2002 2001 2000 1999 (In thousands, except per share amounts) Operating Information:Revenues $ 63,447 $ 68,137 $ 67,591 $ 82,204 $ 82,923 Expenses: Interest expense 20,877 21,322 21,435 26,871 21,716 Depreciation and amortization 12,489 13,705 12,216 13,744 12,122 Impairment charge 1,260 7,097 16,671 5,337 14,939 Legal expenses 1,078 803 289 478 405 Operating and other expenses 6,561 6,044 8,702 5,303 5,453 Total expenses 42,265 48,971 59,313 51,733 54,635 Income before non-operating income and minority interest 21,182 19,166 8,278 30,471 28,288 Non-operating income 1,970 — — — 1,304 Minority interest (1,300 ) (1,308 ) (973 ) (982 ) (1,018 ) Income from continuing operations 21,852 17,858 7,305 29,489 28,574 Discontinued Operations: Gain (loss) from discontinued operations 168 (538 ) (11,773 ) (6,842 ) 3,253 Gain on sale of assets, net 2,299 14,483 1,560 8,990 — Net income (loss) from discontinued operations 2,467 13,945 (10,213 ) 2,148 3,253 Net income (loss) 24,319 31,803 (2,908 ) 31,637 31,827 Preferred stock redemption charge (1,241 ) — — — — Preferred stock dividends (16,596 ) (15,042 ) (15,077 ) (15,087 ) (15,087 ) Net income (loss) available to common stockholders $ 6,482 $ 16,761 $ (17,985 ) $ 16,550 $ 16,740 Per share Information:Basic net income (loss) available to common stockholders $ 0.36 $ 0.91 $ (0.75 ) $ 0.63 $ 0.61 Diluted net income (loss) available to common stockholders $ 0.36 $ 0.91 $ (0.75 ) $ 0.63 $ 0.61 Common Stock Distributions declared $ 0.65 $ 0.40 $ 0.00 $ 0.87 $ 1.56 Balance Sheet Information:Real estate investments, net $ 515,752 $ 552,434 $ 604,306 $ 622,428 $ 683,736 Total assets 574,924 599,925 648,568 676,585 721,811 Total debt 156,250 227,837 284,634 262,560 292,274 Total liabilities 192,741 239,113 294,785 272,546 303,300 Minority interest 13,401 13,399 13,404 9,912 9,894 Total stockholders’ equity 368,782 347,413 340,379 394,127 408,617 Other Information:Cash flows provided by operating activities $ 36,218 $ 42,903 $ 43,852 $ 45,307 $ 60,785 Cash flows provided by (used in) investing activities 20,707 19,320 46,772 45,697 (48,156 ) Cash flows used in financing activities (47,007 ) (60,544 ) (86,172 ) (91,789 ) (11,477 ) 22
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) RESTATED(3) ------------------------------------ 1996 1995 1994 1993 1992(1) --------- ---------- --------- --------- -----------OPERATING INFORMATION: Revenues $ 54,930 $ 35,569 $ 27,641 $ 15,847 $ 4,012 Expenses: Interest expense 20,604 9,407 6,563 6,400 2,597 Depreciation and amortization 6,298 3,072 1,781 799 41 Amortization of Founders' stock 114 221 372 481 281 Provision for loan losses - - 550 372 75 Minority interest 898 57 - - - Operating and other expenses 4,479 2,772 3,037 948 255 -------- --------- -------- -------- -------- Total expenses 32,393 15,529 12,303 9,000 3,249 -------- --------- -------- -------- -------- Other income (loss) 6,173 (1,656) 667 - - -------- --------- -------- -------- -------- Income before cumulative effect of change in accounting 28,710 18,384 16,005 6,847 763 Cumulative effect of accounting change - - 1,205 - - -------- --------- -------- -------- -------- Net Income $ 28,710 $ 18,384 $ 17,210 $ 6,847 $ 763 ======== ========= ======== ======== ======== Weighted average shares outstanding 19,257 18,257 15,443 9,169 7,962 ======== ========= ======== ======== ======== PER SHARE INFORMATION: Net income before cumulative effect of accounting change $ 1.49 $ 1.01 $ 1.04 $ 0.75 $ 0.10 Cumulative effect on prior year (yearItem 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Results
Year ended
December 31, 1993) of a change in method of accounting for REMIC Certificates - - 0.07 - - -------- --------- -------- -------- -------- Net income $ 1.49 $ 1.01 $ 1.11 $ 0.75 $ 0.10 ======== ========= ======== ======== ======== Distributions declared (2) $ 1.335 $ 1.21 $ 1.10 $ 1.02 $ 0.35 BALANCE SHEET INFORMATION: Real estate investments, net $488,134 $ 340,441 $220,025 $147,269 $ 94,802 Total assets 500,538 357,378 239,369 154,303 148,562 Total debt 283,472 174,083 55,835 61,804 73,192 Total liabilities 299,207 185,458 66,148 69,156 78,250 Minority interest 10,528 1,098 - - - Total stockholders' equity 190,803 170,822 175,093 85,147 70,312 OTHER INFORMATION: 1996 1995 1994 1993 1992 -------- --------- -------- -------- -------- Cash flows from operating activities $ 33,789 $ 24,197 $ 19,242 $ 8,863 $ 3,268 Cash flows used in investing activities (94,210) (111,459) (73,546) (52,706) (94,578) Cash flows provided by (used) in financing activities 62,135 74,430 65,465 (2,817) 141,075 Weighted average shares outstanding 19,257 18,257 15,443 9,169 7,962(1) From August 25, 1992 (commencement of operations) toDecember 31,1992. (2) Distributions may exceed current2003 compared to year ended December 31, 2002Revenues for the year ended December 31, 2003 were $63.4 million compared to $68.1 million for the same period in 2002. Rental income decreased $0.9 million primarily as a result of the effect of classifying eight properties leased to Sun Healthcare Group, Inc. (or Sun) as non-accrual rents ($3.3 million) and the elimination of rents from sold properties not subject to Statement of Financial Accounting Standard (or SFAS ) No. 144“Accounting for the Impairment or
accumulated net income. (3) As further discusseddisposal of Long-Lived Assets”reclassification ($0.9 million), partially offset by the receipt of past due rent that we had not accrued due to collectibility uncertainties ($0.5 million), the receipt of rent from properties formerly operated by CLC Healthcare Inc. (or CLC) see Item 8. FINANCIAL STATEMENTS —Note 8. CLC Healthcare, Inc.($1.5 million), security deposits applied to past due rents ($0.5 million), acquisitions ($0.1 million) and new leases and rental increases provided for inNote 1existing lease agreements ($0.7 million). Same store rental income, (rental income from properties owned for both years ended December 31, 2003 and 2002) decreased $1.8 million due to the effect ofConsolidated Financial Statements included herein,classifying rents on eight properties leased to Sun as non-accrual rents, partially offset by theCompany has restated its 1996, 1995receipt of past due rent that we had not accrued due to collectibility uncertainties and1994 results of operations to effect a changenew leases and normal rental rate increases, as set forth in themethod usedlease agreements.Interest income from mortgage loans and notes receivable decreased $0.9 million primarily as a result of the early payoff of four mortgage loans (one in 2003 and three in 2002) and the receipt of past due interest on CLC’s line of credit in September 2002. Interest income from REMIC Certificates for the year ended December 31, 2003 decreased $3.0 million compared to
account for its2002 due to the amortization of the related asset and the early payoff of certain mortgage loans underlying our investment in REMIC Certificates.In March 1995, NAREIT adoptedInterest and other income increased $0.1 million in 2003 from thefollowing definitionprior year due primarily to the receipt ofFunds From Operations ("FFO"): net income (computedinterest on our investment inaccordance with GAAP) excluding gains (or losses)secured notes of ALC.Interest expense decreased $0.4 million in 2003 from the prior year. Included in interest expense for 2003 was a $2.1 million write-off of debt
restructuringissue costs related to our early retirement of our Secured Revolving Credit. Interest expense decreased due to a decrease in average borrowings outstanding during the year andsalesa decrease in interest rates on our Secured Revolving Credit partially offset by an increase in our overall weighted average interest rate related to our Senior Participation Payable. See Item 8. FINANCIAL STATEMENTS —Note 11. Debt Obligationsfor a description and further discussion ofproperty, plus depreciationour Secured Revolving Credit and Senior Mortgage Participation Payable.Depreciation and amortization expense for 2003 decreased $1.2 million from the prior year due to properties sold in 2002 not subject to SFAS No. 144 reclassification and a lower basis of
realcertain assets due to impairment charges taken in 2002.We perform periodic comprehensive evaluations of our investments. During our evaluation of the realizability of expected future cash flows from the mortgages underlying our REMIC Certificates, there were indications that certain expected future cash flows would not be realized by the REMIC Trust. Accordingly, we recorded a $1.3 million impairment charge to reflect the estimated impact on future cash flows from loan prepayments occurring during, or expected to occur subsequent to, the first quarter of 2003 related to certain subordinated REMIC Certificates we hold. During 2002 we recorded impairments of $1.7 million in one skilled nursing property and
after adjustmentsone assisted living property ($0.7 million of which is included in net loss from discontinued operations). Of this $1.7 million, $1.0 million applied to a skilled nursing property where we agreed to a rent reduction that required an impairment adjustment and $0.7 million was forunconsolidated entitiesan assisted living property we agreed to sell at less than net book value. We recorded a $1.6 million impairment for mortgage loans on two skilled nursing properties. Of this amount, $0.6 million was for a skilled nursing property that had closed and the borrower defaulted on the loan and $1.0 million was for a loan on a skilled nursing property whose operator was reporting losses from operations and requesting temporary loan payment modifications. Additionally, we recorded a $4.5 million impairment on investments inwhichREMIC Certificates. Of this $4.5 million charge, $1.2 million was for loans paying off prior to maturity and reducing the value of our interest only REMIC Certificates, $0.5 million was for one skilled nursing property that closed, $1.3 million was for one skilled nursing facility that we, as loan servicing agent for the REMIC Trust, agreed could pay the loan off at aREIT holds$1.0 million reduction in principal and $1.5 million was for one skilled nursing property whose operator advised us they were considering either closing the facility or attempting to convert the building to aninterest. In addition, the Company excludes any unrealized gains or losses resulting from temporary 22changesalternative use.23
Legal expenses were $0.3 million higher in 2003 than in 2002 due to higher legal costs for general litigation defense. Operating and other expenses increased $0.5 million due to higher property tax payments made on behalf of operators in 2003 as compared to 2002.
Non-operating income of $2.0 million was recognized in 2003 as a result of ALC’s early redemption of its secured notes that we owned. No non-operating income was recognized in the
estimated fair value of its REMIC Certificates in the computation of FFO. The Company implemented this new definition of FFO effective as of the NAREIT-suggested adoption date of January 1, 1996.prior year.For the year ended December 31,
1996, the Company's FFO was $28,793,000 representing2003, net income from discontinued operations was $2.5 million. During 2003 we sold eight skilled nursing facilities, one of$28,710,000 plus depreciationwhich was formerly operated by Sun and three were formerly operated by CLC. We recognized a $2.3 million gain onreal estate investmentsthese sales and received $15.7 million in net proceeds which we used to pay $3.8 million in mortgage debt related to these properties, $2.6 million to repay outstanding borrowings under the Secured Revolving Credit and the remaining net proceeds were used to fund the partial redemption of$6,256,000, less unrealized gains on its REMIC Certificate investmentsour Series A Preferred Stock. During 2003 we reported income from discontinued operations of$6,173,000 The Company believes that FFO is an important supplemental measure of operating performance. FFO should not be considered as an alternative to net income or any other GAAP measurement of performance as an indicator of operating performance or as an alternative to cash flows from operations, investing, and financing activities as a measure of liquidity. The Company believes that FFO is helpful in evaluating a real estate investment portfolio's overall performance considering the fact that historical cost accounting implicitly assumes that the value of real estate assets diminishes predictably over time. The term FFO$0.2 million. This reclassification wasdesigned by the REIT industry to provide useful supplemental information. FFO provides an alternative measurement criteria, exclusive of certain non-cash charges included in GAAP income, by which to evaluate the performance of such investments. FFO, used by the Companymade in accordance with SFAS No. 144 which requires that theNAREIT definition mayfinancial results of properties meeting certain criteria be reported on a separate line item called “Discontinued Operations.” During 2002 we recognized a $14.5 million gain related to sale of 15 skilled nursing properties and one assisted living property and reported a $0.5 million loss from discontinued operations.During 2003 we announced the redemption of 40% of the outstanding shares of our Series A Preferred Stock. This redemption was completed January 30, 2004, and as a result, we recognized original issuance costs of $1.2 million that were related to the shares we redeemed as a preferred stock redemption charge. We did not
be comparableredeem any preferred stock in 2002. Preferred stock dividends increased $1.6 million due tosimilarly entitled items reported by other REITs that have not adoptedtheNAREIT definition. 23ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS Year ended December 31, 1996 comparedissuance of 2.2 million shares of 8.5% Series E Convertible Preferred Stock (or Series E Preferred Stock) in September of 2003.Net income available to common stockholders for the year ended December 31,
1995 Total revenues2003 was $6.5 million compared to $16.8 million for thetwelve monthsyear ended December 31,1996 increased by $19,361,000 or 54%2002. This decrease is due primarily to$54,930,000 from $35,569,000. The increase was primarily duegains on asset sales in 2002 as previously discussed.Year ended December 31, 2002 compared to
increased rental income of $10,594,000, increased mortgage interest income of $4,382,000 and increased interest income from REMIC Certificates of $3,480,000.year ended December 31, 2001Revenues for the year ended December 31, 2002 were $68.1 million compared to $67.6 million for the same period in 2001. Rental income increased
$7,375,000 as a result of $113,858,000 of property acquisitions made in 1996 and by $3,011,000 as a result of a full year's effect on rental revenue of facilities acquired during 1995. Rental revenue also increased by $109,000 due to contingent rents received from certain facilities based on increases in the facilities' incremental operating revenues (as defined in the respective leases). "Same-store" rentals (rents from facilities owned for all of 1995 and 1996) increased by $99,000 as a result of additional rents received in 1996 on facilities that are subject to rental increases tied to increases in Consumer Price Indices (CPI). The increase in mortgage interest income resulted from the higher overall mortgage investment base in 1996 as compared to the 1995 investment base. Interest from REMIC Certificates increased$4.2 million primarily as a result of thethird securitization transaction whichacquisition of properties in December 2001, new leases and rental increases provided for in the existing lease agreements, partially offset by the elimination of rents from sold properties and closed properties and a reduction inMarch 1996. The remainingrents due from ALC. Specifically “same store” rental income, (rental income from properties owned for both years ended December 31, 2002 and 2001) increased $0.9 million due to rental rate increases provided for in the leases partially offset by decreases in rents due from ALC. Properties acquired in December 2001 and a loan that converted to an owned property in 2002 resulted in a $5.8 million increase in rental income during 2002 while properties sold in 2001 and 2002 resulted in a $2.5 million decrease in rental income.Interest income from mortgage loans and notes receivable decreased $1.9 million primarily as a result of
$905,000 was primarily due to penaltiestheCompany receivedearly payoff of five mortgage loans (three in1996 from prepayments2002 and two in the second half of 2001), the conversion of one mortgage loan to an owned property, a receipt of delinquent interest related to a bankruptcy order in the prior year andeight loans underlyingthe effect of not accruing interest on one mortgage loan.Interest income from REMIC Certificates
held by the Company. Total expenses for the twelve months ended December 31, 1996 increased by $16,864,000 or 109% to $32,393,000 from $15,529,000 a year ago. The increase resulted primarily from increases in interest expense of $11,197,000, depreciation and amortization expense of $3,119,000, and from operating and other expense of $1,707,000. Interest expense increased primarily due to a higher borrowing base in 1996 that resulted from convertible debt issuances totaling $60,000,000 offset by $18,813,000 of conversions, increases in net bank borrowings of $30,930,000 and increases in net mortgage financing of $37,498,000. During 1996, the Company acquired 22 assisted living facilities and 20 skilled nursing facilities resulting in an increase in depreciation and amortization expense. Operating and other expenses increased by $1,707,000 or 62% due to approximately $1,445,000 in additional salaries and bonuses. Approximately $1,299,000 of the increase in salaries and bonuses were attributable to higher wages and bonuses paid to existing personnel and approximately $146,000 was due to additional staffing. The remaining portion of the increase in operating expense was due to higher administrative costs. Minority interest expense increased $841,000decreased $2.1 million due to theadditionamortization ofsix new partnership transactionsthe related asset, the early payoff of certain mortgage loans underlying our investment in1996. Total expenses forREMIC Certificates and thetwelve months ended December 31, 1996, as a percentagesale ofrevenues,REMIC Certificates in the third quarter of 2001.Interest and other income increased
35% as compared$0.4 million due primarily to theprior period. The relatively higher increasereceipt of interest income from our investment inexpenses when compared to revenues was primarilysecured ALC notes.Interest expense decreased $0.1 million due to
financing activitieslower debt outstanding along with a decrease in thelatter part of 1995 and 1996 which utilized more debt than equity. As a result, interest expense, as a percentage of revenues, increased by approximately 42%. In addition, the investments funded with these borrowings generally resulted in lower spreads as a result of marketinterest ratepressures, when compared to prior investments which utilized more equity financing.on our Secured Revolving Credit, partially offset by a higher interest rate on our Senior Mortgage Participation Payable.Depreciation and amortization expense increased
by 33% as a percentage of revenues$1.5 million due to theincreaseacquisition of properties in December 2001 and theCompany'sconversion of mortgage loans into owned properties,asset base in 1996partially offset byapproximately $113,858,000. Minority expense also increased 920% asproperties sold not subject to SFAS No. 144 reclassification and apercentagelower basis ofrevenues as a result of the six additional partnership transactions completed in 1996 and the full year impact of the partnership transaction completed in 1995. Operating and other expenses increased by 5% as a percentage of revenues primarilycertain assets due tohigher salariesimpairment charges taken in 2001 andbonuses paid to existing staff during 1996. 24Other income (loss) increased in 1996 over 1995 due to the higher estimated fair value2002.We perform periodic comprehensive evaluations of
the Company's REMIC Certificate investments when compared to prior year's. The higher estimated fair value was attributable to the Company's third securitization which was completed in March 1996. On an overall basis, the Certificates' estimated fair value was $6,389,000 greater than book value as of December 31, 1996.our investments. As a result, we determined certain investments in long term care properties were impaired. During 2002 we recorded impairments of $1.7 million in one skilled nursing property and one assisted living property ($0.7 million of which is included in net loss from discontinued24
operations). Of this $1.7 million, $1.0 million applied to a skilled nursing property where we agreed to a rent reduction that required an impairment adjustment and $0.7 million was for an assisted living property we agreed to sell at less than net book value. We recorded a $1.6 million impairment for mortgage loans on two skilled nursing properties. Of this amount, $0.6 million was for a skilled nursing property that had closed and defaulted on theforegoing, net incomeloan and $1.0 million was for a loan on a skilled nursing property whose operator was reporting losses from operations and requesting temporary loan payment modifications. Additionally, we recorded a $4.5 million impairment on investments in REMIC Certificates. Of this $4.5 million charge, $1.2 million was for loans paying off prior to maturity and reducing thetwelve months ended December 31, 1996 increased $10,326,000 over the same period a year earlier. Year ended December 31, 1995 compared to the year ended December 31, 1994 Total revenues increased $7,928,000 primarily as a resultvalue ofincreased rental income of $4,292,000, increased interest income onour I/ O REMIC Certificates,of $2,980,000 and increased interest income on mortgage loans of $280,000. The increase in rental income of $4,292,000$0.5 million wasdue primarily to additional rents of $1,748,000 resulting fromfor one skilled nursing propertyacquisitions made in 1995 and by $2,362,000 as a result of a full year's effect on rental revenue of facilities acquired during 1994. "Same-store" rentals (rents from facilities ownedthat closed, $1.3 million was forall of 1995 and 1994) increased by $116,000 primarily as a result of an additional $107,000 of rent associated with the expansion ofone skilled nursing facility that we, as loan servicing agent for the REMIC Trust, agreed could pay the loan off at a $1.0 million reduction in principal and $1.5 million was for one skilled nursing property whose operator advised us they were considering either closing the facility or attempting to convert the building to an alternative use. During 2001 we recorded net impairments of $16.7 million ($11.9 million of which is included in loss from discontinued operations) for 14 skilled nursing properties; $0.5 million in lease termination costs; $1.5 million onwhich 60 new beds were constructeda note receivable andby $9,000 resulting$9.8 million on ALC’s pre-bankruptcy convertible subordinated debentures.Legal expenses increased $0.5 million in 2002 from
increased rent on one facility due to a rent adjustment tied to increases in CPI. Rental revenue also increased by increased by $66,000 due to contingent rents received based on increases in the facilities' incremental operating revenues (as defined in the respective leases). Interest income on REMIC Certificates increased $2,980,000 primarily2001 due to thefull year impactincreased costs ofthe securitization transaction completed in 1994. Interest income on mortgage loans increased $6,443,000 due to the investments completed in 1995 and $3,996,000 due to the full year impact of mortgage loan investments completed in 1994. The increases were offset by reductions in interest income of $9,506,000 relating to the sale of mortgages to the REMIC and $653,000 resulting from the prepayment of certain mortgages in 1994. The remaining increase in total revenues of $376,000 was primarily due to an increase of $158,000 in prepayment penalties received by the Company in 1995 and increases in facility fees and other income of $218,000. Total expenses for the twelve months ended December 31, 1995 increased $3,226,000 primarily due to increases in interest expense of $2,844,000 and depreciation and amortization of $1,140,000. Interest expense increased by approximately $3,581,000 due to the issuance of $30,000,000 of convertible debentures in September 1994 and $61,500,000 of convertible debentures in September 1995. Interest expense also increased by approximately $899,000 due to increased levels of bank borrowings and by approximately $954,000 due to the assumption of non-recourse mortgages. These increases were offset by a decrease of $2,590,000 in interest expense in connection with the conversion of a portion of the Company's 9.75% convertible debentures in 1995. Increased expenses were also attributable to increased depreciation and amortization totaling $1,140,000 as a result of acquisitions in 1995 and 1994. During 1995, the Company acquired 11 skilled nursing facilities and six assisted living residences. The above increases were offset by decreases in operating and other expenses of $265,000. Reduction in operating and other expenses resulted primarily from a decrease in compensation expense of $764,000 offset by increased staffing and administrative costs. Minority interest increased by $57,000 due to a partnership formed by the Company in 1995. Total expenses for the twelve months ended December 31, 1995, as a percentage of revenues, decreased by approximately 2% as compared to the prior period. Although on an overall basis revenues compared to expenses were stable between the periods, there were some changes with respect to certain expense categories. Interest expense, as a percentage of revenues, increased 11% as a result of a greater proportion of debt being used to finance the 1995 investments as compared to 1994, which utilized debt and 25equity more proportionately. Depreciation and amortization expense increased by 34% as a percentage of revenues due to the additional investments in 1995 and the full impact of 1994 owned property investments which primarily occurred during the second half of 1994. These increases were offset by decreases in the provision for loan or lease losses of 100%.general litigation defense. Operating and other expenses decreased byapproximately 29% as$2.6 million due primarily to apercentage of revenues primarily$2.5 million charge for an adjustment to stockholder loans in 2001.The loss from discontinued operations was $11.2 million lower due to
comparatively lower compensation expenseimpairment charges recorded in1995.2001 on properties that were sold in 2002. During 2002 we sold 15 skilled nursing properties and one assisted living property resulting in a net gain of $14.5 million. During 2001, we sold three skilled nursing properties, three assisted living properties and three schools resulting in a net gain of $3.2 million. Additionally, we sold certain REMIC Certificates with a net book value of $19.0 million resulting in a $1.1 million loss. We also sold other miscellaneous assets during 2001 which resulted in an aggregate $0.5 million loss.The
decreaseyear ended December 31, 2002, resulted inothernet income(loss)available to common stockholders of $16.8 million compared to a net loss after preferred dividends of $18.0 million for the year ended December 31,1995 was2001. This increase is due primarily to gains on asset sales in 2002, impairment charges in 2001 and thelowercharge for an adjustment to stockholder loans in 2001.Critical Accounting Policies
Preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. See Item 8. FINANCIAL STATEMENTS —Note 2. Summary of Significant Accounting Policiesfor a description of the significant accounting policies we followed in preparing the consolidated financial statements for all periods presented. We have identified the following significant accounting policies as critical accounting policies in that they require significant judgment and estimates and have the most impact on financial reporting.
Impairments. Impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses the impairment of properties individually and impairment losses are calculated as the excess of the carrying amount over the fair value of assets to be held and used, and the
Company's REMIC Certificate investments as of December 31, 1995 when compared to estimated fair value at December 31, 1994. On an overall basis, the Certificates' estimated fair value was $216,000 greater than book value as of December 31, 1995. As more fully described in Note 1 of the Consolidated Financial statements included herein, the Company restated its earnings to adoptcarrying amount over the fair valueaccounting provisionsless cost to sell in instances where management has determined that we will dispose ofStatementthe property, as per SFAS No. 121“Accounting for the Impairment ofFinancialLong-Lived Assets and for Long-Lived Assets to be Disposed of” for years prior to 2002 and as per SFAS No. 144“AccountingStandards No. 115. As a result,for thecumulative effect on earningsImpairment or Disposal of$1,205,000Long-Lived Assets” beginning January 1, 2002. In determining fair value, we use current appraisals or other third party opinions of value and other estimates of fair value such as estimated undiscounted future cash flows.To the extent there are defaults or unrecoverable losses on the
date of adoption (January 1, 1994) has been reflected as a separate component in the Consolidated Statement of Income for the year ended December 31, 1994. As a resultunderlying mortgages of theforegoing, net income for the twelve months ended December 31, 1995 increased $1,174,000 over the same period a year earlier. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996, the Company had investments in 248 skilled nursing facilities with a total of 28,628 beds and 35 assisted living facilities with a total of 1,456 units in 32 states. The Company's real estate investment portfolio consisted of approximately $178,262,000 invested in mortgage loans (before allowance for doubtful accounts of $1,000,000), approximately $98,934,000 ofREMIC Certificatesat estimated fair value ($92,545,000 cost basis), and approximately $223,578,000 (before accumulated depreciation of $11,640,000) investedresulting inlong-term care facilities owned by the Company and leased to operators. During 1996, the Company completed investments totaling over $205,000,000 which consisted of purchases of 42 long-term care facilities for approximately $113,858,000 and mortgage loans of $99,440,000 net of the sale of four properties in Texas for $7,589,000. The Company financed its investments through the sale of $60,000,000 aggregate principal amount of convertible debentures in February and August 1996, the sale of $90,552,000 of REMIC Certificates in March 1996, the assumption of non-recourse mortgage loans totaling $9,641,000, the issuance of $8,932,000 in limited partnership interests, short-term borrowings and cash on hand. During 1996, the Company repurchased and retired 120,000 shares of common stock for an aggregate price of approximately $1,831,000. The Company also paid off one of its outstanding mortgage loans totaling $3,331,000. Under the Credit Agreement, the Company has an unsecured line of credit in the amount of $45,000,000 which expires on May 31, 1998. Borrowings under the credit line bear interest at LIBOR plus 1.5% and are subject to standard affirmative and negative covenants. As of February 1, 1997, the Company had $38,700,000 in borrowings outstanding under the Credit Agreement bearing a weighted average interest rate of approximately 7.2%. In addition, the Company has entered into the Repurchase Agreement with a financial institution under which it can borrow up to $84,000,000. The scheduled maturity of the Repurchase Agreement is November 15, 1997; however, the Company has historically been able to renew the Repurchase Agreement. Borrowings under the Repurchase Agreement bear interest at LIBOR plus 2% and are secured by a pledge of certain mortgage loans. At February 1, 1997, $50,000,000 was outstanding under the Company's Repurchase Agreement bearing an average interest rate of approximately 7.7%. The credit and repurchase agreements (collectively "lines of credit") limit the amount of borrowings available to between 50% and 60% of the Company's borrowing base. Under the Credit Agreement, the Company's borrowing base is comprised of certain owned properties and mortgage loans. At December 31, 1996, the borrowing base under the Credit Agreement is limited to 50% of the cost of the total applicable value of the properties and 60% of the total applicable value of eligible mortgage loans in the borrowing base or 26approximately $45,000,000. Under the Repurchase Agreement, the borrowing base consists of various loans which have been assigned to the financial institution. The Company can borrow up to 60% of the loans which have been assigned. Based on the current level of collateral and borrowings at February 1, 1997, there was approximately $28,451,000 available under the Company's Repurchase Agreement which the Company anticipates will be increased to $34,000,000 when additional collateral is accepted. In addition, the Company had registered in a shelf registration but had not issued up to $77,250,000 of additional securities for future issuance from time to time. In July 1996, in connection with obtaining a $50,180,000 commitment to enter into a sale leaseback transaction with Assisted Living Concepts, Inc. ("ALC"), the Company agreed to sell four assisted living facilities ("ALFs") it acquired during 1996 in Texas to ALC for approximately $7,589,000. There was no gain or loss recognized on the sale; however, the Company received an administration fee of approximately $214,000 in conjunction with the sale of the four ALFs. In connection with the commitment, the Company entered into a one- year forward ten-year interest rate swap agreement (the "November 1996 Agreement"). The terms of the commitment provide for an initial lease term of twelve years and an lease rate of 9.90% on each facility acquired. The Company will finance this commitment with fixed rate financing, and as such, has utilized an interest rate swap to "lock-in" the rate at which such financing will be obtained. Interest rate swaps are contractual agreements between the Company and third parties to exchange fixed and floating interest payments periodically without the exchange of the underlying principal amounts (notional amounts). Under the November 1996 Agreement, the Company will be credited with interest at the three-month LIBOR and will incur interest at a fixed rate of 6.835% on a $40,000,000 notional amount beginning on November 7, 1997. The November 1996 Agreement will be terminated on or before November 7, 1998 which is the latest date on which the Company expects to fully fund the commitment and have long-term financing in place. At December 31, 1996, the Company had an unrealized gain of $251,000 under the November 1996 Agreement. The Company also anticipates completing a securitization transaction within the next year, the proceeds of which will be used to repay borrowings outstanding under its Repurchase Agreement and its Credit Agreement. In connection with such securitization, the Company, in September 1995, entered into a seven-year forward interest rate swap agreement (the "September 1995 Agreement"). Under the September 1995 Agreement, beginning on March 31, 1997 and continuing semi-annually thereafter, the Company is to be credited interest at the six month LIBOR and incur interest at a fixed rate of 6.64% on a notional amount of $60,000,000 which is being accounted for as a hedge. This effectively "locked-in" the net interest margin on $60,000,000 principal amount of senior certificates the Company anticipates will be sold in the securitization transaction. Concurrent with the closing of the hedged transaction, any gains and losses associated with the interest rate swap will be included as a component of the proceeds of the transaction. The September 1995 Agreement will be terminated at the earlier of (i) an anticipated securitization transaction to be completed during the second half of 1997 or (ii) November 17, 1997. At December 31, 1996, the Company had an unrealized loss of $253,000 under the September 1995 Agreement. The Company has the option to redeem, without penalty, its currently outstanding $843,000 aggregate principal amount of 9.75% Convertible Subordinated Debentures at any time. Since such debentures are convertible into common stock of the Company at a conversion price of $10.00 per share, the Company anticipates that substantially all of such debentures will be converted if it elects to redeem the debentures. During January 1997, the Company provided mortgage loans totaling approximately $18,530,000 and acquired one skilled nursing facility for $2,556,000. Included in the mortgage loans are approximately $17,330,000 of mortgage loans on assisted living facilities which will be paid off once the Company 27completes a sale leaseback transaction for the same amount on assisted living facilities that are being constructed. As of February 1, 1997, the Company had outstanding investment commitments totaling $82,790,000, consisting of approximately $22,650,000 in commitments to make mortgage loans and commitments for the acquisition of one nursing and 25 assisted living facilities for an aggregate purchase price of approximately $60,140,000, including the remaining $35,330,000 commitment to Assisted Living Concepts, Inc. discussed previously. The Company expects to fund substantially all of these commitments by the end of 1997. In addition, in January 1997, the Company sold 1,000,000 shares of common stock at $17.75 per share through a public offering. Of the net proceeds, $17,300,000 was used to pay borrowings under the unsecured line of credit. The Company expects its future income and ability to make distributions fromreduced cash flows,from operations to depend onthecollectibility of its mortgage loans receivable, REMIC Certificates and rents. The collection of these loans,subordinated certificatesand rents will be dependent,we hold would, inlarge part, upon the successful operation by the operators of the skilled nursing and assisted living facilities owned by or pledged to the Company. The operating results of the facilities will depend on various factors over which the operators/owners may have no control. Those factors include, without limitation, the status of the economy, changes in supply of or demand for competing long-term care facilities, ability to control rising operating costs, and the potential for significant reforms in the long-term care industry. In addition, the Company's future growth in net income and cash flow may be adversely impacted by various proposals for changes in the governmental regulations and financing of the long-term care industry. The Company cannot presently predict what impact these proposals may have, if any. The Company believes that an adequate provision has been made for the possibility of loans proving uncollectible but will continually evaluate the status of the operations of the skilled nursing and assisted living facilities, the Company's borrowers and the underlying collateral for mortgage loans and make future revisions to the provision, if considered necessary. The Company's investments, principally its investments in mortgage loans, REMIC Certificates, and owned properties, are subject to the possibility of loss of their carrying values as a result of changes in market prices, interest rates and inflationary expectations. The effects on interest rates may affect the Company's costs of financing its operations and the fair market value of its financial assets. The Company generally makes loans which have predetermined increases in interest rates and leases which have agreed upon annual increases. Inasmuch as the Company initially funds its investments with its revolving bank line and repurchase agreement, the Company is at risk of net interest margin deterioration if medium and long-term rates were to increase between the time the Company originates the investment and the time it securitizes the loans or replaces the short-term variable rate borrowings with a fixed rate financing. To help reduce the negative impact of changes in interest rates, the Company partially hedges, or locks in, its net interest rate spread on its investments with interest rate swaps, as previously described. The REMIC Certificates retained by the Company are subordinate in rank and right of payment to the certificates sold to third-party investors and as such wouldgeneral bear the first risk oflossloss. In accordance with EITF 99-20, management evaluates the realizability of expected future cash flows periodically. Management includes in its evaluation such factors as actual and/or expected loan prepayments, actual and/or expected credit losses, and other factors that may impact the amount and timing of REMIC Certificate future cash flows. An impairment is recorded in current period earnings when management believes that it is likely that a portion of the underlying mortgage collateral would not be realized by the REMIC Trust.25
Securitization Transactions.We are a REIT and, as such, make investments with the intent to hold them for long-term purposes. However, mortgage loans may be transferred to a REMIC, a qualifying special-purpose entity, when a securitization provides us with the best available form of capital to fund additional long-term investments. When contemplating a securitization, consideration is given to our current and expected future interest rate posture and liquidity and leverage position, as well as overall economic and financial market trends.
A securitization is completed in a two-step process. First, a wholly owned special-purpose bankruptcy remote corporation (or REMIC Corp.) is formed and selected mortgage loans are sold to the REMIC Corp. without recourse. Second, the REMIC Corp. transfers the loans to a trust (or REMIC Trust) in exchange for commercial mortgage pass-through certificates (or REMIC Certificates) which represent beneficial ownership interests in the
eventREMIC Trust assets (the underlying mortgage loans). Under this structure, the REMIC Trust is a qualifying special purpose entity from which the mortgages are isolated from us and the REMIC Corp. Holders of REMIC Certificates issued by the REMIC Trust have the right free of any conditional constraints to pledge or exchange those interests, and neither we or the REMIC Corp. maintain effective control over the transferred assets (the mortgages). The REMIC Trust is administered by a third-party trustee solely for the benefit of the REMIC Certificate holders.Under the securitization structure described above, we account for the transfer of the mortgages as a sale and any gain or loss is recorded in earnings. The gain or loss is equal to the excess or deficiency of the cash proceeds and fair market value of any subordinated certificates received when compared with the carrying value of the mortgages sold, net of any transaction costs incurred and any gains or losses associated with an
impairmentunderlying hedge. Subordinated certificates received by us are recorded at their fair value at the date of the transaction. We have no controlling interest in the REMIC since the majority of the beneficial ownership interests (in the form of REMIC Certificates) are sold to third-party investors. Consequently, the financial statements of the REMIC Trust are not consolidated with those of our company for financial reporting purposes.REMIC Certificates retained by us as consideration for the mortgages sold are accounted for at fair value. In determining fair value on the date of sale, management considers various factors including, pricing of the certificates sold relative to the certificates retained as evaluated by the underwriters, discount rates and applicable spreads at the time of issuance for similar securities (or adjustments thereto if no comparable securities are available), assumptions regarding prepayments including the weighted-average life of prepayable assets, if any, and estimates relating to potential realized credit losses.
The REMIC Certificates issued by the REMIC Trust include various levels of senior, subordinated, interest only and residual classes. The subordinated REMIC Certificates generally provide a level of credit enhancement to the senior REMIC Certificates. The senior REMIC Certificates (which historically have represented 66% of the total REMIC Certificates) were then sold to outside third-party investors through a private placement under Rule 144A of the Securities Act of 1933, as amended. The subordinated REMIC Certificates along with the cash proceeds from the sale of the senior REMIC Certificates were retained by the REMIC Corp. as consideration for the initial transfer of the mortgage loans to the REMIC Trust. Neither we, nor the REMIC Corp. is obligated to purchase any of the
underlying mortgages.REMIC Trust assets or assume any liabilities.Description of the REMIC Certificates.REMIC Certificates represent beneficial ownership interests in the REMIC Trust and can be grouped into three categories; senior, subordinated and subordinated interest only (or I/ O). The
returnsREMIC Certificates sold to third-party investors are the senior certificates and those retained by us are the subordinated certificates. The senior and the subordinated certificates have stated principal balances and stated interest rates (or pass-through rates). The I/ O REMIC Certificates have no stated principal but are entitled to interest distributions. Interest distributions on theCompany's investment inI/ O REMIC Certificates aresubject to certain uncertainties and contingencies including, without limitation,typically based on thelevel of prepayments, estimated future credit losses, prevailingspread between the monthly interestrates,received by the REMIC Trust on the underlying mortgage collateral and thetimingmonthly pass-through interest paid by the REMIC Trust on the outstanding pass-through rate REMIC Certificates. Interest andmagnitudeprincipal distributions are made in order ofcreditREMIC Certificate seniority. As such, to the extent there are defaults or unrecoverable losses on the underlying mortgagescollateralizingresulting in reduced cash flows, thesecuritiessubordinated certificates held by us would in general bear the first risk of loss. Management evaluates the realizability of expected future cash flows periodically. An impairment is recorded in current period earnings when management believes thatareit is probable that aresultportion of thegeneral condition of the real estate market or long-term care industry. As these uncertainties and contingencies are difficult to predict and are subject to future events that may alter management's estimations and assumptions, no assurance canunderlying mortgage collateral would not begiven that current yields will not vary significantly in future periods. To minimize the impact of prepayments, the mortgage loans underlyingrealized by the REMICCertificates generally prohibit prepayment unless the property is sold to an unaffiliated third party (with respect to the borrower). Additionally, management believes it employs conservative underwriting policies and to date there have 28been no credit losses on any of the mortgages underlying the certificates nor are any credit losses currently anticipated. Certain of the Certificates retained by the Company have designated certificate principal balances and a stated certificate interest "pass-through" rate. These Certificates are subject to credit risk to the extent that there are estimated or realized credit losses on the underlying mortgages, and as such their effective yield would be negatively impacted by such losses. The Company also retains the interest-only (I/O) Certificates, which provide cash flow (interest-only) payments that result from the difference between the interest collected from the underlying mortgages and interest paid on all the outstanding pass-through rate certificates.Trust.In addition to the risk from credit losses, the I/O Certificates are also subject to prepayment risk, in that prepayments of the underlying mortgages reduce future interest payments of which a portion flows to the I/O Certificates, thus, reducing their effective yield. The
Certificates'Certificates’ fair values are estimated, in part, based on a spread over the applicableU.SU.S. Treasury rate, and consequently, are inversely affected by increases or decreases in such interest26
rates. There is no active market in these securities from which to readily determine their value. The estimated fair values of both classes of Certificates are subject to change based on the estimate of future prepayments and credit losses, as well as fluctuations in interest rates and market risk. Althoughthe Company iswe are required to reportitsour REMIC Certificate investments available for sale at fair value, many of the factors considered in estimating their fair value are difficult to predict and are beyond the control ofthe Company'sour management, consequently, changes in the reported fair values may vary widely and may not be indicative of amounts immediately realizable ifthe Companyour company was forced to liquidate any of the Certificates.On January 1, 1999, we adopted SFAS No. 134“Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.”Upon adoption of SFAS No. 134, we, based on our ability and intent to hold our investments in REMIC Certificates, transferred our I/O REMIC Certificates and certificates with an investment rating of “BB” or higher from the trading category to the available-for-sale category and our certificates with an investment rating of “B” or lower to the held-to-maturity category. The
Company believestransfer was recorded at fair value on the date of the transfer.Mortgage Loans Receivable. Mortgage loans receivable are recorded on an amortized costs basis. We maintain a valuation allowance based upon the expected collectibility of our mortgage loans receivable. Changes in the valuation allowance are included in current period earnings. In accordance with SFAS No. 114“Accounting by Creditors for Impairment of a Loan”we evaluate the carrying values of our mortgage loans receivable on an individual basis. Management periodically evaluates the realizability of future cash flows from the mortgages when events or circumstances, including the non-receipt of principal and interest payments and/or significant deteriorations of the financial conditions of the borrowers indicate that
itsthe carrying amount of the mortgage loan receivable may not be recoverable. An impairment charge is recognized in current period earnings and is calculated as the difference between the carrying amount of the mortgage loan receivable and the discounted cashflowflows expected to be received, or if foreclosure is probable, the fair value of the collateral securing the mortgage.Mortgage Servicing Rights. We sub-service mortgage loans that are collateral for REMIC Certificates issued in our securitization transactions for which we receive servicing fees, based on market rates for such services at the time the securitization is completed, equal to a fixed percentage of the outstanding principal on the collateral loans. A separate asset for servicing rights is not recognized since the servicing fees received only adequately compensate us for the cost of servicing the loans. The fair value of servicing rights for mortgage loans originated and retained by us are estimated based on the fees received for servicing mortgage loans that serve as collateral for REMIC Certificates. All costs to originate mortgage loans are allocated to the mortgage loans since the fair value of servicing rights only sufficiently covers the servicing costs.
Revenue Recognition.Interest income on mortgage loans and REMIC Certificates is recognized using the effective interest method. We follow a policy related to mortgage interest whereby we consider a loan to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid mortgage interest income from
operations availablethat loan until the amounts have been received. Base rents under operating leases are accrued as earned over the terms of the leases. Substantially all of our leases contain provisions fordistributionspecified annual increases over the rents of the prior year and are generally computed in one of four methods depending on specific provisions of each lease as follows: (i) a specified annual increase over the prior year’s rent, generally 2%; (ii) an increase based on the change in the Consumer Price Index from year to year; (iii) an increase derived as a percentage of facility net patient revenues in excess of base revenue amounts orreinvestment, its remaining borrowing capacity under its lines of credit and anticipated securitization transaction are sufficient to(iv) specific dollar increases over prior years. SEC Staff Bulletin No. 101Revenue Recognition in Financial Statements (or SAB 101) does not provide forpaymentthe recognition ofitssuch contingent revenue until all possible contingencies have been eliminated. We consider the operatingcosts, fund investments and provide funds for distribution to its stockholders. In addition to its borrowing capacity, the Company is considering various other proposals for additional long-term financing to meet the needshistory of theCompany. 29lessee and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. We follow a policy related to rental income whereby we consider a lease to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid rental income from that lease until the amounts have been received. Rental revenues relating to leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis when we believe that all of the rent related to a particular lease will be collected according to the terms of the lease. In evaluating whether we believe all the rent will be collected all of the following conditions must be met: (i) the property has been operated by the same operator for at least six months (adding a new property to a master lease with an operator that otherwise qualifies does not disqualify the lease from being straight-lined); (ii) payments for any monetary obligations due under the lease, or any other lease such operator has with us have been received late no more than (four) times during last eight fiscal quarters; (iii) the operator of the property has not during the last eight fiscal quarters (a) been under the protection of any Bankruptcy court; (b) admitted in writing its
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inability to pay it debts generally as they come due; (c) made an assignment for the benefit of creditors; or, (d) been under the supervision of a trustee, receiver or similar custodian; and (iv) the property operating income has covered the applicable lease payment in each of the prior four fiscal quarters.We will discontinue booking rent on a straight-line basis if the lessee becomes delinquent in rent owed under the terms of the lease and has been put on “non-accrual” status (i.e. we have stopped booking rent on an accrual basis for a particular lease because the collection of rent is uncertain). Once a lease is on “non-accrual” status, we will evaluate the collectibility of the related straight-line rent asset. If it is determined that the collection problem is temporary, we will resume booking rent on a straight-line basis once payment is received for past due rents. If it appears that we will not collect future rent under the “non-accrual lease” we will record an impairment charge related to the straight-line rent asset.
Management periodically evaluates the realizability of future cash flows from the mortgages underlying our REMIC Certificates. Included in our evaluation, management considers such factors as actual and/or expected loan prepayments, actual and/or expected credit losses, and other factors that may impact the amount and timing of REMIC Certificate future cash flows. Impairments are recorded when an adverse change in cash flows is evident and is determined to be other than temporary in nature. Additionally, interest recognition amortization schedules are adjusted periodically to reflect changes in expected future cash flows from the REMIC Certificates, thus, accordingly adjusting future interest income recognized.
Transactions with Affiliate. See Item 8. FINANCIAL STATEMENTS —Note 8. CLC Healthcare, Inc., for a description of our transactions with CLC Healthcare, Inc. and the accounting policies we followed related to those transactions.
Liquidity and Capital Resources
Financing Activities:
In the third quarter of 2003 we issued 2,200,000 shares of our Series E Preferred Stock that generated net cash proceeds of approximately $52.4 million. Each share of Series E Preferred Stock has a liquidation value of $25.00 per share and is convertible at anytime into shares of our common stock at a conversion price of $12.50 per share of common stock, subject to adjustment under certain circumstances. The cash proceeds and cash on hand were used to fully repay amounts outstanding under our Secured Revolving Credit. Following this repayment, in December 2003 we cancelled our Secured Revolving Credit a year early and entered into a new three-year Unsecured Credit Agreement that provides for $45.0 million of total commitments with no scheduled maturities other than the three-year term and provides for the inclusion of additional banks and an expansion of the Unsecured Credit Agreement under certain terms and conditions. The Unsecured Credit Agreement pricing varies between LIBOR plus 2.75% and LIBOR plus 3.25% (4.1% at December 31, 2003) depending on our leverage ratio. The Unsecured Credit Agreement contains financial covenants customary to an unsecured line of credit.
Subsequent to December 31, 2003, we borrowed $21.0 million under the Unsecured Credit Agreement in January 2004 and used $4.5 million to pay, prior to maturity, mortgage debt that was due in January 2005 and used $16.5 million to fund the partial redemption of our Series A Preferred Stock described below. During February 2004, we repaid the $21.0 million from the proceeds of the redemption of ALC Senior and Junior Secured Notes and some of the proceeds from the issuance of our 8% Series F Cumulative Preferred Stock (or Series F Preferred Stock), both described below. At present, we have no outstanding amounts under the Unsecured Credit Agreement.
On December 31, 2003, we announced that we would be receiving approximately $12.3 million plus accrued interest in January 2004 from the early redemption of ALC Senior and Junior Secured Notes we owned. On that same day we announced a partial (40% or 1,225,680 shares) redemption of our Series A Preferred Stock. The redemption price of the Series A Preferred Stock per share, including accrued and unpaid dividends, was $25.1914. On January 29, 2004, we distributed $30.9 million to redeem the 1,225,680 shares. Funds were provided from cash on hand, primarily from asset sales described below and the draw under our Unsecured Credit Agreement. As a result of this redemption we recorded a $1.2 million non-cash preferred stock redemption charge which represented 40% of the original issuance costs of the Series A Preferred Stock.
During the year ended December 31, 2003, we purchased and retired 482,800 shares of common stock for an aggregate purchase price of $3.2 million, an average of $6.72 per share. The shares were purchased on the open market under a Board authorization to purchase up to 5,000,000 shares. Including the shares purchased in 2003, 2,348,200 shares have been purchased under this authorization; therefore, we continue to have an open Board
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authorization to purchase an additional 2,651,800 shares of common stock. Also during 2003 we purchased 5,000 each of our Series A Preferred Stock and our 9.0% Series B Cumulative Preferred Stock (or Series B Preferred Stock) for a total purchase price of approximately $0.2 million.Additionally during 2003, we received $4.4 million from principal payments (including the pay-off price to maturity of one officer loan) on stockholder loans and $1.3 million for the exercise by employees of stock options. In February 2004 two loans to Board members were paid in full. As a result, subsequent to the February 2004 payments, we have no outstanding loans to employees or Board members. The two loans paid in February 2004 to two Board members who sold shares of our common stock to repay the loans. These sales were made in accordance with our policy regarding “Securities Trades by Company Personnel” and both Board members timely filed Forms 4 with the Securities and Exchange Commission.
In 2003 we distributed $11.6 million in common dividends and $15.2 million in preferred dividends. We declared preferred dividends of $16.6 million in 2003 not including the preferred stock redemption charge recorded relating to the 40% redemption of the Series A Preferred Stock. As a result of the redemption of our Series A and Series B Preferred Stock, issuance of our Series E Preferred Stock described above, the issuance of our 8.0% Series F Cumulative Preferred Stock (or Series F Preferred Stock), described below, and assuming no conversion of our Series E Preferred Stock, our preferred dividends in 2004 will be approximately $17.1 million (excluding a preferred stock redemption charge related to the original issuance costs associated with the Series A and Series B Preferred Stock redeemed in the first quarter of 2004 as discussed below).
During 2003, we borrowed $7.5 million and repaid $55.9 million under our now terminated Secured Revolving Credit. Funds were provided for this net reduction from a combination of cash on hand at the beginning of 2003, the net proceeds from the issuance of our Series E Preferred Stock, asset sales described below and net cash provided from operations.
We paid the Senior Mortgage Participation holder approximately $11.4 million from the proceeds of principal payments on mortgage loans described below and we paid approximately $14.3 million ($3.8 million from net proceeds from asset sales) in principal payments on non-participated mortgage loans.
As of December 31, 2003, we are obligated in 2004 to make approximately $3.0 million in scheduled principal payments on our mortgage loans payable, bonds payable and capital lease obligations (there are no 2004 maturities) and in 2005 through 2008 the total scheduled principal payments and debt maturities are approximately $16.3 million, $47.4 million, $2.2 million and $16.3 million, respectively. Subsequent to December 31, 2003, $5.8 million of the 2005 maturities were prepaid.
In February 2004 we announced the sale of a total of 4,000,000 shares of our Series F Preferred Stock that generated net proceeds of approximately $98.5 million. This stock was issued at $25.00 per share prior to expenses and fees. Also in February we announced the redemption of the remaining 1,838,520 outstanding shares of our Series A Preferred Stock and the redemption of all of the outstanding 1,988,000 shares of our Series B Preferred Stock. Of the $98.5 million net proceeds, approximately $96.3 million will be used to fund these two redemptions including the accrued and unpaid dividends. In the first quarter of 2004 we will have a non-cash preferred stock redemption charge of $4.0 million related to the remaining original issuance costs of the Series A and Series B Preferred Stock.
Subsequent to December 31, 2003 we purchased for $3.4 million a 120 bed skilled nursing property in Texas. We have entered into a 20 year lease with an operator which begins March 3, 2004 and for an annual amount of $0.4 million in the first year and increasing 2% every year thereafter.
Available Shelf Registrations:
Issuance of both the Series E Preferred Stock and the Series F Preferred Stock reduced the capacity under our currently effective shelf registration to $45.0 million. In anticipation of acquisitions or other refinancings in 2004, we intend to file a new Form S-3 that will increase our available securities offering capacity to a total of $200.0 million and anticipate that the registration statement will become effective in the first or second quarter of 2004. We may from time to time raise capital under our currently effective shelf registration or the anticipated new shelf registration by issuing, in public or private transactions, our equity and debt securities, but the availability and terms of such issuance will depend upon then prevailing market and other conditions.
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Operating and Investing Activities:
During the year ended December 31, 2003, net cash provided by operating activities was $36.2 million. We completed the placement of a mortgage loan of $1.7 million, acquired two skilled nursing properties for approximately $1.2 million and invested approximately $2.3 million in building improvements and furniture and equipment leased to operators.
We received during 2003 approximately $12.9 million from principal payments on mortgage loans receivable and paid to the holder of the Senior Mortgage Participation approximately $11.4 million in principal payments as discussed above.
In 2003 we sold eight skilled nursing properties for a total gross sales price of $16.2 million. We received net proceeds of $15.7 million which we used to repay $3.8 million in mortgage debt related to these sold properties, $2.6 million was used to repay borrowings under our Secured Revolving Credit and we used the remaining net proceeds to redeem 40% of our outstanding Series A Preferred Stock.
Subsequent to December 2003, we sold a 72 bed skilled nursing property in Georgia for $1.5 million and used $1.3 million of the proceeds to pay a mortgage note payable.
In addition to the $3.8 million paydown of mortgage debt related to asset sales, we also repaid five loans payable to REMIC Pools originated by us totaling $7.7 million and made $2.8 million in scheduled principal payments on mortgage loans, notes payable and capital leases.
We also invested approximately $2.0 million in 2003 to purchase additional ALC Senior and Junior Secured Notes that have subsequently been redeemed as discussed above.
New Leases in 2003:
In the first quarter of 2003 Sun advised us that they would no longer make lease payments on nine properties they leased from us and stopped paying rent in February 2003. Additionally, we did not collect or record rental revenue on 19 properties leased to CLC for the first eight months of 2003 before these properties were turned over by CLC to a management company who subsequently began paying us rent on these 19 properties in September 2003. These 19 properties, along with one former Sun property are now leased under a master lease with Center Healthcare, Inc. (or Center Healthcare) providing for lease revenue in 2004 of approximately $4.6 million. Of the remaining eight Sun properties, one was sold as described above and the remaining seven properties were leased during the fourth quarter of 2003 to three separate operators. Taking into consideration the rental revenue generated in 2003 from the sold properties, the former Sun properties and the former CLC properties, we anticipate rental income will increase in 2004 by approximately $3.4 million as a result of these new leases offset by the reduction in rental revenues as a result of properties sold in 2003. Subsequent to December 31, 2003, at our election, we paid $3.7 million to acquire a defaulted mortgage loan in the 1994 REMIC pool. The amount paid represents the outstanding balance on the loan which approximated the fair value.
REMIC Revenue and Cash Flow:
Loans within certain REMIC Certificate pools have amortized, are scheduled to mature or have paid off early. As a result, we anticipate REMIC interest income in 2004 will be approximately $1.0 million less than 2003, absent any modifications of the underlying loans. As of December 31, 2003, scheduled maturities on REMIC Certificates we hold are $6.7 million, $8.1 million, $9.8 million, $6.5 million, $3.2 million and $27.2 million for the years ending December 31, 2004, 2005, 2006, 2007, 2008 and thereafter.
Commitments:
As of December 31, 2003, we had committed to provide to Alterra $2.5 million over three years to invest in leasehold improvements to properties they lease from us and an additional $2.5 million over three years to expand properties they lease from us. Both of these investments would be made at a 10% annual return to us.
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Contractual Obligations:
We monitor our contractual obligations to ensure funds are available to meet obligations when due. The following table represents our long-term contractual obligations as of December 31, 2003 and excludes the effects of interest (amounts in thousands):
Total Less than 1 year 1-2 years 3-5 years After 5 years Mortgage loans payable $ 123,314 $ 2,304 $ 62,088 $ 16,614 $ 42,308 Bonds payable and capital lease obligations 14,686 719 1,612 1,855 10,500 $ 138,000 $ 3,023 $ 63,700 $ 18,469 $ 52,808 Off-Balance Sheet Arrangements:
We had no off-balance sheet arrangements as of December 31, 2003.
Liquidity:
We believe we have sufficient liquidity and financing capability to fund additional investments in 2004, maintain our preferred dividend payments, pay common dividends at least sufficient to maintain our REIT status and repay borrowings at or prior to their maturity through our generation of funds from operation, borrowings under our Unsecured Credit Agreement, asset sales, proceeds from mortgage notes receivable, principal payments from REMIC certificates we hold or additional financings. We believe our liquidity and sources of capital are adequate to satisfy our cash requirements. We cannot, however, be certain that these sources of funds will be available at a time and upon terms acceptable to us in sufficient amounts to meet our liquidity needs.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Readers are cautioned that statements contained in this section “Quantitative and Qualitative Disclosures About Market Risk” are forward looking and should be read in conjunction with the disclosure under the heading “Statement Regarding Forward Looking Disclosure” set forth above.
We are exposed to market risks associated with changes in interest rates as they relate to our mortgage loans receivable, investments in REMIC Certificates and debt. Interest rate risk is sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control.
We do not utilize interest rate swaps, forward or option contracts or foreign currencies or commodities, or other types of derivative financial instruments nor do we engage in “off-balance sheet” transactions. The purpose of the following disclosure is to provide a framework to understand our sensitivity to hypothetical changes in interest rates as of December 31, 2003.
Our future earnings, cash flows and estimated fair values relating to financial instruments are dependent upon prevalent market rates of interest, such as LIBOR or term rates of U.S. Treasury Notes. Changes in interest rates generally impact the fair value, but not future earnings or cash flows, of mortgage loans receivable, our investment in REMIC Certificates and fixed rate debt. For variable rate debt, such as our revolving line of credit, changes in interest rates generally do not impact the fair value, but do affect future earnings and cash flows.
At December 31, 2003, based on the prevailing interest rates for comparable loans and estimates made by management, the fair value of our mortgage loans receivable was approximately $74.5 million. A 1% increase in such rates would decrease the estimated fair value of our mortgage loans by approximately $2.8 million while a 1% decrease in such rates would increase their estimated fair value by approximately $3.0 million. A 1% increase or decrease in applicable interest rates would not have a material impact on the fair value of our investment in REMIC Certificates or fixed rate debt.
We had no borrowings outstanding under our Unsecured Credit Agreement at December 31, 2003. Thus, an increase or decrease in interest rates would have no impact on annual interest expense on our Unsecured Credit Agreement.
The estimated impact of changes in interest rates discussed above are determined by considering the impact of the hypothetical interest rates on our borrowing costs, lending rates and current U.S. Treasury rates from which our financial instruments may be priced. We do not believe that future market rate risks related to our financial
31
instruments will be material to our financial position or results of operations. These analyses do not consider the effects of industry specific events, changes in the real estate markets, or other overall economic activities that could increase or decrease the fair value of our financial instruments. If such events or changes were to occur, we would consider taking actions to mitigate and/or reduce any negative exposure to such changes. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our capital structure.32
Item 8. FINANCIAL STATEMENTS
Page ----Report of Independent Auditors.................................................................25Auditors34 Consolidated Balance Sheets as of December 31, 19962003 and1995...................................26200235 Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 1996, 19952003, 2002 and1994...............................................................27200136 Consolidated Statements of Stockholders'Stockholders’ Equity for the years ended December 31,1996, 19952003, 2002 and1994.........................................................28200137 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 19952003, 2002 and1994...............................................................29200138 Notes to Consolidated Financial Statements.....................................................30Statements39 3033
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LTC Properties, Inc.
We have audited the accompanying consolidated balance sheets of LTC Properties, Inc. as of December 31,
19962003 and19952002 and the related consolidated statements of operations and comprehensive income,stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended December 31,1996.2003. Our audits also included the financial statement schedules listed in the index at Item14(a)15(a). These financial statements and financial statement schedules are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.We conducted our audits in accordance with auditing standards generally accepted
auditing standards.in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of LTC Properties, Inc. at December 31,
19962003 and1995,2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31,19962003 in conformity with accounting principles generally acceptedaccounting principles.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.As discussed in Note 1, the Company has restated its financial statements, after discussions with the Staff of the Securities and Exchange Commission, to adopt the fair value accounting provisions of SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities", for its investment in REMIC certificates, as opposed to the previously reported amortized cost accounting. As a result of this change in accounting, the Company earnings increased in 1996 by $6,173,000 ($0.32 per share), decreased in 1995 by $1,656,000 ($0.09 per share), and increased in 1994 by $1,872,000 ($0.12 per share). /s/ ERNST & YOUNG LLP
/s/ ERNST & YOUNG LLP Los Angeles, California
January 13, 1997,February 9, 2004exceptNotefor Notes 8, 10, 11 and 12as to which the date isFebruary 1, 1997 31March 5, 200434
LTC PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(RESTATED) -------------------------------------------- DECEMBER 31, December 31, 1996 1995 ------------------- ------------------ ASSETS (In thousands)Real Estate Investments: Buildings and improvements, net of accumulated depreciation and amortization: 1996 - $11,640; 1995 - $5,487 $199,591 $104,546 Land 12,347 7,236 Mortgage loans receivable, held for sale, net of allowance for doubtful accounts: 1996 - $1,000; 1995 - $997 177,262 161,059 REMIC Certificates, at estimated fair value 98,934 67,600 ------------------- ------------------ Real estate investments, net 488,134 340,441 Other Assets: Cash and cash equivalents 3,148 1,434 Restricted cash - 8,300 Debt issue costs, net 4,150 3,331 Interest receivable 2,817 2,093 Prepaid expenses and other assets 2,289 1,779 ------------------- ------------------ 12,404 16,937 ------------------- ------------------ Total assets $500,538 $357,378 =================== ================== LIABILITIES AND STOCKHOLDERS' EQUITY Convertible subordinated debentures due 1999 - 2004 $135,828 $ 94,641 Bank borrowings 79,400 48,470 Mortgage loans payable 54,205 16,707 Bonds payable and capital lease obligations 14,039 14,265 Accrued interest 6,015 3,196 Accrued expenses and other liabilities 3,041 2,415 Distributions payable 6,679 5,764 ------------------- ------------------ Total liabilities 299,207 185,458 Minority interest 10,528 1,098 Commitments - - Stockholders' equity: Preferred stock $0.01 par value: 10,000,000 shares - - authorized; none issued and outstanding Common stock $0.01 par value; 40,000,000 shares authorized; shares issued and outstanding: 1996 - 19,484,208; 1995 - 18,297,254 195 183 Capital in excess of par value 195,297 178,453 Cumulative net income 71,914 43,204 Cumulative distributions (76,603) (51,018) ------------------- ------------------ Total stockholders' equity 190,803 170,822 ------------------- ------------------ Total liabilities and stockholders' equity $500,538 $357,378 =================== ==================See accompanying notes 32LTC PROPERTIES, INC. CONSOLIDATED STATEMENTS OF INCOME (In(In thousands, except per shareamount)amounts)
YEARS ENDED DECEMBER 31, ----------------------------------------------- (RESTATED) ----------------------------------------------- 1996 1995 1994 -------------- ------------ ------------ Revenues:Rental income $20,529 $ 9,935 $ 5,643 Interest income from mortgage loans 17,498 13,116 12,836 Interest income from REMIC Certificates 14,383 10,903 7,923 Interest and other income 2,520 1,615 1,239 -------------- ------------ ------------ Total revenues 54,930 35,569 27,641 Expenses: Interest expense 20,604 9,407 6,563 Depreciation and amortization 6,298 3,072 1,781 Amortization of Founders' stock 114 221 372 Provision for loan losses - - 550 Minority interest 898 57 - Operating and other expenses 4,479 2,772 3,037 -------------- ------------ ------------ Total expenses 32,393 15,529 12,303 -------------- ------------ ------------ Other income/(loss): Unrealized holding gain/(loss) on changes in estimated fair value of REMIC Certificates 6,173 (1,656) 667 -------------- ------------ ------------ Income before cumulative effect of accounting change 28,710 18,384 16,005 Cumulative effect of accounting change - - 1,205 -------------- ------------ ------------ Net income $28,710 $18,384 $17,210 ============== ============ ============ Per share amounts: Income before cumulative effect of accounting charge $ 1.49 $ 1.01 $ 1.04 Cumulative effect on prior year (year ended December 31, 1993) of a change in method of accounting for REMIC Certificates - - 0.07 -------------- ------------ ------------ Net income $ 1.49 $ 1.01 $ 1.11 ============== ============ ============ Weighted average shares outstanding 19,257 18,257 15,443 ============== ============ ============
December 31, 2003 2002 ASSETS Real Estate Investments: Buildings and improvements, net of accumulated depreciation and amortization: 2003 — $73,376; 2002 — $61,101 $ 357,282 $ 366,679 Land 25,343 24,996 Properties held for sale, net of accumulated depreciation and amortization: 2003 — $0; 2002 — $3,215 — 13,665 Mortgage loans receivable, net of allowance for doubtful accounts: 2003 — $1,280; 2002 — $1,280 71,465 82,675 REMIC Certificates 61,662 64,419 Real estate investments, net 515,752 552,434 Other Assets: Cash and cash equivalents 17,919 8,001 Debt issue costs, net 1,496 5,309 Interest receivable 3,809 3,764 Prepaid expenses and other assets 4,495 2,069 Prepaid expenses and other assets related to properties held for sale — 2,037 Notes receivable (includes $9,292 due from CLC Healthcare, Inc. in 2003 and $7,836 in 2002) 19,172 18,343 Marketable debt securities 12,281 7,968 59,172 47,491 Total assets $ 574,924 $ 599,925 LIABILITIES AND STOCKHOLDERS’ EQUITY Bank borrowings $ — $ 48,421 Mortgage loans payable 123,314 134,388 Bonds payable and capital lease obligations 14,686 15,361 Senior mortgage participation payable 18,250 29,667 Accrued interest 952 1,267 Accrued expenses and other liabilities 2,514 4,419 Accrued expenses and other liabilities related to properties held for sale — 4,609 Liability for 9.5% Series A Preferred Stock redemption — 1,226 shares 30,642 — Distributions payable 2,383 981 Total liabilities 192,741 239,113 Minority interests 13,401 13,399 Stockholders’ Equity: Preferred stock $0.01 par value: 2003 — 15,000 shares authorized; shares issued and outstanding: 2003 — 8,026; 2002 — 7,062 189,163 165,183 Common stock $0.01 par value; 2003 — 35,000 shares authorized; shares issued and outstanding: 2003 — 17,807; 2002– 18,055 178 181 Capital in excess of par value 250,055 253,050 Cumulative net income 274,948 250,629 Other (638 ) (6,112 ) Cumulative distributions (344,924 ) (315,518 ) Total stockholders’ equity 368,782 347,413 Total liabilities and stockholders’ equity $ 574,924 $ 599,925 See accompanying
notes 33notes. 35
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY (Restated) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)OPERATIONS AND COMPREHENSIVE INCOME
Capital in Total Common Stock excess of Cumulative Cumulative Stockholders' Shares Amount par value Net Income Distributions Equity ----------------------------------------------------------------------------------------------Balances at December 31, 1993 9,737 $ 97 $ 89,698 $ 7,610 $(12,258) $ 85,147 Amortization of Founders' stock - - 372 - - 372 Issuance of common stock, net 4,800 48 59,570 - - 59,618 Conversions of debentures, net of unamortized issue costs of 3,330 34 32,261 - - 32,295 $1,237 Repurchase of common stock (209) (2) (2,666) - - (2,668) Net income - - - 17,210 - 17,210 Distributions ($1.10 per share) - - - - (16,881) (16,881) ---------------------------------------------------------------------------------------------- Balances at December 31, 1994 17,658 177 179,235 24,820 (29,139) 175,093 ---------------------------------------------------------------------------------------------- Amortization of Founders' stock - - 221 - - 221 Exercise of stock options 2 - 24 - - 24 Conversions of debentures, net of - unamortized issue costs of 1,936 19 18,924 - 18,943 $651 Repurchase of common stock (1,299) (13) (18,076) - - (18,089) Repurchase of warrants - - (1,875) - - (1,875) Net income - - - 18,384 - 18,384 Distributions ($1.21 per share) - - - - (21,879) (21,879) ---------------------------------------------------------------------------------------------- Balances at December 31, 1995 18,297 183 178,453 43,204 (51,018) 170,822 ---------------------------------------------------------------------------------------------- Amortization of Founders' stock - - 114 - - 114 Exercise of options 3 - 39 - - 39 Conversions of debentures, net of - unamortized issue costs of 1,304 13 18,521 - 18,534 $576 Repurchase of common stock (120) (1) (1,830) - - (1,831) Net income - - - 28,710 - 28,710 Distributions ($1.335 per share) - - - - (25,585) (25,585) ---------------------------------------------------------------------------------------------- Balances at December 31, 1996 $19,484 $195 $195,297 $71,914 $(76,603) $190,803 ==============================================================================================(In thousands, except per share amounts)
Years ended December 31, 2003 2002 2001 Revenues: Rental income $ 40,554 $ 41,440 $ 37,259 Interest income from mortgage loans and notes receivable 9,814 10,718 12,593 Interest income from REMIC Certificates 9,964 12,970 15,116 Interest and other income 3,115 3,009 2,623 Total revenues 63,447 68,137 67,591 Expenses: Interest expense 20,877 21,322 21,435 Depreciation and amortization 12,489 13,705 12,216 Impairment charge 1,260 7,097 16,671 Legal expenses 1,078 803 289 Operating and other expenses 6,561 6,044 8,702 Total expenses 42,265 48,971 59,313 Income before non-operating income and minority interest 21,182 19,166 8,278 Non-operating income 1,970 — — Minority interest (1,300 ) (1,308 ) (973 ) Income from continuing operations 21,852 17,858 7,305 Discontinued operations: Income (loss) from discontinued operations 168 (538 ) (11,773 ) Gain on sale of assets, net 2,299 14,483 1,560 Net income (loss) from discontinued operations 2,467 13,945 (10,213 ) Net income (loss) 24,319 31,803 (2,908 ) Preferred stock redemption charge (1,241 ) — — Preferred stock dividends (16,596 ) (15,042 ) (15,077 ) Net income (loss) available to common stockholders $ 6,482 $ 16,761 $ (17,985 ) Net Income (Loss) per Common Share from Continuing Operations Net of Preferred Stock Dividends: Basic $ 0.22 $ 0.15 $ (0.45 ) Diluted $ 0.22 $ 0.15 $ (0.45 ) Net Income (Loss) Per Common Share from Discontinued Operations: Basic $ 0.14 $ 0.76 $ (0.30 ) Diluted $ 0.14 $ 0.75 $ (0.30 ) Net Income (Loss) Per Common Share Available to Common Stockholders: Basic $ 0.36 $ 0.91 $ (0.75 ) Diluted $ 0.36 $ 0.91 $ (0.75 ) Basic weighted average shares outstanding 17,836 18,371 23,924 Comprehensive Income: Net income (loss) available to common stockholders $ 6,482 $ 16,761 $ (17,985 ) Unrealized (loss) gain on available-for-sale securities (427 ) (1,435 ) 2,807 Reclassification adjustment 1,303 276 1,376 Comprehensive income (loss) $ 7,358 $ 15,602 $ (13,802 ) See accompanying
notes 34notes. 36
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share amounts)
Shares Capital in Preferred Common Preferred Common Excess of Cumulative Cumulative Stock Stock Stock Stock Par Value Net Income Other Distributions Balance — December 31, 2000 7,080 26,031 $ 165,500 $ 260 $ 296,568 $ 221,734 $ (11,872 ) $ (278,063 ) Interest added to stockholder note balance — — — — — — (369 ) — Adjustment to stockholder note balance — — — — — — 2,453 — Reclassification adjustment — — — — — — 1,376 — Unrealized gain on available-for-sale securities — — — — — — 2,807 — Repurchase of stock (18 ) (7,588 ) (317 ) (75 ) (41,661 ) — — — Net loss — — — — — (2,908 ) — — Preferred stock dividends — — — — — — — (15,077 ) Vested restricted stock — — — — 23 — — — Canceled restricted stock — (50 ) — — — — — — Balance — December 31, 2001 7,062 18,393 165,183 185 254,930 218,826 (5,605 ) (293,140 ) Interest added to stockholder note balance — — — — — — (62 ) — Payments on stockholder notes — — — — — — 877 — Reclassification adjustment — �� — — — — — 276 — Unrealized loss on available-for-sale securities — — — — — — (1,435 ) — Repurchase of stock — (338 ) — (4 ) (2,329 ) — — — Net income — — — — 31,803 — — Preferred stock dividends — — — — — — — (15,042 ) Vested restricted stock — — — — 286 — — — Reclassification of unvested restricted stock — — — — 163 — (163 ) — Common stock cash distributions ($0.40 per share) — — — — — — — (7,336 ) Balance — December 31, 2002 7,062 18,055 165,183 181 253,050 250,629 (6,112 ) (315,518 ) Interest added to stockholder note balance — — — — — — (9 ) — Payments on stockholder notes — — — — — — 4,444 — Stock option exercises — 246 — 2 1,325 — — — Reclassification adjustment — — — — — — 1,303 — Unrealized loss on available-for-sale securities — — — — — — (427 ) — Repurchase of stock (10 ) (483 ) (250 ) (5 ) (3,188 ) — — — 9.5% Series A Preferred Stock redemption (1,226 ) — (30,642 ) — 1,241 — — (1,241 ) 8.5% Series E Preferred Stock offering 2,200 — 55,000 — (2,562 ) — — — Net income — — — — — 24,319 — — Preferred stock dividends — — — — — — — (16,596 ) Accelerated vesting of stock options — — — — 23 — — — Vested restricted stock — — — — — — 132 — Canceled restricted stock — (11 ) — — (31 ) — 31 — Other — — (128 ) — 197 — — — Common stock cash distributions ($0.65 per share) — — — — — — — (11,569 ) Balance — December 31, 2003 8,026 17,807 $ 189,163 $ 178 $ 250,055 $ 274,948 $ (638 ) $ (344,924 ) See accompanying notes.
37
LTC PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended December 31, ---------------------------------------------------------- (Restated) ---------------------------------------------------------- 1996 1995 1994 ---------------- ----------------- -----------------OPERATING ACTIVITIES: Net income $ 28,710 $ 18,384 $ 17,210 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 7,999 4,998 2,956 Unrealized holding gain/(loss) on changes in estimated fair value of REMIC Certificates (6,173) 1,656 (667) Cumulative effect of accounting change - - (1,205) Noncash charges 296 237 226 Net change in other assets and liabilities 2,957 (1,078) 722 --------- --------- --------- Net cash provided by operating activities 33,789 24,197 19,242 INVESTING ACTIVITIES: Investment in real estate mortgages (99,440) (101,908) (120,472) Acquisitions of real estate properties, net (95,285) (23,403) (41,136) Sale of real estate properties, net 7,589 - - Deferred facility fees, net 233 251 558 Proceeds from sale of REMIC Certificates, net 86,674 19,216 80,203 Principal payments on real estate mortgages 2,272 2,634 8,550 Restricted cash 8,300 (8,300) - Principal payments on mortgage loans payable (3,893) (37) - Other (660) 88 (1,249) --------- --------- --------- Net cash used in investing activities (94,210) (111,459) (73,546) FINANCING ACTIVITIES: Proceeds from issuance of convertible debenture offerings 60,000 61,500 30,000 Proceeds from issuance of common stock, net 39 - 59,618 Proceeds from issuance of bonds - 8,300 - Debt issue costs (2,167) (2,409) (1,101) Repurchase of warrants - (1,875) - Distributions paid (24,670) (21,237) (14,388) Borrowings under the lines of credit 219,000 133,220 109,800 Repayment of bank borrowings (188,070) (84,750) (115,800) Repurchase of common stock (1,831) (18,089) (2,668) Other (166) (230) 4 --------- --------- --------- Net cash provided by (used in) financing activities 62,135 74,430 65,465 --------- --------- --------- (Decrease) increase in cash and cash equivalents 1,714 (12,832) 11,161 Cash and cash equivalents, beginning of year 1,434 14,266 3,105 --------- --------- --------- Cash and cash equivalents, end of year $ 3,148 $ 1,434 $ 14,266 ========= ========= ========= Supplemental disclosure of cash flow information: Interest paid during the year $ 16,631 $ 7,428 $ 6,909 ========= ========= =========(In thousands, except per share amounts)
Year ended December 31, 2003 2002 2001 OPERATING ACTIVITIES: Net income (loss) $ 24,319 $ 31,803 $ (2,908 ) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,998 14,400 13,866 Gain on sale of real estate and other investments, net (2,299 ) (14,483 ) (1,560 ) Write-off of debt issue costs related to early retirement of bank debt 2,075 — — Gain on redemption of investment in marketable debt securities, net (1,970 ) — — Non-cash impairment charge 1,260 7,807 28,584 Adjustment to stockholder notes receivable — — 2,453 Other non-cash charges, net 4,584 4,475 4,639 (Increase) decrease in interest receivable (28 ) (621 ) 32 (Increase) decrease in prepaid, other assets and allowance (2,639 ) 11 (1,068 ) (Decrease) increase in accrued interest (309 ) 119 (1,279 ) (Decrease) increase in accrued expenses and other liabilities (1,773 ) (608 ) 1,093 Net cash provided by operating activities 36,218 42,903 43,852 INVESTING ACTIVITIES: Investment in real estate mortgages (1,707 ) — — Acquisition of real estate properties and capital improvements, net (3,467 ) (1,422 ) (1,689 ) Proceeds from sale of real estate investments, net 15,664 12,090 43,493 Principal payments on mortgage loans receivable 12,886 6,022 9,291 Investment in debt securities (2,015 ) (26 ) (2,909 ) Proceeds from redemption of investment in debt securities 281 903 — Advances to CLC Healthcare, Inc. (1,452 ) (792 ) (5,537 ) Repayment of advances to CLC Healthcare, Inc. 2,146 1,393 1,149 Other (1,629 ) 1,152 2,974 Net cash provided by investing activities 20,707 19,320 46,772 FINANCING ACTIVITIES: Debt issue costs (1,064 ) (3,335 ) (1,187 ) Distributions paid (26,763 ) (23,200 ) (14,259 ) Proceeds from stock offering 52,438 — — Repayment of stockholder loans 4,444 — — Bank borrowings 7,500 10,000 50,000 Repayment of bank borrowings (55,921 ) (55,561 ) (64,000 ) Proceeds from issuance of senior mortgage participation — 30,000 — Repayment of senior mortgage participation (11,417 ) (333 ) — Mortgage loan borrowings — — 11,500 Principal payments on mortgage loans, notes payable and capital leases (14,332 ) (14,537 ) (3,966 ) Redemption of convertible subordinated debentures — (2,408 ) (22,230 ) Repurchase of common and preferred stock (3,443 ) (2,332 ) (42,054 ) Other 1,551 1,162 24 Net cash used in financing activities (47,007 ) (60,544 ) (86,172 ) Increase in cash and cash equivalents 9,918 1,679 4,452 Cash and cash equivalents, beginning of year 8,001 6,322 1,870 Cash and cash equivalents, end of year $ 17,919 $ 8,001 $ 6,322 Supplemental disclosure of cash flow information: Interest paid $ 16,612 $ 19,946 $ 22,184 Non-cash investing and financing transactions: SeeNote 4: Supplemental Cash Flow Informationfor further discussion.See accompanying
notes 35notes. 38
LTC PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)1.
THE COMPANY Organization and InvestmentsThe CompanyLTC Properties, Inc.
(the "Company") was incorporated on May 12, 1992 in the State of(LTC), a Marylandandcorporation, commenced operations on August 25, 1992.The Company, whichLTC isorganized asa real estate investment trust (or REIT) that invests primarily in long-term carefacilitiesproperties through mortgage loans,facilityproperty lease transactions and other investments.As2. Summary of
December 31, 1996, the Company had investments in 248 properties ("the Properties") located in 32 states and operated by 84 health care providers. The Properties include 248 skilled nursing facilities with a total of 28,628 beds and 35 assisted living residences with a total of 1,456 units. At December 31, 1996, the Company's real estate investment portfolio consisted of approximately $223,578,000 (before accumulated depreciation of $11,640,000) invested in 73 long-term care facilities owned by the Company and leased to operators, approximately $178,262,000 (before allowance for doubtful accounts of $1,000,000) invested in 67 mortgage loans secured by 73 skilled nursing facilities and 11 assisted living facilities ("ALFs") and approximately $92,545,000 invested in REMIC Certificates secured by 148 skilled nursing facilities. Restatement As previously disclosed in the current and prior years, the Company has securitized portions of its mortgage loan portfolio and retained a portion of the resulting REMIC Certificates to hold as long-term investments. Historically, the Company has accounted for its REMIC Certificate investments at amortized cost and provided fair value disclosures because of the highly specialized nature of the collateral underlying the REMIC Certificates, the lack of marketability of the Certificates and the Company's intent and investment posture to hold its real estate investments for long-term purposes. Moreover, the Company believes that the fair value accounting provisions of SFAS 115, which require the recognition of unrealized gains or losses resulting from temporary changes in the fair value of originated mortgage-backed securities (the REMIC Certificates) that are retained by the Company, may reflect equity or earnings in the Company's financial statements that may not be ultimately realized and portray a level of liquidity with respect to its REMIC Certificates that may not exist. Furthermore, the Company believed that the accounting literature supported the accounting for the REMIC Certificates at amortized cost. However, after reconsideration following discussions with the Staff of the Securities and Exchange Commission, the Company decided to adopt the fair value accounting provisions of SFAS 115 as opposed to the amortized cost accounting the Company believed applicable under SFAS 115. The fair value accounting provisions require the recognition in earnings of temporary changes in the fair values of the Company's REMIC Certificates investments, irrespective of the Company's reservations about the realizability of such earnings. Accordingly, the 1996 financial statements, which include the results of operations for the years ended December 31, 1996, 1995 and 1994, have been restated to reflect the adjustment to estimated fair value, of the Company's REMIC Certificate investments. As a result, the Company has increased earnings by $6,173,000 for the year ended 1996, decreased earnings by $1,656,000 in 1995 and increased earnings by $1,872,000 in 1994, to record the temporary changes in the fair value of its REMIC Certificate investments during each reporting period. 36LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESSignificant Accounting PoliciesBasis of
PresentationPresentation.The accompanying consolidated financial statements include the accounts ofthe Company, itsLTC, our wholly-owned subsidiaries and our controlled partnerships. All intercompany investments, accounts and transactions have beeneliminatedeliminated. Control over those partnerships is based on the provisions of the partnership agreements that provide us with a controlling financial interest inconsolidation.the partnerships. Under the terms of the partnership agreements, we are responsible for the management of the partnerships’ assets, business and affairs. Our rights and duties in management of the partnerships include making all operating decisions, setting the capital budgets, executing all contracts, making all employment decisions, and the purchase and disposition of assets, among others. The general partner is responsible for the ongoing, major, and central operations of the partnership and makes all management decisions. In addition, the general partner assumes the risk for all operating losses, capital losses, and is entitled to substantially all capital gains (appreciation).The limited partners have virtually no rights and are precluded from taking part in the operation, management or control of the partnership. The limited partners are also precluded from transferring their partnership interests without the expressed permission of the general partner. However we can transfer our interest without consultation or permission of the limited partners.
In January 2003, the Financial Accounting Standards Board (or FASB) issued Interpretation No. 46“Consolidation of Variable Interest Entities”(or FIN 46) to expand upon and strengthen existing accounting guidance that addresses when a company should include in its financial statements the assets, liabilities and activities of another entity. Accounting guidance prior to FIN 46 required that we include another entity in our consolidated financial statements only if we controlled the entity through voting interests. FIN 46 changes that guidance by requiring that we consolidate a “variable interest entity” if we are subject to a majority of the risk of loss from the “variable interest entity’s” activities, or are entitled to receive a majority of the entity’s residual returns, or both. FIN 46 also requires disclosure about “variable interest entities” that we are not required to consolidate but in which we have a significant variable interest. In December 2003, FIN 46 was revised and the effective date of applying FIN 46 to certain variable interests was deferred. The revised FIN 46 requires us to apply the provision of FIN 46 immediately to any special purpose entities and to any “variable interest entities” created after January 31, 2003. Application of the provisions will be required for all other “variable interest entities” in financial statements for periods ending after March 15, 2004. We have evaluated the requirements of FIN 46 and we believe that as of December 31, 2003, we do not have investments in any entities that meet the definition of a “variable interest entity.”
Certain reclassifications have been made to the prior period financial statements to conform to the current year presentation as required by Statement of Financial Accounting Standards (or SFAS) No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets.”
Use of
Estimates The preparationEstimates.Preparation of the consolidated financial statements in conformity with accounting principles generally acceptedaccounting principlesin the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.Revenue Recognition Interest income on mortgage loans and REMIC Certificates is recognized on the accrual basis using the effective interest method. The total amount of the base rent payments from operating leases is accrued as earned over the term of the lease. Contingent rental income, which is generated by a percentage of increased revenue over a specified base period revenue of the long-term care facilities, is recognized as earned.Cash
EquivalentsEquivalents.Cash equivalents consist of highly liquid investments with a maturity of three months or less when purchased and are stated at cost which approximates market.Land, Buildings and
ImprovementsImprovements.Land, buildings and improvements are recorded at cost. Depreciation isprovided on acomputed principally by the straight-linebasis over the estimatedmethod for financial reporting purposes and by accelerated methods for income tax purposes. Estimated useful livesof the related assets whichfor financial reporting purposes range from 3 years on computers to 7 years for equipment and 35 to 40 years for buildings.Depreciation expense on buildings39
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impairments. Impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and
improvements, including facilities owned under capital leases, was $6,214,000, $2,996,000the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses the impairment of properties individually and$1,740,000 forimpairment losses are calculated as theyears ended December 31, 1996, 1995excess of the carrying amount over the fair value of assets to be held and1994, respectively. Duringused, and carrying amount over theyear,fair value less cost to sell in instances where management has determined that we will dispose of theCompany adopted Statement of Financial Accounting Standards (SFAS)property, per SFAS No. 121"Accounting“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposedof". This pronouncement requires that impairmentOf” for years prior to 2002 and per SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets” beginning January 1, 2002. In determining fair value, we use current appraisals or other third party opinions of value and other estimates of fair value such as estimated discounted future cash flows.To the extent there are defaults or unrecoverable losses
for such assets be basedon thefair valueunderlying mortgages of theasset.REMIC Certificates resulting in reduced cash flows, the subordinated certificates held by us would, in general, bear the first risk of loss. In accordance withthis pronouncement,EITF 99-20, management evaluates theCompany records impairment losses on long-lived assets when indicatorsrealizability ofimpairment are present and the undiscountedexpected future cash flowsestimated to be generated by these assets are less than their carrying amounts.periodically. Managementassesses the potential for impairment on a property by property basis. The adoption of SFAS No. 121 had no impact on the Company's consolidated financial statements as no impairment write-downs were necessary. 37LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Mortgage Loans Receivable The Company maintains a long-term investment interestincludes in itsmortgages either throughevaluation such factors as actual and/or expected loan prepayments, actual and/or expected credit losses, and other factors that may impact thedirect retention of mortgages or through the retentionamount and timing of REMICcertificates originatedCertificates’ future cash flows. An impairment is recorded inthe Company's securitizations. The Company may, from time-to-time, securitizecurrent period earnings when management believes that it is probable that a portion ofitsthe underlying mortgageloan portfolio in transactions accountedcollateral would not be realized by the REMIC Trust.Securitization Transactions.LTC is a REIT and, as such, makes investments with the intent to hold them for
as sales,long-term purposes. However, mortgage loans may be transferred to a REMIC, a qualifying special-purpose entity, when a securitization providesthe Companyus with the best available form ofraisingcapital tomakefund additional long-term investments.Because portionsWhen contemplating a securitization, consideration is given to our current and expected future interest rate posture and liquidity and leverage position, as well as overall economic and financial market trends.A securitization is completed in a two-step process. First, a wholly owned special-purpose bankruptcy remote corporation (or REMIC Corp.) is formed and selected mortgage loans are sold to the REMIC Corp. without recourse. Second, the REMIC Corp. transfers the loans to a trust (or REMIC Trust) in exchange for commercial mortgage pass-through certificates (or REMIC Certificates) which represent beneficial ownership interests in the REMIC Trust assets (the underlying mortgage loans). Under this structure, the REMIC Trust is a qualifying special purpose entity from which the mortgages are isolated from us and the REMIC Corp. Holders of REMIC Certificates issued by the REMIC Trust have the right free of any conditional constraints to pledge or exchange those interests, and neither we or the REMIC Corp. maintain effective control over the transferred assets (the mortgages). The REMIC Trust is administered by a third-party trustee solely for the benefit of the
Company's mortgage loan portfolioREMIC Certificate holders.Under the securitization structure described above, we accounted for the transfer of the mortgages as a sale with any gain or loss recorded in earnings. The gain or loss is equal to the excess or deficiency of the cash proceeds and fair market value of any subordinated certificates received when compared with the carrying value of the mortgages sold, net of any transaction costs incurred and any gains or losses associated with an underlying hedge. Subordinated certificates received by us are
anticipatedrecorded at their fair value at the date of the transaction. We have no controlling interest in the REMIC since the majority of the beneficial ownership interests (in the form of REMIC Certificates) are sold to third-party investors. Consequently, the financial statements of the REMIC Trust are not consolidated with those of our company for financial reporting purposes. The securitization transactions and the related transaction structures used therein were completed during or prior to 1998 and prior to the implementation of SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 140 modified some of the requirements that previously existed under prior accounting principles that provided for the transfer of mortgages in securitization transactions to besecuritized inaccounted for as sales. Should we complete future securitizations, we anticipate that such securitization structure would comply with thefuture, the Company is required to classify its mortgages as held for sale and account for them at the lower of cost-or- market under thesales accounting provisions of SFAS65. However, historically,No. 140.REMIC Certificates retained by us as consideration for the
Company hasmortgages soldits mortgages solely in connection with its REMIC securitizations and does not anticipate selling any of its mortgages other than in the course of completing future securitizations. The Company considers mortgages that have not yet been securitized to be "uncommitted mortgages" (as defined under SFAS No. 65) until they have been acceptedare accounted forsecuritization by two independent rating agencies.at fair value. In determining fair value on theestimated market value for such mortgages, the Companydate of sale, management considersestimated prices and yields, which are based in part on a spread over the applicable U.S. Treasury Note Rate, sought by qualified institutional buyersvarious factors including, pricing of theREMICcertificatesoriginated in the Company's securitizations. As of December 31, 1996, the estimated market value of Company's mortgage loan investments, all which are considered uncommitted mortgages, exceeded their amortized cost. The Company determines the lower of cost or market of its mortgage loans on an aggregate basis. To the extent that the aggregate cost basis exceeds the aggregate market value, a valuation allowance is established with the resulting amount included in the determination of net income. Changes in the valuation allowance are included in current period earnings. Hedging of Anticipated Transactions As further discussed in Notes 4 and 9, the Company has entered into forward interest rate swap agreements to hedge certain firm commitments and to hedge anticipated securitization transactions. Firm commitments subject the Company to interest rate risksold relative to theextent that debt or other fixed rate financing will be usedcertificates retained as evaluated by the underwriters, discount rates and applicable spreads at the time of issuance for similar securities (or adjustments thereto if no comparable securities are available), assumptions regarding prepayments including the weighted-average life of prepayable assets, if any, and estimates relating tofund such investments. In such circumstances, the Company may elect to hedge such financings thereby reducing its exposure to interest rate risk. The Company designates such interest rate swaps as hedges when the significant characteristics and expected terms of the anticipated transaction are identified and when it is probable that the anticipated transaction will occur. Any gains or losses on the qualifying hedges are recognized upon the completion of the hedged transaction. Federal Income Taxes No provision has been made for federal income taxes. The Company qualifies as a real estate investment trust under Sections 856 through 869 of the Internal Revenue Code of 1986, as amended. As such, the Company is not taxed on its income which is distributed to stockholders, provided that such distribution is at least 95 percent of its taxable income. At December 31, 1996, the reported amount of the Company's net assets and liabilities exceeds the tax bases by approximately $21,000,000. For Federal Tax purposes, depreciation is taken on the Company's owned properties based on the assets' tax bases (which is materially the same as GAAP book value) calculated, in general, at a rate of 3.6%, using the straight-line method over a period of 27.5 years. Earnings and profits, which determine the taxability of dividends to stockholders, differ from net income for financial statement purposes due to the treatment required under the Internal Revenue Code of certain interest income and expense items, depreciable lives and bases of assets. 38potential realized credit losses. 40
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) Investments in REMIC Certificates Income on investments in the Company's REMIC Certificates, including interest-only Certificates, is recognized based on the effective interest method using the anticipated yield over the expected life of these investments. These Certificates are recorded at their estimated fair value at the time of the transactions and are accounted for under the provisions of SFAS No. 115 (as described before in "Debt Securities"). Impairment adjustments are made if the projected yield of a certificate class is less than the risk-free rate of return on an investment with similar duration. Such projected yields are based on management's best estimate of future cash flows at each reporting date. Concentrations of Credit Risk The Company's credit risks primarily relate to cash and cash equivalents, the investment in REMIC Certificates, mortgage loans receivable, facility leases and interest rate swaps. Cash and cash equivalents are primarily held in bank accounts and overnight investments.— (Continued)The REMIC Certificates
relate to participating interests in real estate mortgage investment conduits ("REMICs") as discussed in Note 4.issued by the REMIC Trust include various levels of senior, subordinated, interest only and residual classes. TheCompany's mortgage loans receivable relate primarily to loans secured by long-term care facilities as discussed in Note 4. The facility leases relatesubordinated REMIC Certificates generally provide a level of credit enhancement to thelong-term care facilities the Company owns and leases to third party operators.senior REMIC Certificates. TheCompany's financial instruments, principally its investment insenior REMIC Certificatesand mortgage loans receivable, are subject to the possibility of loss(which historically have represented 66% of thecarrying valuestotal REMIC Certificates) were then sold to outside third-party investors through a private placement under Rule 144A of the Securities Act of 1933, asa resultamended. The subordinated REMIC Certificates along with the cash proceeds from the sale ofeitherthefailure of other parties to perform according to their contractual obligations or changes in market prices which may make the instrument less valuable. The Company obtains various collateral and other protective rights, and continually monitors these rights, in order to reduce such possibilities of loss. In addition, the Company provides reserves for potential losses based upon management's periodic review of its portfolio. Thesenior REMIC Certificates were retained by theCompany are subordinate in rank and rightREMIC Corp. as consideration for the initial transfer ofpaymentthe mortgage loans to thecertificatesREMIC Trust. Neither we, nor the REMIC Corp. is obligated to purchase any of the REMIC Trust assets or assume any liabilities.Description of the REMIC Certificates.REMIC Certificates represent beneficial ownership interests in the REMIC Trust and can be grouped into three categories; senior, subordinated and subordinated interest only (or I/O). The REMIC Certificates sold to third-party investors are the senior certificates and
asthose retained by us are the subordinated certificates. The senior and the subordinated certificates have stated principal balances and stated interest rates (or pass-through rates). The I/O REMIC Certificates have no stated principal but are entitled to interest distributions. Interest distributions on the I/O REMIC Certificates are typically based on the spread between the monthly interest received by the REMIC Trust on the underlying mortgage collateral and the monthly pass-through interest paid by the REMIC Trust on the outstanding pass-through rate REMIC Certificates. Interest and principal distributions are made in order of REMIC Certificate seniority. As such, to the extent there are defaults or unrecoverable losses on the underlying mortgages resulting in reduced cash flows, the subordinated certificates held by us would in general bear the first risk oflossloss. Management evaluates the realizability of expected future cash flows periodically. An impairment is recorded inthe event of an impairment to anycurrent period earnings when management believes that it is probable that a portion of the underlyingmortgages. The returnsmortgage collateral would not be realized by the REMIC Trust.On January 1, 1999, we adopted SFAS No. 134“Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.”Upon adoption of SFAS No. 134, based on
the Company's investmentour ability and intent to hold our investments in REMIC Certificates,are subjectwe transferred our I/O REMIC Certificates and certificates with an investment rating of “BB” or higher from the trading category tocertain uncertaintiesthe available-for-sale category andcontingencies including, without limitation,our certificates with an investment rating of “B” or lower to thelevel of prepayments, estimated future credit losses, prevailing interest rates, and the timing and magnitude of credit lossesheld-to-maturity category. The transfer was recorded at fair value on theunderlying mortgages collateralizing the securities that are a resultdate of thegeneral condition of the real estate market or long-term care industry. As these uncertainties and contingencies are difficult to predict and are subject to future events that may alter management's estimations and assumptions, no assurance can be given that current yields will not vary significantly in future periods. To minimize the impact of prepayments, the mortgage loans underlying thetransfer.The I/O REMIC
Certificates generally prohibit prepayment unless the property is sold to an unaffiliated third party (with respect to the borrower). Additionally, management believes it employs conservative underwriting policies and to date there have been no credit losses on any of the mortgages underlying the certificates nor are any credit losses currently anticipated. Certain of the Certificates retained by the Company have designated certificate principal balances and a stated certificate interest "pass-through" rate. These Certificates are subject to credit risk to the extent that there are estimated or realized credit losses on the underlying mortgages, and as such their 39LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) effective yield would be negatively impacted by such losses. The Company also retains the interest-only (I/O) Certificates, which provide cash flow (interest-only) payments that result from the difference between the interest collected from the underlying mortgages and interest paid on all the outstanding pass-through rate certificates. In addition to the risk from credit losses, the I/O Certificates are also subject to prepayment risk, in that prepayments of the underlying mortgages reduce future interest payments of which a portion flows to the I/O Certificates, thus, reducing their effective yield. The Certificates'Certificates’ fair values are estimated, in part, based on a spread over the applicableU.SU.S. Treasuryrate,Rate, and consequently, are inversely affected by increases or decreases in such interest rates. There is no active market in these securities from which to readily determine their value. The estimated fair values of both classes ofCertificatescertificates are subject to change based on the estimate offuture prepayments andthe current interest rate environment, estimated spreads over the U.S. Treasury Rate at which the retained certificates might trade, expectations regarding credit losses,as well as fluctuations in interestif any, expected weighted-average life of the underlying collateral and discount ratesand market risk. Net Income Per Share Computationcommensurate with the risks involved.Because of
net income per share is based on weighted average numberthe nature ofsharesthe underlying mortgage collateral ofcommon stock outstanding and dilutive common stock equivalents (principally stock options). Debt Securities The Company's investment in debt securities is limited to its investments in REMIC Certificates, which resulted from its past securitizations. It is the Company's intent to hold itsour REMIC Certificate investments,as long-term investments. SFAS No. 115 "Accounting for Certain Investmentsmany market and/or industry specific factors may affect the treasury rate spreads or discount rates used inDebt and Equity Securities" (SFAS 115), requires that securities retained which resulted fromestimating theorigination and securitization of mortgage loans be recorded and accounted for atfair valuewithof the REMIC Certificates. Such factors may include, but are not limited to uncertainty surrounding proposed or pending changes inthe securities' fair value reflected as a separate component of earnings in the current period, irrespective of an organization's intent or ability to hold such securities or the level of marketability, if any, with respect to such securities. As such, the Company reflects the change in the Certificates' estimated fair value as a separate component of earnings at each reporting period. The Company believes that any unrealized gainsfederal and/orlosses reflectedstate reimbursement programs for long-term care which may be subject to among other things, budgetary constraints, perceptions surrounding the future supply of long-term care beds, changes inits income statement, as required by SFAS 115, would not be immediately realizable becauseregulations surrounding the operation ofthe investment posture of the Companylong-term care facilities and theilliquid nature of certain of the Certificates retained from its securitizations. In estimating the Certificates' fair value, significant judgment is used since there is no market for these Certificates. In arriving at such estimates, management considersassociated costs therewith, and operating factorswhich affect the Certificates' projected cash flowsincluding, but not limited to,actuallabor costs, insurance costs and other costs. Additionally, the general interest rate environment and the availability and demand of higher yielding investments also are factors that impact the spreads and/or yields used in estimating the fair value of the REMIC Certificates. Investor sentiment towards any one or more of these factors can impact where our REMIC Certificate investments would be priced by a potential investor at any given point in time. Because there are a limited number of securities similar to the REMIC Certificates held by us, which trade infrequently, if at all, we balance our fair value estimates with valuations of more traditional types of asset-backed securities that have similar rating characteristics with REMIC Certificates held by us. Differences between the carrying amounts of our REMIC Certificate investments and the estimatedprepayments, projected credit losses, if any, on the underlying mortgages, as well as general economic and regulatory factors affectingfair value of those certificates, are due in large part to current market sentiments towards the long-term care industry andprevailingvarious factors cited above. Changes in marketinterest rate conditions. Since many of these factorssentiments are difficult to predict,and are beyond the control of the Company'sat best, thus, managementchanges in the reported fair values may vary widely and may not be indicative of amounts immediately realizable if the Company was forcedendeavors toliquidate any of the Certificates. Securitization Transactions Under the Company's securitization structure (see Note 4), transfers of mortgage loans to a Real Estate Mortgage Investment Conduit ("REMIC Trust"), a qualifying special-purpose entity, are accounted for as a sale upon completion of the transaction with any gain or loss recorded in earnings 4041
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) at the time— (Continued)utilize its understanding of the
transaction.underlying collateral and the expected cash flows therefrom, to determine whether changes in values are other than market related.Mortgage Loans Receivable. Mortgage loans receivable are recorded on an amortized cost basis. We maintain a valuation allowance based upon the expected collectibility of the mortgage loans receivable. Changes in the valuation allowance are included in current period earnings. In
determiningaccordance with SFAS No. 114“Accounting by Creditors for Impairment of againLoan”we evaluate the carrying values of mortgage loans receivable on an individual basis. Management periodically evaluates the realizability of future cash flows from the mortgages when events orloss,circumstances, including theCompany comparesnon-receipt of principal and interest payments and/or significant deteriorations of the financial conditions of the borrowers indicate that the carrying amount of the mortgage loan receivable may not be recoverable. An impairment charge is recognized in current period earnings and is calculated as the difference between the carrying amount of the mortgage loan receivable and the discounted cash flows expected to be received, or if foreclosure is probable, the fair value of themortgages sold, net of any transaction costs incurred and any gains or losses associated withcollateral securing theunderlying hedge, to the cash proceeds and fair market value of any subordinated certificates received. Subordinated certificates received by the Company are recorded at their estimated fair value on the date of the transaction. Additionally, under this structure, the Company has no controlling interest in the REMIC since the majority of the beneficial ownership interests (in the form of REMIC certificates) are sold to third-party investors. Consequently, the financial statements of the REMIC Trust are not consolidated with those of the Company for financial reporting purposes. Stock-Based Compensation In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based Compensation" (Statement 123) which provides companies an alternative to accounting for stock-based compensation as prescribed under APB Opinion No. 25 (APB 25). Statement 123 encourages, but does not require companies to recognize expense for stock-based awards based on their fair value at date of grant. Statement 123 allows companies to continue to follow existing accounting rules (intrinsic value method under APB 25) provided that pro-forma disclosures are made of what net income and earnings per share would have been had the new fair value method been used. The Company has elected to adopt the disclosure requirements of Statement 123 but will continue to account for stock-based compensation under APB 25. Statement 123's disclosure requirements are applicable to stock-based awards granted in fiscal years beginning after December 15, 1994.mortgage.Mortgage Servicing
Rights Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 122 "Mortgage Servicing Rights" (SFAS 122). SFAS 122 requires the recognition of a separate asset for the right to serviceRights.We subservice mortgage loans that areacquired through either the purchase or origination of mortgage loans. The pronouncement also requires the allocation of costs amongcollateral for REMIC Certificates issued in our securitization transactions for which we receive servicingrights and the loans,fees, based ontheir relative fair values. Currently, the Company serves as the sub-servicer on its REMIC transactions comprising 85 loans at December 31, 1996. In that capacity, the Company receives fees which are determined based on prevailingmarket rates for such services at the time the securitization is completed, equal to a fixed percentage ofeach REMIC transaction. Becausethe outstanding principal on the collateral loans. A separate asset for servicing rights is not recognized since the servicing fees received only adequately compensates us for the cost of servicing the loans. The fair value of servicing rights for mortgage loans originated and retained by us are estimated based on the fees received forsuchservicingresult in only adequate compensation after considering themortgage loans that serve as collateral for REMIC Certificates. All costs toservice the loans, the Company does not recognize a separate asset for servicing rights. With respect to servicing rights associated withoriginate mortgage loansoriginated byare allocated to theCompany, the estimated fair value of such rights would be determined based on the underlying characteristics of the mortgages the Company services in its REMIC securitizations. Sincemortgage loans since the fair value ofsuchservicing rights only sufficiently covers the servicing costs.Investments. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, reported in other comprehensive income. Realized gains and losses and declines in value judged to be other-than-temporary on available-for-sale securities are included in net income. The cost of
such servicing, no separate servicing assetsecurities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest and other income.Revenue Recognition.Interest income on mortgage loans and REMIC Certificates is recognized
sinceusing the effective interest method. We follow a policy related to mortgage interest whereby we consider a loan to be non-performing after 60 days of non-payment of amounts due and do not recognize unpaid mortgage interest income from that loan until the past due amounts have been received. Base rents under operating leases are accrued as earned over the terms of the leases. Substantially all of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four methods depending on specific provisions of each lease as follows: (i) a specified annual increase over the prior year’s rent, generally 2%; (ii) an increase based on the change in the Consumer Price Index from year to year; (iii) an increase derived as a percentage of facility net patient revenues in excess of base revenue amounts or (iv) specific dollar increases over prior years. SEC Staff Bulletin No. 101Revenue Recognition in Financial Statements (or SAB 101) does not provide for the recognition of such contingent revenue until all possible contingencies have been eliminated. We consider the operating history of the lessee and the general condition of the industry when evaluating whether all possible contingencies have been eliminated and have historically, and expect in the future, to not include contingent rents as income until received. We follow a policy related to rental income whereby we consider a lease to be non-performing after 60 days of non-payment of past due amounts and do not recognize unpaid rental income from that lease until the amounts have been received.Rental revenues relating to leases that contain specified rental increases over the life of the lease are recognized on the straight-line basis when we believe that all of the rent related to a particular lease will be collected according to the terms of the lease. In evaluating whether we believe all the rent will be collected all of the following conditions must be met: (i) the property has been operated by the same operator for at least six months (adding a new property to a master lease with an operator that otherwise qualifies does not disqualify the lease from being straight-lined); (ii) payments for any monetary obligations due under the lease, or any other lease such operator has with us have been received late no more than four times during last eight fiscal quarters; (iii) the operator of the property has not during the last eight fiscal quarters (a) been under the protection of any Bankruptcy court; (b) admitted in writing its inability to pay it debts generally as they come due; (c) made an assignment for the benefit of creditors; or, (d) been
42
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
under the supervision of a trustee, receiver or similar custodian; and (iv) the property operating income has covered the applicable lease payment in each of the prior four fiscal quarters.
We will discontinue booking rent on a straight-line basis if the lessee becomes delinquent in rent owed under the terms of the lease and has been put on “non-accrual” status (i.e. we have stopped booking rent on an accrual basis for a particular lease because the collection of rent is uncertain). Once a lease is on “non-accrual” status, we will evaluate the collectibility of the related straight-line rent asset. If it is determined that the collection problem is temporary, we will resume booking rent on a straight-line basis once payment is received for past due rents. If it appears that we will not collect future rent under the “non-accrual lease” we will record an impairment charge related to the straight-line rent asset.
Management periodically evaluates the realizability of future cash flows from the mortgages underlying our REMIC Certificates. Included in our evaluation, management considers such factors as actual and/or expected loan prepayments, actual and/or expected credit losses, and other factors that may impact the amount and timing of Certificate future cash flows. Impairments are recorded when an adverse change in cash flows is evident and is determined to be other than temporary in nature. Additionally, interest recognition amortization schedules are adjusted periodically to reflect changes in expected future cash flows from the REMIC certificates, thus, accordingly adjusting future interest income recognized.
Transactions with Affiliate. SeeNote 8. CLC Healthcare, Inc.for a description of our transactions with CLC Healthcare, Inc. (or CLC) and the accounting policies we followed related to those transactions.
Federal Income Taxes.LTC qualifies as a REIT under the Internal Revenue Code of 1986, as amended and as such, no provision for Federal income taxes has been made. A REIT may deduct distributions to its stockholders from its taxable income. If at least 90% (95% for taxable years ending prior to January 1, 2001) of a REIT’s taxable income is distributed to its stockholders and it complies with other Internal Revenue Code requirements, a REIT generally is not subject to Federal income taxation.
For Federal tax purposes, depreciation is generally calculated at a rate of 3.6% based on the assets’ tax basis (which approximates cost) using the straight-line method over a period of 27.5 years. Earnings and profits, which determine the taxability of distributions to stockholders, differ from net income for financial statement purposes principally due to the treatment of certain interest income and expense items, the non-deductibility of impairment charges, and the depreciable lives and basis of assets under the Internal Revenue Code. At December 31, 2003, the book basis of our net assets exceeded the tax basis by approximately $8,212,000 due primarily to additional depreciation taken for tax purposes.
Concentrations of Credit Risks.Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, REMIC Certificates, mortgage loans receivable and operating leases on owned properties. Our financial instruments, principally REMIC Certificates, mortgage loans receivable and operating leases, are subject to the possibility of loss of carrying value as a result of the failure of other parties to perform according to their contractual obligations or changes in market prices which may make the instrument less valuable. We obtain various collateral and other protective rights, and continually monitor these rights, in order to reduce such possibilities of loss. In addition, we provide reserves for potential losses based upon management’s periodic review of our portfolio.
Our REMIC Certificates are subordinate in rank and right of payment to the certificates sold to third-party investors and as such, in most cases, would bear the first risk of loss in the event of an impairment to any of the underlying mortgages. The returns on the REMIC Certificates are subject to uncertainties and contingencies including, without limitation, the level of prepayment, prevailing interest rates and the timing and magnitude of credit losses on the mortgages underlying the securities that are a result of the general condition of the real estate market or long-term care industry. These uncertainties and contingencies are difficult to predict and are subject to future events that may alter management’s estimations and assumptions therefore, no assurance can be
immaterial. Therefore, the entire cost of originatinggiven that current yields will not vary significantly in future periods. In general, the mortgage loans underlying the REMIC Certificates generally prohibit prepayment unless the property isallocatedsold to an unaffiliated third party (with respect to the borrower).Certain of the REMIC Certificates retained by us have designated certificate principal balances and a stated certificate interest “pass-through” rate. These REMIC Certificates are subject to credit risk to the extent that there
43
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
are estimated or realized credit losses on the underlying mortgages, and as such
mortgages. New Accounting Pronouncementtheir effective yield would be negatively impacted by such losses. We also retain the I/ O REMIC Certificates. InJune 1996,addition to the risk from credit losses, the I/ O REMIC Certificates are also subject to prepayment risk, in that prepayments of the underlying mortgages reduce future interest payments of which a portion flows to the I/ O REMIC Certificates, thus, reducing their effective yield.Discontinued Operations.In August 2001, the Financial Accounting Standards Board
("FASB")(or FASB) issuedStatementSFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets,” which was required to be adopted in fiscal years beginning after December 15, 2001. SFAS No. 144 supercedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,” and provides a single accounting model for long-lived assets to be disposed of. Subsequent to January 1, 2002, and in accordance with SFAS No. 144, properties held-for-sale on the balance sheet includes only those properties available for immediate sale in their present condition and for which management believes that it is probable that a sale of the property will be completed within one year. Properties held-for-sale are carried at the lower of cost or fair value less estimated selling costs. No depreciation expense is recognized on properties held-for-sale once they have been classified as such. In accordance with the implementation provisions of SFAS No. 144, the operating results of real estate assets designated as held-for-sale subsequent to January 1, 2002 are included in discontinued operations in the consolidated statement of operations. In addition, all gains and losses from real estate sold are also included in discontinued operations. As prescribed by SFAS No. 144, gains and losses on prior years related to assets included on discontinued operations in 2002 have been reclassified to discontinued operations for comparative purposes. Assets designated as held-for-sale prior to January 1, 2002, have been accounted for under SFAS No. 121 and accordingly, gains and losses from these assets have not been included in discontinued operations. SeeNote 6. Real Estate Investments, for a detail of the components of the net loss from discontinued operations.Net Income Per Share. Basic earnings per share is calculated using the weighted-average shares of common stock outstanding during the period excluding common stock equivalents. Diluted earnings per share includes the effect of all dilutive common stock equivalents.
Stock-Based Compensation. Effective January 1, 2003, we adopted SFAS No. 148“Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123“Accounting for Stock-Based Compensation” to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28“Interim Financial Reporting” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy for stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123 for stock-based employee compensation. In addition to the prospective method originally provided under SFAS No. 123, SFAS No. 148 provides for a modified prospective method and a retroactive restatement method. We have adopted the prospective method and therefore will recognize compensation expense related to all employee stock-based awards granted, modified or settled after January 1, 2003. No options were granted in 2003.
We use the Black-Scholes model for calculating stock option expense. This model requires management to make certain estimates including stock volatility, discount rate and the termination discount factor. If management incorrectly estimates these variables, the results of operations could be affected. Prior to January 1, 2003, we accounted for stock option grants in accordance with APB Opinion No. 25,“Accounting for Stock Issued to Employees” (APB 25) and related Interpretations. Historically, we granted stock options for a fixed number of shares to employees with an exercise price equal to the fair value of the shares at the date of grant. Under APB 25, because the exercise price of our employee stock options equaled the market price of the underlying stock on the date of grant, no compensation expense was recognized.
Fair Value of Financial
Accounting StandardsInstruments.SFAS No.125 "Accounting for Transfers and Servicing107“Disclosures about Fair Value of FinancialAssetsInstruments”requires the disclosure of fair value information about financial instruments for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate andExtinguishmentsestimates ofLiabilities" (SFAS 125) which is effective for transactions occurring after December 41future cash flows. In that regard, the derived fair value estimates cannot be 44
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) 31, 1996— (Continued)substantiated by comparison to independent markets and,
applicable to assets held on or acquired after January 1, 1997. SFAS 125 amendsin many cases, could not be realized in immediate settlement of the instrument. SFAS No.115107 excludes certain financial instruments andsupersedesall non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair market value amounts presented in the footnotes to these financial statements do not represent our underlying value in financial instruments.The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments. The fair value of investments in marketable debt securities in 2002 is based upon quotes from a broker who trades in those securities and in 2003 it is based on face value due to the issuer’s announcement of early redemption The fair values of mortgage loans receivable, REMIC Certificates and long-term debt obligations are based upon the estimates of management and on rates currently prevailing for comparable loans, and instruments of comparable maturities.
Segment Disclosures.SFAS No.
77 "Reporting by Transferors131“Disclosures About Segments of an Enterprise and Related Information”establishes standards forTransfers of Receivables with Recourse." In addition, Statement 125 amends certain other accounting literaturethe manner in whichprovided guidance with respect to the Company's REMIC securitization transactions. SFAS 125 provides specific criteria for determining whether or not a transfer of assets is a sale or a secured borrowing. In order for sales accounting to apply, the new criteria specifies that 1) transferred assets must be isolated from the transferor 2) the transferee obtains the right free of any conditional constraints to pledge or exchange the assets, or the transferee is a qualifying special purpose entity of which the holders of the beneficial interests have the right free of any conditional constraints to pledge or exchange those interests, and 3) the transferor does not maintain effective control over the transferred assets. The Company believes that the structure of its securitizations would continue to meet the sales accounting standards established in SFAS 125, however, to the extent that recent interpretations of certain provisions of SFAS 125 would require modification to the REMIC structure, the Company would make the necessary modifications to allow for its future securitizations to continue to be accounted for as sales. In addition, SFAS 125 provides that upon completion of a sale, the assets received and the liabilities incurred, if any, shall be recognized at their fair values at the time of the transaction with any gains or losses recognized in earnings.public business enterprises report information about operating segments. Management believes thatthese new provisions will not have a material impact on the financial position or results of operations of the Company with respect to any future securitizations. SFAS 125 also requires the measurement of servicing assets and liabilities when an entity undertakes an obligation to service financial assets. The Company currently provides servicing on the loans from its three previous REMIC securitizations and would expect to do so in any future REMIC. However, historically, the Company receives only adequate compensation for such servicing and, as such, has determined that any servicing asset would be immaterial. Therefore, management believes that this provision of SFAS 125 will not materially impact the Company's financial position. Furthermore, SFAS 125 modifies the accounting for certain financial assets that can contractually be prepaid or otherwise settled in such a way that the holder would notsubstantiallyrecoverall ofits recorded investment to be accounted for at their fair value under SFAS 115.our operations comprise one operating segment.New Accounting Pronouncements. The
Company currently accounts for its investmentsfollowing accounting pronouncements became effective or were issued inREMIC Certificates at estimated fair value, consequently, there would be2003 and have no material effect on our financial statements:
• SFAS No. 149“Amendment of Statement 133 on Derivative Instruments and Hedging Activities”requires that contracts with comparable characteristics be accounted for similarly and clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative, clarifies when a derivative contains a financing component and amends the definition of an underlying investment to conform it to language used in other FASB promulgations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. At December 31, 2003, we did not have any derivative instruments or contracts outstanding nor were we involved in any hedging relationships. If in the future we enter into any derivative contracts or hedging relationships we will follow the guidelines set forth in SFAS No. 149; • SFAS No. 150“Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. Many of these instruments were previously classified as equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and to all other instruments that existed as of the beginning of the first interim financial reporting period beginning after June 15, 2003. In October 2003 portions of SFAS No. 150 that apply to non-controlling (minority) interests in finite-life entities were deferred indefinitely. Also in October 2003 the FASB clarified that any non-controlling minority interest that may be redeemed with equity of any entity (including equity of an entity other than the subsidiary) does not meet the definition of a mandatorily redeemable financial instrument and thus does not fall under SFAS No. 150 guidelines. Since the partnership agreements with our limited partners (minority interests) specify that the limited partners’ exchange rights may be settled in our common stock or cash at our option the adoption of SFAS No. 150 does not have an impact on the financial statement presentation or accounting for our minority interests. However, our adoption of SFAS No. 150 did require that the Series A Preferred Stock we called for redemption on December 31, 2003 be classified as a liability. • FIN 45“Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN 45 also outlines additional disclosures that a guarantor must make in its interim and annual financial statements about its obligations under certain guarantees that it has issued. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. During 2003 we did not enter into any guarantees nor did we have any guarantees outstanding at December 31, 2003. 45
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. Major Operators We have two lessees, based on properties subject to lease agreements and secured by mortgage loans that represent between 10% and 20% of our total assets. The following table summarizes our major lessees’ assets, stockholders’ equity, interim revenue and net income (loss) from continuing operations as of or for the nine months ended September 30, 2003 per the lessees’ public filings:
Assisted Living Concepts, Inc. Alterra Healthcare Corporation (unaudited, in thousands) Current assets $ 26,828 $ 83,674 Non-current assets 187,256 458,487 Current liabilities 25,711 348,541 Non-current liabilities 155,895 748,172 Redeemable preferred stock — — Gross revenue 125,519 309,018 Operating expenses 112,144 313,846 Income (loss) from continuing operations 2,276 (32,641 ) Net income (loss) 2,770 (65,624 ) Cash provided by operations 7,332 184 Cash provided by investing activities 5,067 82,568 Cash used in financing activities (8,660 ) (81,498 ) Assisted Living Concepts, Inc. (or ALC) leases 37 assisted living properties with a total of 1,434 units owned by us representing approximately 12.6%, or $72,486,000, our total assets at December 31, 2003. In October 2001, ALC filed for reorganization under Chapter 11 of the federal bankruptcy laws. The filing was pre-negotiated with sufficient debt holders to allow ALC to reorganize its debt and equity and emerge from bankruptcy as of 12:01 a.m. on January 1, 2002. The final order affirming the reorganization was made in December 2001, consequently we reflected the transaction as of December 31, 2001. We agreed to reduce total rents under the 37 leases by $875,000 a year, beginning January 1, 2002, and received a lease rejection claim of $2,500,000 for this concession. Under the provisions of ALC’s Plan, we would have been entitled to receive, due to our ownership of pre-bankruptcy convertible subordinated debentures and the lease rejection claim, $7,986,000 of ALC’s new Senior Secured Notes (or Senior Notes) bearing interest at 10% per annum, payable semi-annually in arrears, $3,026,000 new Junior Secured Notes (or Junior Notes) bearing interest payable in additional new Junior Notes for three years at 8% and thereafter payable in cash at 12% per annum, payable semi-annually in arrears and 1,238,076 shares of ALC common stock. Provisions of the Revenue Code governing REITs prohibit REITs from owning debt and/or equity securities representing more than 10% of the value or voting power of any one issuer. Without qualifying as safe harbor debt, the Senior Notes and the Junior Notes would have been included in the calculation of 10% of the value of ALC. In order to qualify as safe harbor debt and retain our REIT status we were able to hold only the debt. For REIT income test purposes, provisions would also disqualify income from any entity in which a REIT owns 10% or more of the total combined voting power of all classes of stock or 10% or more of the total value of shares of all classes of a corporate tenant. And as a result, we could not be owners of the ALC common stock. In December 2001, we entered into an Assignment and Assumption Agreement with Healthcare Holdings, Inc. (or HHI), a wholly owned subsidiary of CLC, allowing HHI to purchase the right to receive the common stock of ALC. SeeNote 8. CLC Healthcare, Inc. andNote 10. Marketable Debt Securitiesfor further discussions. At the request of LTC’s Board of Directors, our Chairman, CEO and President, Mr. Andre C. Dimitriadis, became a Board member of ALC as of January 1, 2002. During the bankruptcy and since emergence, ALC has been current on all lease payments to us.
Alterra leases 35 assisted living properties with a total of 1,416 units owned by us representing approximately 12.4%, or $71,281,000, of our total assets at December 31, 2003. Alterra announced on January 22, 2003, that it had filed a voluntary petition with the U.S. Bankruptcy Court for the District of Delaware to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Alterra’s Plan of Reorganization was approved in November 2003 and Alterra
46
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
emerged from bankruptcy in December 2003 as a non-publicly traded company. All of our leases with Alterra were assumed, without change, by the reorganized Alterra. Alterra is no longer a publicly traded company.
ALC is a publicly traded company, and as such is subject to the filing requirements of the Securities and Exchange Commission. Our financial position and ability to make distributions may be adversely affected by further financial difficulties experienced by ALC and Alterra or
resultsany of our other lessees and borrowers, including additional bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with us or our borrowers when it expires.
4. Supplemental Cash Flow Information
For the year ended December 31, 2003 2002 2001 (in thousands) Non-cash investing and financing transactions: Assumption of mortgage loans payable related to acquisitions of real estate properties $ — $ 1,357 $ 50,774 Assumption of minority interest liability related to acquisition of general partnership interest — — 3,518 Assumption of accrued interest related to acquisitions of real estate properties — — 229 Conversion of mortgage loans and secured lines of credit into owned properties — 3,832 3,899 Reduction in receivables from CLC related to the acquisition of debt securities — — 7,800 Exchange of third party debt securities related to the acquisitions of real estate properties — — 7,925 Reduction in receivables from CLC related to the acquisitions of real estate properties — — 9,285 Increase in short term notes receivable related to the disposition of real estate properties — 2,631 8,483 Preferred stock redemption charge relating to the original issuance costs of the 40% of Series A Preferred Stock redeemed 1,241 — —
5. Impairment Charge We periodically perform a comprehensive evaluation of our real estate investment portfolio. During 2002, we adopted SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets” and therefore calculate the impairment losses as the excess of the carrying value over the fair value of assets to be held and used, and the carrying value over the fair value less cost to sell in instances where management has determined that we will dispose of the property. Prior to 2002, we calculated impairment losses using the same methodology as per SFAS No. 121“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.” In recent years the long-term care industry experienced significant adverse changes, which have resulted in operating losses by certain of our lessees and borrowers and in some instances the filing by certain lessees and borrowers for bankruptcy protection. As a result we have identified certain investments in skilled nursing properties that we determined had been impaired. These assets were determined to be impaired primarily because the estimated undiscounted future cash flows to be received from these investments are less than the carrying values of the investments.
During 2003, we recorded an impairment charge of $1,260,000. Of this charge, $31,000 was to fully reserve a mortgage loan on one skilled nursing facility that was closed in 2002 and not reopened or sold. Additionally, we recorded a $1,303,000 impairment related to certain interest only REMIC Certificates net of a $74,000 adjustment of an impairment loss, recognized in the fourth quarter of 2002, related to our investment in REMIC Certificates. This
47
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$1,303,000 impairment charge had been previously recognized in comprehensive income as a fair market value adjustment on available-for-sale REMIC Certificates as described inNote 6. Real Estate Investments.As more fully described inNote 2. Summary of Significant Accounting Policies, to the extent there are defaults, unrecoverable losses or prepayments of principal on the underlying mortgages resulting in reduced cash flows, the subordinated REMIC Certificates we hold would bear the first risk of loss. During management’s periodic evaluation of the realizability of expected future cash flows from the mortgages underlying our investment in REMIC certificates, there were indications that certain expected future cash flows would not be realized by the REMIC Trust. Accordingly, we recorded a net $1,229,000 impairment charge during 2003, to reflect the estimated impact on future cash flows from loan prepayments occurring during, or expected to occur subsequent to, the first quarter of 2003 related to certain subordinated REMIC Certificates we held.
During 2002, we recorded an impairment charge of approximately $7,807,000 ($710,000 of which is included in net loss from discontinued operations). The impairment charge included the write-down of $1,000,000 for one owned skilled nursing property as a result of our agreeing to a rent reduction and $710,000 for one assisted living property that was subsequently sold at less than net book value, a $1,600,000 write-down of two mortgages on two skilled nursing properties and a $4,497,000 valuation adjustment of the subordinated REMIC Certificates held by us. Of the $1,600,000 write-down, $600,000 was for a skilled nursing property that had closed and defaulted on the loan and $1,000,000 was for a loan on a skilled nursing property whose operator was reporting losses from operations and requesting temporary loan payment modifications. Relative to the $4,497,000 charge and as more fully described inNote 2. Summary of Significant Accounting Policiesto the extent there are defaults, unrecoverable losses or prepayments of principal on the underlying mortgages resulting in reduced cash flows, the subordinated REMIC Certificates held by us would bear the first risk of loss. As a result, during 2002 we recorded this $4,497,000 charge of which, $1,215,000 was for loans paying off prior to maturity and reducing the value of our I/ O REMIC Certificates, $500,000 was for one skilled nursing property that closed, $1,282,000 was for a loan on one skilled nursing property that we, as loan servicing agent for the REMIC Trust, agreed could pay the loan off at a $1,000,000 reduction in principal and $1,500,000 was for one skilled nursing property whose operator advised us that the operator was considering either closing the property or attempting to convert the building to an alternative use. During management’s periodic evaluation of the realizability of expected future cash flows from the mortgages underlying our REMIC Certificates, there were indications that a portion of the underlying mortgage collateral would not be realized by the REMIC Trust. Accordingly, we recorded an impairment charge in current period earnings.
During 2001, we recorded an impairment charge of approximately $28,584,000, ($8,937,000 of which is included in net loss from discontinued operations in accordance with SFAS No. 144). The impairment charge included the write-down of the carrying value to the estimated fair value, less cost to sell, of 14 owned skilled nursing properties of $16,755,000, notes receivable determined to be uncollectable of $1,500,000, pre-bankruptcy debt securities of ALC of $9,829,000 and $500,000 in lease termination costs. Of the $16,755,000 charge, $13,677,000 was for nine closed properties, $2,484,000 was for three properties that were leased at reduced lease values and $594,000 was for two properties that were sold. The fair values were based on current appraisals or other third-party opinions of value and other estimates of fair value such as estimated discounted future cash flows.
We believe we have recorded valuation adjustments on all assets for which there are permanent impairments. However, the long-term care industry has experienced significant adverse changes which have resulted in operating losses by certain of our lessees and borrowers and in some instances the filing by certain lessees and borrowers for bankruptcy protection. Thus, we cannot predict what, if any, impairment charge may be needed in the future.
6. Real Estate Investments Mortgage Loans. During the year ended December 31, 2003, we received principal repayments totaling $11,422,000 on two mortgage loans, and scheduled principal payments of $1,464,000. One mortgage loan with an outstanding principal balance of $1,707,000 that was secured by one long-term care property was purchased from the REMIC Trust for cash of $1,707,000 in connection with the termination of the 1993-1 REMIC Pool.
At December 31, 2003, we had 37 mortgage loans secured by first mortgages on 30 skilled nursing properties with a total of 3,681 beds and eight assisted living residences with 369 units located in 19 states. At December 31, 2003,
48
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the mortgage loans had interest rates ranging from 9.5% to 12.6% and maturities ranging from 2004 to 2018. In addition, the loans contain certain guarantees, provide for certain facility fees and generally have 25-year amortization schedules. The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points. At December 31, 2003 and 2002, the estimated fair value, based on the net present value of the future cash flows discounted at 10.5%, of the mortgage loans was approximately $74,511,000 and $85,429,000, respectively. Scheduled principal payments on mortgage loans are $7,021,000, $3,538,000, $9,223,000, $11,753,000, $12,680,000 and $28,530,000 in 2004, 2005, 2006, 2007, 2008 and thereafter.
Owned Properties and Lease Commitments. During 2003, we purchased two skilled nursing properties with a total of 98 beds from CLC. We paid cash of $1,215,000 for the two properties which CLC used to repay the outstanding loan balance due to a REMIC pool originated by us.
During 2003, we sold eight skilled nursing properties for a total sales price of $16,227,000. We recognized a $2,299,000 gain on these sales and used $3,758,000 of proceeds to pay down mortgage loans and $2,595,000 of proceeds to repay outstanding borrowings under our Secured Revolving Credit. The remaining $9,311,000 of net proceeds was used to fund the partial redemption of our Series A Preferred Stock.
Subsequent to December 31, 2003 we purchased a 120 bed skilled nursing property in Texas for a total of $3,389,000 in cash. Additionally, we sold a 72 bed skilled nursing property in Georgia for $1,500,000 and will recognize a $975,000 gain in the first quarter of 2004. We used $1,250,000 of the net proceeds to pay down a mortgage note payable.
Owned properties are leased pursuant to non-cancelable operating leases generally with an initial term of 10 to 30 years. Many of the leases contain renewal options and one contains an option for a limited time that permits the operator to purchase three properties. The leases provide for fixed minimum base rent during the initial and renewal periods. The majority of our leases contain provisions for specified annual increases over the rents of the prior year and are generally computed in one of four ways depending on specific provisions of each lease: (i) a specified percentage increase over the prior year, generally 2%; (ii) the higher of (i) or a calculation based on the Consumer Price Index; (iii) as a percentage of facility net patient revenues in excess of base amounts or (iv) specific dollar increases. Each lease is a triple net lease which requires the lessee to pay all taxes, insurance, maintenance and repairs, capital and non-capital expenditures and other costs necessary in the operations of the
Company resulting from the adoption of these provisions of SFAS 125. 3. SUPPLEMENTAL CASH FLOW INFORMATION The details of net changes in other assets and liabilitiesfacilities. Contingent rent income for the years ended December 31,1996, 19952003, 2002 and19942001 was not significant in relation to contractual base rent income.Depreciation expense on buildings and improvements, including properties owned under capital leases and properties classified as discontinued operations as required by SFAS No. 144, was $12,783,000, $14,197,000, and $13,695,000 for the years ended December 31, 2003, 2002 and 2001.
Future minimum base rents receivable under the remaining non-cancelable terms of operating leases are: $45,160,000, $45,569,000, $46,645,000, $47,640,000, $46,354,000 and $384,189,000 for the years ending December 31, 2004, 2005, 2006, 2007, 2008 and thereafter.
In August 2001, the Financial Accounting Standards Board (or FASB) issued SFAS No. 144“Accounting for the Impairment or Disposal of Long-Lived Assets,” which was required to be adopted in fiscal years beginning after December 15, 2001. SFAS No. 144 on asset impairment supercedes SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,”and provides a single accounting model for long-lived assets to be disposed of. Subsequent to January 1, 2002, and in accordance with SFAS No. 144, properties held-for-sale on the balance sheet includes only those properties available for immediate sale in their present condition and for which management believes that it is probable that a sale of the property will be completed within one year. Properties held-for-sale are carried at the lower of cost or fair value less estimated selling costs. No depreciation expense is recognized on properties held-for-sale once they have been classified as
follows:
1996 1995 1994 --------------- --------------- --------------(Increase) in interest receivable $ (875) $ (741) $ (462) (Increase) decrease in prepaid, other assets and allowance (99) (285) 475 Increase (decrease) in accrued interest 2,819 1,224 (755) Increase (decrease) in accrued expenses and other liabilities 1,112 (1,276) 1,464 ------- ------- -------- Net change $ 2,957 $(1,078) $ 722 ======= ======= ======== Non-cash investing and financing transactions: Securitization of mortgage loans for REMIC Certificates $80,962 $ - $127,64042such. In accordance with the implementation provisions of SFAS No. 144, the operating results of real estate assets designated as held-for-sale subsequent to January 1, 2002, are included in discontinued operations in the consolidated statement of operations. In addition, all gains and losses from real estate sold are also included in discontinued operations. As required by SFAS No. 144, gains and losses on prior years related to assets included on discontinued operations in 2002 have been reclassified to discontinued operations for comparative purposes. Assets designated as held-for-sale 49
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
1996 1995 1994 -------------- ------------- -------------Issuance of mortgage loans payable for REMIC Certificates 31,525 - - Conversion of debentures into common stock 18,813 19,357 33,306 Assumption of mortgage loans payable relating to acquisitions of real estate properties 9,641 13,407 3,337 Assumption of capital lease obligations - 5,965 - Minority interest 8,932 1,041 -4. REAL ESTATE INVESTMENTS MORTGAGE LOANS During 1996,— (Continued)prior to January 1, 2002 have been accounted for under SFAS No. 121 and accordingly, gains and losses from these assets have not been included in discontinued operations.
Set forth in the
Company invested $99,440,000 in mortgage loans secured by, among other things, first mortgages on 31 skilled nursing facilities with a total of 4,077 beds and five assisted living residences with a total of 177 units and certain borrower guarantees. The mortgage loans, which individually range from $305,000 to $11,250,000 in principal amount, have an initial weighted average interest rate of 10.42%, have stated maturities of 5 to 20 years, generally have 25-year amortization schedules, and provide for certain facility fees. Mosttable below are the components of theloans providenet loss from discontinued operations (in thousands):
For the year ended December 31, 2003 2002 2001 Rental income $ 772 $ 1,425 $ 2,253 Interest income from mortgage loans — — 10 Interest and other income 149 226 258 Total revenues 921 1,651 2,521 Interest expense 271 311 475 Depreciation and amortization 509 695 1,650 Impairment charge — 710 11,913 Legal expenses 8 (37 ) — Operating and other (income) expenses (35 ) 510 256 Total expenses 753 2,189 14,294 Income (loss) from discontinued operations $ 168 $ (538 ) $ (11,773 ) REMIC Certificates. The outstanding principal balance and the weighted-average pass through rate for
annual interest rate increases intheinitial rate based upon a specified increase, which range from 10 to 12.5 basis points. Approximately $9,825,000senior certificates (held by third parties) and the carrying value of theloans duesubordinated certificates (held by us) as of December 31, 2003 and 2002 were as follows(dollar amounts in1997 will be paid off once the Company completes a sale-leaseback transaction for the same amount on assisted living facilities that are being constructed. In March 1996, the Company provided non-recourse mortgage loans secured by long-term care facilities to three of its wholly owned subsidiaries and to certain partnerships in which the Company was a general partner totaling $31,525,000. Concurrent with the closing of the loans, the Company completed a real estate investment conduit ("REMIC") transaction in which loans totaling $112,487,000, including the $31,525,000 originated in 1996, were exchanged for mortgage pass-through certificates for an equal amount. See "REMIC Certificates." See Note 5 - Other Long-term Obligations.thousands):
2003 2002 Senior Senior Certificates Subordinated Certificates Subordinated Certificates Certificates Principal Rate Carrying Value Principal Rate Carrying Value 1993-1 Pool(1) $ – – $ – $ 28 7.1 % $ 238 1994-1 Pool 3,184 10.0 % 19,029 16,796 10.0 % 19,308 1996-1 Pool 67,895 7.6 % 9,560 74,812 7.5 % 9,754 1998-1 Pool 79,358 6.5 % 33,073 89,978 (2) 6.4 % 35,119 $ 61,662 $ 64,419
(1) The 1993-1 Pool was fully retired through mortgage payments at maturity in 2003 with no realized credit losses during its term. (2) Included in the 1998-1 Pool assets are $0 at December 31, 2003 and $7,879,000 at December 31, 2002 of certificates originated in the 1993-1 Pool that are excluded from the amount outstanding presented for the 1993-1 Pool. At December 31,
1996,2003 and 2002, theCompany had 67 mortgage loans receivable secured by first mortgage loansaggregate effective yield of the subordinated certificates, based on73 skilled nursing facilitiesexpected future cash flows witha total of 8,672 bedsno unscheduled prepayments, was 15.4% and11 assisted living residences with 588 units located in 23 states. The mortgage loans, which have a carrying amount of approximately $177,262,000 at17.04%, respectively. Income on the subordinated certificates was as follows for the years ended December 31,1996, are reflected2003, 2002 and 2001 (dollar amounts inthe Company's financial statements net of $1,000,000 of loan loss reserves. The mortgage loans, which individually range from $302,500 to $11,240,000 in principal amount, have current interest rates ranging from 9.16% to 13.2% with final payments due from 1997 to 2017. The minimum future principal payments from the mortgage loans at December 31, 1996 are as follows: $11,617,000 in 1997, $3,035,000 in 1998, $5,095,000 in 1999, $7,189,000 in 2000, $7,327,000 in 2001 and $143,999,000 thereafter. 43thousands ):
2003 2002 2001 1993-1 Pool $ 22 $ 736 $ 929 1994-1 Pool 2,085 2,510 3,847 1996-1 Pool 1,991 2,614 3,128 1998-1 Pool 5,866 7,110 7,212 $ 9,964 $ 12,970 $ 15,116 50
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)— (Continued)As sub-servicer for all of the above REMIC
CERTIFICATESpools, we are responsible for performing substantially all of the servicing duties relating to the mortgage loans underlying the REMICStructureCertificates and act as the special servicer to restructure any mortgage loans that default.The
Company has organized itselfREMIC Certificates retained by us, represent the non-investment grade certificates issued in the securizations. Furthermore, because of the highly specialized nature of the underlying collateral (long-term care properties), there is an extremely limited market for these securities. Because REMIC Certificates of this nature trade infrequently, if at all, market comparability to the certificates we retain is very limited.We use certain assumptions and estimates in determining the fair value allocated to the retained interest at the time of initial sale and each subsequent measurement date in accordance with SFAS No. 140. These assumptions and estimates include projections concerning the expected level and timing of future cash flows, current interest rate environment, estimated spreads over the U.S. Treasury Rate at which the retained certificates might trade, expectations regarding credit losses, if any, expected weighted-average life of the underlying collateral and discount rates commensurate with the risks involved. These assumptions are reviewed periodically by management. If these assumptions change, the related asset and income would be affected. Key economic assumptions used in measuring the retained interests at December 31, 2003, were as follows: a U.S. Treasury Rate of 4.3%, market spread on “B” rated certificates of 950 basis points over the applicable U.S. Treasury Rate, a weighted average discount rate on unrated and interest only certificates of 29.0%, weighted-average life of 151 months and no expected annual credit losses. At December 31, 2003, key economic assumptions and the sensitivity of the current fair value of cash flows on the REMIC Certificates retained by us to immediate 10% and 20% adverse changes in those assumptions are as follows: (dollar amounts in thousands):
Estimated Carrying Retained Interests in REMIC Securitizations: Fair Value Amount Available-for-sale REMIC Certificates $ 9,778 $ 9,778 Held-to-maturity REMIC Certificates 38,395 51,884 Totals $ 48,173 $ 61,662
10% Adverse 20% Adverse Change Decline Change Decline Key Assumption Sensitivity Analysis: in Fair Value in Fair Value Average Spread and Discount Rate Assumption Average Spread on “B” rated certificates – 950 basis points $ 264 $ 521 Average discount rate on Unrated and I/ O Certificates – 29.0% 2,010 3,799 Total $ 2,274 $ 4,320 U.S. Treasury Rate Assumption (4.3%) $ 120 $ 235 Weighted-Average Life Assumption (151 Months) $ 1,712 $ 3,096 Expected Credit Loss Assumption (No Expected Losses) $ 4,571 $ 9,142 As more fully described inNote 2. Summary of Significant Accounting Policies, to the extent there are defaults, unrecoverable losses or prepayments of principal on the underlying mortgages resulting in reduced cash flow, the subordinated REMIC Certificates held by us would bear the first risk of loss. During management’s periodic evaluation of the realizability of expected future cash flows from the mortgages underlying our REMIC Certificates there were indications that a portion of the underlying mortgage collateral would not be realized by the REMIC Trust. Accordingly, we recorded a net $1,229,000 impairment charge during 2003, to reflect the estimated impact on future cash flows from loan prepayments occurring during, or expected to occur subsequent to, the first quarter of 2003 related to certain subordinated REMIC Certificates we held. We recorded an impairment charge in 2002 of $4,497,000 related to the valuation adjustment of the subordinated REMIC Certificates held by us. SeeNote 5. Impairment Chargefor a discussion of the impairment indicators.
51
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Subsequent to December 31, 2003, at our election, we paid $3,661,000 to acquire a mortgage loan that was in default in the 1994 REMIC pool. The amount paid represents the outstanding balance of the loan which approximated the fair value.
During 2001, we sold certain REMIC Certificates classified as available-for-sale, with a net book value of $19,035,000 prior to a valuation reserve of $1,010,000. The sale resulted in net proceeds of $17,894,000 and a realized loss of $1,141,000.
As of December 31, 2003 and 2002, available-for-sale certificates were recorded at their fair value of approximately $9,778,000 and $13,073,000, respectively. Unrealized holding losses on available-for-sale certificates of $427,000, $1,435,000 and $803,000 were included in comprehensive income for the years ended December 31, 2003, 2002 and 2001, respectively.
7. Asset Securitizations
LTC is a REIT and, as such, makes
itsinvestments with the intent to hold them for long-term purposes. However,from time-to-time, securitization transactionsmortgage loans may beentered intotransferred to a REMIC (securitization) when a securitization providesthe Companyus with the best available form ofraisingcapital tobe used to makefund additional long-terminvestments, considering the Company'sinvestments. When contemplating a securitization, consideration is given to our current and expected future interest rate posture and liquidity and leverage position, as well as overall economic and financial market trends. As of December 31,1996 the Company2003 we had completedthreefour securitization transactions, the last being in 1998. We may again employ this type of financing in the future should we determine the financing environment is appropriate for this type of transaction.From our past securitizations, we receive annual sub-servicing fees, which range from 1.0 to 2.0 basis points of the outstanding mortgage loan balances in each of the REMIC pools. Additionally, through the REMIC Certificates retained by us from past securitizations,
(the "1993-1 Pool", the "1994-1 Pool"we receive cash flows and the"1996-1 Pool"). The Company structures its securitizations throughrights to future cash flows resulting from cash received on thecreationunderlying mortgage loans in the REMIC pools. All ofathe investors in the REMICin a two-step process. Under this structure, a wholly-owned special-purpose bankruptcy remote corporation (LTC REMIC Corp.) is formedCertificates and themortgagesREMIC Trusts themselves have no recourse tobe securitized are transferredour assets for failure by any obligor tosuch entity without recourse by the Company. From this special-purpose corporation, the loans are transferred to a trust (the "REMIC Trust") and exchanged for commercial mortgage pass-through certificates (the "REMIC certificates") issued by the REMIC Trust which represent beneficial ownership interests inthe REMIC Trust assets (the mortgages). The certificates include various levels of senior and subordinated certificate classes, as well as interest only (I/O) certificates and a minor residual class. The senior certificates and the residual class (which historically have represented between 66% and 81% of the certificates for the three securitization transactions) are then soldtooutside third-party investors through a private placement under Rule 144A of the Securities Act of 1933, as amended. The subordinated certificates, which generally provide a level of credit enhancement to the senior certificates, alongpay when due, or comply withthe cash proceeds from the sale of the senior certificates are retained by LTC REMIC Corp. as consideration for the initial transferany provisions of the mortgageloans tocontracts. The REMIC Certificates are classified separately on the balance sheet and interest income earned shown separately on the income statement. Sub-servicing fees and related fees associated with the REMICTrust. NeitherCertificates are included in other income.Certain cash flows received from and paid to REMIC Trusts are as follows (dollar amounts in thousands):
Year Ended 2003 2002 Cash flow received on retained REMIC Certificates $ 12,515 $ 16,624 Servicing and related fees received $ 186 $ 298 Servicing advances made $ 690 $ 725 Repayments of servicing advances $ 782 $ 618 At December 31, 2003 scheduled distributions of principal on REMIC Certificates retained by us are: $6,689,000, $8,138,000, $9,799,000, $6,540,000, $3,239,000 and $27,230,000 for the
Company nor LTC REMIC Corp. is obligated to purchase anyyears ending December 31, 2004, 2005, 2006, 2007, 2008 and thereafter. These amounts are based upon the scheduled remaining amortization periods of theREMIC Trust assets or assume any liabilities. General Description of the Certificates With respectunderlying mortgages, which may be subject tothe Company's REMIC securitizations, the certificates issued represent beneficial ownership interestschange. Currently inthe REMIC Trust and can be grouped into four categories; senior, subordinated, interest-only (subordinated), and residuals. The certificates are designated in alphabetical format (e.g. "A", "B", "C", etc.) with each class of certificates having a later alphabetical designation being subordinated to each class of certificates having an earlier alphabetical designation (except for in general, the class R and LR certificates which share in seniority rank to the class "A" certificates). The certificates sold to outside third-party investors are referred to herein as the "Senior certificates" while the certificates transferred to and retained by the Company as part of the sale proceeds are referred to as the "Subordinated Certificates." Both classes of these certificates have stated principal balances, as well as stated interest rates known as the "pass-through rate." In addition, the I/O certificatesour portfolio we have noprincipal denomination, but rather they are entitled to interest distributions which typically represent the spread between the monthly cash interest received from the underlyingmortgagecollateral and the monthly amount paid by the REMIC Trust in interest distributions on the outstanding pass-through certificates. Interest on each outstanding class of the certificates accrues in arrears at the respective pass- through rate applicable to the certificates and is 44loans held 52
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)— (Continued)for securitization. Quantitative information relating to subserviced mortgage loans including delinquencies and net credit losses is as follows(dollar amounts in thousands):
Year Ended 2003 2002 2001 Average balance of loans in REMIC pools $ 224,742 $ 294,984 $ 340,607 Year-end balance of loans in REMIC pools $ 213,291 $ 245,248 $ 334,394 Net credit losses $ 2,157 $ 1,284 $ 0 Net credit losses to average REMIC pool loans 1.0 % 0.4 % 0 % Delinquencies (greater than 30 days) to year-end REMIC pool loans 0.8 % 1.3 % 0.7 % 8. CLC Healthcare, Inc.
In 2002 LTC Healthcare, Inc. changed its name to CLC Healthcare, Inc.
During 1998, we completed the spin-off of all CLC voting common stock through a taxable dividend distribution to the holders of our common stock, Cumulative Convertible Series C Preferred Stock and Convertible Subordinated Debentures. Upon completion of the distribution, CLC began operating as a separate public company. Beginning in September 1999, CLC began leasing skilled nursing properties owned or financed by us and from that date assumed certain leases of additional properties and closed certain properties owned by us. These properties were previously financed or leased to lessees and borrowers who experienced financial difficulties to such extent that the lessees and borrowers were not able to comply with lease provisions or debt provisions underlying the properties. As such, CLC assumed the leases of troubled facilities and was not able to pay, nor did we record as income, rent under CLC leases with us since 2000.
On October 6, 2003, CLC announced that it had signed an Agreement and Plan of Merger (or Agreement) with Center Healthcare and Center Healthcare’s wholly owned subsidiary, CHMS, Inc. The Agreement provided that in the merger, holders of each outstanding share of CLC’s common stock would receive in cash $1.00 per share of common stock. CLC held a special meeting of its stockholders on November 12, 2003, and the merger was approved by the required sixty-six and two thirds percent of CLC common stockholders. After the merger, CLC became a wholly owned subsidiary of Center Healthcare and ceased to be a publicly traded company. Center Healthcare is owned by an individual who was operating (under the management agreement discussed below) 19 skilled nursing properties owned by us and under lease to CLC. During 2003, we entered into a 30 year, triple-net master lease with Center Healthcare for these 19 properties and one property formerly operated by Sun. This new lease provides for rental payments of approximately $4,567,000 in the first year with a 3% escalation each year for the next 10 years, 2% each year for the following 10 years and 1% each year for the remaining 9 years. In 2003, we advanced Center Healthcare $2,300,000 for capital improvements to the 19 facilities to be expended within a 36 month period.
Our Chairman, President and Chief Executive Officer, Chief Financial Officer and Chief Investment Officer were Board members of CLC through the effective date of the merger at which time they were no longer CLC board members. Additionally, we have an indemnification agreement covering these officers who served as Board members of CLC and one former independent director of CLC.
In 2002, we sold a wholly owned subsidiary, LTC-Fort Tucum, Inc. to CLC for a $500,000 note (or Fort Tucum Note) bearing no interest for one year and thereafter interest at 8% annually for two years. LTC-Fort Tucum, then acquired two skilled nursing facilities in New Mexico subject to a mortgage loan payable
monthly.to a REMIC pool originated by us. During 2003, we acquired these two facilities for $1,215,000 in cash and forgave the $500,000 note, which we had previously fully reserved. CLC used the $1,215,000 to repay the outstanding loan balance that was due to a REMIC pool originated by us. We leased these facilities, along with two other facilities in New Mexico previously operated by Sun, to a third party operator under a triple-net master lease beginning July 1, 2003. This master lease provided for rents of $763,000 in the initial year with 2.0% increases annually for 15 years. We also entered into a triple-net master lease beginning July 1, 2003, with a third party operator for four skilled nursing properties in Georgia, all of which subsequently have been sold. These Georgia properties were formerly operated by CLC.53
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2003, we purchased from CLC all the furniture, fixtures and equipment in 19 properties for $1,843,000. Additionally, we purchased all the furniture, fixtures and equipment at CLC’s corporate office for $967,000. We have included the furniture, fixtures and equipment at the 19 properties and the corporate office in the master lease with Center Healthcare.
During 2003 and 2002 we did not recognize any rental income from CLC. During 2003 CLC did not owe us any rent due to a forbearance agreement effective March 1, 2003. During 2002 CLC owed us $3,000,000 in rent that they were unable to pay. However in 2003, Center Healthcare paid us rent of $1,465,000 after they began operating the 19 properties in September 2003.
Effective October 19, 2003, we amended the secured line of credit with CLC waiving the change of control provisions in this line of credit and in the Promissory Note discussed below, to allow CLC to satisfy certain conditions of the Agreement and Plan of Merger dated October 6, 2003 (discussed above). The amendment also changed the nature of the loan from a secured revolving line of credit to a secured term loan and extended the maturity date to October 1, 2008. The initial principal amount of the note is $8,867,000 which represented the balance due on the secured line of credit including unpaid interest, and rents due and unpaid through April 30, 2003. Additionally, the amendment reduced the interest rate to 8.0% compounded monthly and accruing to the principal balance from October 1, 2003 through September 30, 2004, and 8.0% compounded monthly payable in cash quarterly in arrears beginning October 2004. The book value of the note was $4,046,000 at December 31, 2003. At December 31, 2002 there was $4,741,000 outstanding under the line of credit. During 2003 we did not record any accrued interest on this note. During 2002, CLC paid, and we recorded as income, interest on its line of credit with us totaling $540,000. In 2001, we did not receive or record as income interest on this line of credit.
Additionally, we hold a Promissory Note (or Note) issued by HHI in the face amount of $9,150,000. The original Note was received in December 2001 in exchange for our right to receive 1,238,076 shares of ALC common stock distributed concurrently with ALC’s emergence from bankruptcy on December 31, 2001. The Note is for a term of five years and bears interest at 5.0%, compounded annually and accruing to the principal balance plus interest at 2.0% on the principal payable in cash annually. The Note is a full recourse obligation of HHI and is secured by all of the assets owned now or in the future by HHI and contains a provision for acceleration should there be a change of control of HHI or CLC. We agreed to waive this provision to allow CLC to enter into the Agreement and Plan of Merger (discussed above). During 2003, we purchased from HHI $1,177,000 face value of ALC Senior Notes for $1,177,000 plus accrued interest and $566,000 face value of ALC Junior Notes for $566,000. SeeNote 10. Marketable Debt Securitiesfor discussion of ALC’s redemption of these notes. At December 31, 2003, HHI owned 1,452,794 shares of ALC common stock with a fair market value based on the closing price of ALC stock at December 31, 2003 of $11,259,000 and a market value of $11,622,000 based upon a third party Security and Exchange Commissions Form 4 filing reporting a bulk purchase of 557,209 shares at $8.00 per share. At December 31, 2003, the book value of the $9,150,000 Note was $5,245,000 which represented the fair market value of the 1,238,076 shares acquired by HHI on December 31, 2001 including a $2,150,000 increase in the Note during 2003 which we allowed HHI to upstream to CLC. CLC returned $1,200,000 to us which was applied as a reduction in the line of credit with CLC. In January 2003, we received, in accordance with the terms of the Note, $140,000 from CLC representing the 2.0% interest on the then outstanding principal balance which is payable in cash in arrears. During 2003 we did not accrue any interest income on the Note. In March 2004, we received $196,000 from CLC representing the 2.0% interest on the outstanding principal balance at December 31, 2003 in accordance with the terms of the Note.
All of the aforementioned transactions between and CLC and us were approved by the respective disinterested and/or independent members of the Board of Directors of each company. All interested and/or non-independent Board members abstained from any such vote.
During 2001, we sold all 180,000 shares of CLC common stock we owned at December 31, 2000. The shares were sold to CLC for $225,000, excluding selling commissions, which was the fair market value as of the date of sale. We recognized a loss of $386,000 on the sale of these shares. We sold these shares because the Tax Relief Extension Act of 1999 (or 99 Act) provided that, subject to certain exceptions for taxable years commencing after December 31, 2000, a REIT may not own more than 10% of the total value of the securities of any corporation. Without qualifying
54
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
as safe harbor debt, securities under the 99 Act include the line of credit provided by us to CLC. In order to qualify as safe harbor debt and retain REIT status, we were required to hold only such debt or the shares.
9. Notes Receivable
During 2003 we received $2,843,000 in principal re-payments prior to maturity on three notes. $2,000,000 of the notes paid off represented the down payment on a property that was sold in the fourth quarter of 2003. During 2003 we advanced $2,150,000 under the Note with HHI and $1,200,000 was repaid by CLC as discussed inNote 8. CLC Healthcare, Inc.
During 2002, in conjunction with the sale of five skilled nursing properties, we received a 10-year, $3,550,000 note with a face rate of 7.0%, which we discounted to $2,631,000 for an effective rate of 13.0%. In addition,
monthlywe advanced $468,000 to an operator under a line of credit. We received $1,736,000 in principaldistributions are also made. There-payments at maturity on three notes related to properties sold in previous years.10. Marketable Debt Securities
During 2003 we purchased $1,383,000 face value of ALC Senior Notes and $670,000 face value of ALC Junior Notes. $1,177,000 face value of the Senior Notes and $566,000 face value of the Junior Notes were purchased from CLC as discussedin Note 8. CLC Healthcare Inc.Additionally we purchased from a third party $206,000 face value of the Senior Notes for $186,000 plus accrued interest and
principal distributions$103,000 face value of the Junior Notes for $85,000. During 2003 $281,000 of the Senior Notes were mandatorily redeemed by ALC as a result of ALC’s sale of assets securing the notes. The notes were redeemed at face value plus accrued interest. Also during 2003, we received $279,000 face value of Junior Notes representing paid-in-kind interest.At December 31, 2003, we owned $8,186,000 face value of ALC Senior Notes with a face rate of 10%, payable semi-annually in arrears and maturing on January 1, 2009. At December 31, 2003, we also owned $4,095,000 face value of ALC Junior Notes with a face rate of 8% payable in additional new Junior Notes through 2004 and thereafter payable in cash, payable semi-annually in arrears and maturing on January 1, 2012. On December 31, 2003, ALC announced the mandatory redemption of all of the outstanding Senior and Junior Notes and deposited with the trustee of the notes an amount sufficient to pay the redemption amount and all interest due. In the fourth quarter of 2003, we recognized non-operating income of $1,970,000 related to the reversal of the discount recorded on the Senior and Junior Notes redeemed, and in January 2004 received cash in the amount of $12,374,000 as full redemption of these securities including accrued and unpaid interest.
11. Debt Obligations
Bank Borrowings. On December 26, 2003, we entered into a new three year Unsecured Credit Agreement with three banks. The Unsecured Credit Agreement provides for a revolving line of credit for up to $45,000,000 and for the inclusion of additional banks and an expansion of the line under certain circumstances. There are
madeno scheduled maturities other than the three year term.The pricing of the Unsecured Credit agreement varies between LIBOR plus 2.75% and LIBOR plus 3.25% depending on our leverage ratio. We had no outstanding balances under this agreement as of December 31, 2003, however, had we borrowed our interest rate would have been LIBOR plus 3.00%.
In January 2004 we borrowed $21,000,000 under the Unsecured Credit Agreement and used $4,500,000 to pay early, mortgage debt that was due in January 2005 and used $16,500,000 to fund the partial redemption of our Series A Preferred Stock. In February 2004 we repaid the $21,000,000 from proceeds from the
allocated cash flows received byredemption of ALC Senior and Junior Notes and from some of theREMIC Trustproceeds from theunderlying mortgages. Paymentsissuance of our Series F Preferred Stock. SeeNote 10. “Marketable Debt Securities”andNote 12. “Stockholders Equity.”Under financial covenants contained in the Unsecured Credit Agreement which are
made firstmeasured quarterly we are required tosatisfy the certificates' pass-through rate requirementsmaintain, among other things, (i) a ratio, of total indebtedness to total asset value, not greater than .5 to 1.0, (ii) a ratio not greater than .35 to 1.0 of secured debt to total asset value (iii) a ratio not less than 2.5 to 1.0 of EBITDA to interest expense, and (iv) a ratio of not less than 1.45 to 1.0 for quarters ending through June 30, 2004, and thenprincipal distributions are made, bothnot less than 1.50 to 1.0 of EBITDA to fixed charges. We were inordercompliance with all covenants when we55
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
first drew under this agreement in 2004 and currently have no amounts outstanding under the Unsecured Credit Agreement.
For 2002 and 2001 we had a Secured Revolving Credit that was scheduled to expire on October 2, 2004. We cancelled this credit on December 30, 2003, and expensed as additional interest expense $2,075,000 of
certificate seniority. As such,the remaining unamortized debt issuance costs. The credit facility required us to pay an additional fee of 4% of the outstanding available commitment level as of October 2, 2002. Accordingly, we paid a fee of $3,000,000 (4% of the commitment balance of $75,000,000 on October 2, 2002) to extend the Secured Revolving Credit to October 2, 2004. It was primarily the remaining unamortized portion of this fee that we expensed when we cancelled the credit. Another provision of this agreement required certain levels of commitment reductions as a result of asset sales, financings, equity offerings and repayment of mortgages.In addition, on October 2, 2002, we issued 1,500,000 book value units (or BVU), to the
extent therelenders under the Secured Revolving Credit. The BVUs have been disclosed as a contingent liability at December 31, 2003 and 2002. The number of BVUs issued represented 20,000 BVUs for each $1,000,000 of outstanding commitment ($75,000,000) as October 2, 2002. For the BVUs to have value to the lenders our book value per common share at September 30, 2004, would have to be in excess of $10.92. As an example, should our book value per common share at September 30, 2004, be $11.00, the lenders would receive a total of $120,000 representing $.08 per share times 1,500,000 BVUs. At December 31, 2003, our book value per common share was $10.09 and as a result, the BVUs have no current value and we recognized no expense in the periods presented for the BVUs. Should the BVUs have an intrinsic value at a future reporting period, we will recognize as expense the intrinsic value over the remaining life of the BVUs, adjusted for any change in the intrinsic value at subsequent future reporting periods. We aredefaults or unrecoverable lossesobligated to pay the lenders any amounts due to them relating to the BVUs as of September 30, 2004, even though we have terminated the Secured Revolving Credit.Mortgage Loans Payable
Maturity dates, weighted average interest rates and amounts due at maturity on
the underlying mortgages resultingour mortgage loans payable were(dollar amounts inreduced cash flows, the Subordinated Certificates held by the Company would bear the first risk of loss.thousands):
Maturity December 31, 2003 Rate December 31, 2002 Rate 2004 $ — — $ 4,161 11.70 % 2005 13,412 10.41 % 28,249 8.63 % 2006 47,673 8.63 % 37,831 9.25 % 2007 — — — — 2008 15,938 7.27 % 16,262 7.27 % Thereafter 46,291 8.55 % 46,903 8.55 % $ 123,314 $ 133,406 As of December 31,
1996 none2003 and 2002, the aggregate carrying value ofthe three REMIC pools had experienced any realized losses nor had any of the Company's REMIC Certificate investments been determinedreal estate properties securing our mortgage loans payable was $171,429,000 and $187,481,000, respectively.Subsequent to
be permanently impaired. REMIC Transactions On March 29, 1996, the Company securitized approximately $112,487,000 of loans by creatingDecember 31, 2003, we paid off a mortgage loan payable to a REMICwhich, in turn, issued mortgage pass-through certificates for the same amountPool we originated in theformamount ofvarious classes$4,525,000 and $1,250,000 on another mortgage loan. Both loans had scheduled maturities in 2005.Bonds Payable and Capital Leases.At December 31, 2003 and 2002, we had outstanding principal of
certificates (the "1996-1 Pool")$6,640,000 and $6,960,000, respectively on multifamily tax-exempt revenue bonds that are secured by five assisted living properties in Washington. These bonds bear interest at a variable rate that is reset weekly and matures during 2015. For the year ended December 31, 2003, the weighted average interest rate, including letter of credit fees, on the outstanding bonds was 4.4%.As partAdditionally, at December 31, 2003 and 2002, we had outstanding principal ofthe securitization, the Company sold approximately $90,552,000$3,961,000 and $4,021,000, respectively on a multi-unit housing tax-exempt revenue bond that bears interest at 8.75% and matures in 2025 and is secured by one assisted living property in Oregon.56
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At December 31, 2003 and 2002, we had outstanding principal of
certificates to third parties at an effective$4,085,000 and $4,380,000, respectively, under capital lease obligations. The capital leases are secured by four assisted living residences, have a weighted average interest rate of7.19%. The Company retained7.6% and mature at various dates through 2013.As of December 31, 2003 and 2002, the
remaining $21,935,000 face amountaggregate gross investment in real estate properties securing our bonds payable and capital leases was $26,078,000 and $26,078,000, respectively.Senior Mortgage Participation Payable. In 2002, we completed a loan participation transaction whereby we issued a $30,000,000 Senior Participation interest in 22 of
such Certificates which are effectively subordinated in rightour first mortgage loans that had a total unpaid principal balance ofpayment to the certificates sold to third parties. Included$58,627,000 in theREMIC Certificates are interest-only certificates which have no face amount but are entitledParticipation Loan Pool. The Participation Loan Pool had a weighted average interest rate of 11.6% and a weighted average scheduled term toreceive cash flows designated as interest.maturity of 77 months. The Senior Participation is secured by the entire Participation Loan Pool. We received net proceeds from theREMIC transaction wereissuance of the Senior Participation of $29,750,000 that was used torepay borrowingsreduce commitments and amounts outstanding under our Secured Revolving Credit.The Senior Participation receives interest at a rate of 9.25% per annum, payable monthly in arrears, on the
Company's linesthen outstanding principal balance ofcredit. Thethe Senior Participation. In addition, the Senior Participation receives all mortgageloans represented byprincipal collected on thecertificates consistedParticipation Loan Pool until the Senior Participation balance has been reduced to zero. We retain interest received on the Participation Loan Pool in excess of34 mortgage loans, includingtheloans provided9.25% paid to theCompany's wholly owned subsidiaries andSenior Participation. The ultimate extinguishment of the Senior Participation is tied to thelimited partnerships totaling $31,525,000, and were secured by 55 skilled nursing facilities in 17 states. The mortgageunderlying maturities of loans in theREMIC pool had an initial weighted average mortgage interest rate of 10.69% and a weighted average remaining termParticipation Loan Pool which range from 14 tostated maturity of approximately 107176 months.Concurrently with the closing of the REMIC transaction, the Company's interest rate swap agreement entered into in May 1995 was terminated at a cost of approximately $1,500,000 and was included as a component of the transactions cost in the determination of the fair value of the assets received in the transaction. During 1993 and 1994, the Company securitized approximately $242,340,000 of loans by creating REMICs which, in turn, issued mortgage pass-through certificates for the same amount in the form of various classes of certificates (the 1993-1 and 1994-1 Pools, respectively). As part of these securitizations, the Company sold approximately $158,664,000 of certificates to third parties (the "Senior certificates") and retained $83,676,000 face amount of the Certificates. REMIC CertificatesAs of December 31,19962003, there are 21 loans remaining in theoutstanding certificate principalParticipation Loan Pool, the Senior Participation balance was $18,250,000 and the weighted averagepass-throughinterest rate was 11.58%. We have accounted for theSenior certificates (all heldparticipation transaction as a secured borrowing under SFAS No. 140“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”Liability for 9.5% Series A Preferred Stock Redemption. As required by
outside third parties) inSFAS No. 150, we classified the1993-1, 1994-1Series A Preferred Stock that was mandatorily redeemable on December 31, 2003 as a liability as a result of our December 2003 announced redemption of 1,225,680 shares of Series A Preferred Stock.Scheduled Principal Payments.Total scheduled principal payments for our mortgage loans payable, bonds payable and
1996-1 REMIC pools were $59,223,000, $47,649,000, and $85,338,000, and 7.5%, 9.2% and 7.2%, respectively. Ascapital lease obligations as of December 31,1996,2003 were $3,023,000, $16,312,000, $47,388,000, $2,190,000, $16,279,000 and $52,808,000 in 2004, 2005, 2006, 2007, 2008 and thereafter. To the extent we receive principal payments on the mortgage loans securing the Senior Participation Payable, scheduled principal payments at December 31, 2003 were $860,000, $2,899,000, $1,018,000, $10,278,000 and $3,195,000 in 2004, 2005, 2006, 2007 and 2008.Fair Value.The estimated fair value of the
Subordinated Certificates held by the Company in the 1993-1, 1994-1 and 1996-1 REMIC pools were $29,461,000, $37,236,000 and $32,237,000, respectively. As ofSenior Participation Payable was $19,133,000 at December 31,19952003 based on the net present value of the future cash flows discounted at 7.0%. The estimated fair value of the mortgage loans payable, bonds payable and capital lease obligations approximated their carrying values at December 31, 2003.12. Stockholders’ Equity
Preferred stock.Preferred Stock is comprised of four series of cumulative redeemable preferred stock summarized as follows:
Shares outstanding at Carrying Value at December 31, Liquidation December 31, Value Per Dividend Issuance 2003 2002 share Rate 2003 2002 Series A Cumulative Preferred Stock 1,838,520 3,069,200 $ 25.00 9.5 % $ 23.99 $ 23.98 Series B Cumulative Preferred Stock 1,988,000 1,993,000 $ 25.00 9.0 % $ 23.91 $ 23.90 Series C Cumulative Convertible Preferred Stock 2,000,000 2,000,000 $ 19.25 8.5 % $ 18.80 $ 18.80 Series E Cumulative Convertible Preferred Stock 2,200,000 — $ 25.00 8.5 % $ 23.84 — Dividends on the Series A Preferred Stock and Series B Preferred Stock are cumulative from the date of original issue and are payable monthly to stockholders of record on the first day of each month. In December 2003 we announced the redemption of 40% of our outstanding
certificate principal balance and the weighted average pass-through rate for the Senior certificates (all held by outside third parties) in the 1993-1 and 1994-1 45Series A Preferred Stock or 1,225,680 shares. Accordingly, we 57
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) REMIC pools were $70,128,000 and $72,858,000, and 7.5% and 9.1%, respectively. As— (Continued)recognized a preferred stock redemption charge of
December 31, 1995,$1,241,000 related to theestimated fair valueoriginal issue costs of theSubordinated Certificates held byshares we redeemed. In 2004, we announced theCompany in the 1993-1 and 1994-1 REMIC pools were $31,251,000 and $36,349,000, respectively. For the years ended December 31, 1996, 1995 and 1994, income recorded by the Company under the effective interest method for its investments in the Subordinated REMIC Certificates for the 1993-1, 1994-1 and 1996-1 REMIC pools was $5,603,000, $5,118,000 and $3,662,000 in 1996, $5,628,000, $5,275,000 and $0 in 1995, and $6,767,000, $1,156,000and $0 in 1994, respectively. As partredemption ofthe REMIC transaction discussed above, the Company serves as the sub-servicer and, in such capacity, is responsible for performing substantiallyall of theservicing duties relating to the mortgage loans represented by the certificates. The Company receives monthly fees equal to a fixed percentageremaining 1,838,520 outstanding shares ofthe then outstanding mortgage loans in the REMIC which, in management's opinion, represent currently prevailing terms for similar transactions. In addition, the Company will act as the special servicer to restructure any mortgage loans in the REMIC that are in default. At December 31, 1996,Series A Preferred Stock and all of thepayments currently due on its REMIC Certificates were received. INTEREST RATE SWAP AGREEMENTS In November 1996,1,988,000 outstanding shares of Series B Preferred Stock. Accordingly, we will recognize theCompany entered into a one-year forward ten-year interest rate swap agreement (the "November 1996 Agreement")$1,861,000 and $2,168,000 of original issue costs related tohedge a $50,180,000 firm commitment to purchase assisted living facilities. The terms ofthecommitment provide for an initial lease term of twelve yearsSeries A andan lease rate of 9.90% on each facility acquired. The Company will finance this commitment with fixed rate financing, and as such, has utilized an interest rate swap to "lock-in" the rate at which such financing will be obtained. Interest rate swaps are contractual agreements between the Company and third parties to exchange fixed and floating interest payments periodically without the exchange of the underlying principal amounts (notional amounts). Under the November 1996 Agreement, the Company will be credited with interest at the three-month LIBOR and will incur interest at a fixed rate of 6.835% on a $40,000,000 notional amount beginning on November 7, 1997. The November 1996 Agreement will be terminated on or before November 7, 1998 which is the latest date on which the Company expects to fully fund the commitment and have long-term financing in place. At December 31, 1996, the Company had an unrealized gain of $251,000 under the November 1996 Agreement. (See Note 9). In September 1995, the Company entered into a seven-year forward interest rate swap agreement (the "September 1995 Agreement") to hedge a securitization which is expected to be completed by the end of 1997. As of December 31, 1996, the Company believes that it is probable that the securitization transaction will occur as scheduled. Under the September 1995 Agreement, beginning on March 31, 1997 and continuing semi-annually thereafter, the Company is to be credited interest at the six month LIBOR and incur interest at a fixed rate of 6.64% on a notional amount of $60,000,000 which is being accounted forSeries B Preferred Stock, respectively, as ahedge. This effectively "locked-in" the net interest margin on $60,000,000 principal amount of senior certificates the Company anticipates will be soldpreferred stock redemption charge in thesecuritization transaction. Concurrent with the closingfirst quarter ofthe hedged transaction, any gains2004. During 2003, we purchased andlosses associated with the interest rate swap will be included as a componentretired 5,000 shares ofthe proceeds of the transaction. The September 1995 Agreement will be terminated at the earlier of (i) an anticipated securitization transaction to be completed during the second half of 1997 or (ii) November 17, 1997. At December 31, 1996, the Company had an unrealized loss of $253,000 under the September 1995 Agreement. 46LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At December 31, 1996, the total notional amount of the interest rate swap agreements with off-balance sheet risk was $100,000,000. REAL ESTATE PROPERTIES AND LEASE COMMITMENTS During 1996, the Company acquiredSeries A Preferred Stock forapproximately $45,345,000 22 assisted living facilities ("ALFs") in Alabama, Idaho, Oklahoma, Oregon, Texas and Washington with a total of 820 units. Eighteen of these ALFs were purchased for a total of $38,495,000 and have been leased to Assisted Living Concepts, Inc. ("ALC") for a total annual rent of approximately $3,758,000 (subject to annual increases) pursuant to long-term non-cancelable agreements. Included in the leases to ALC were five ALFs in Washington which were purchased for $11,280,000 and had been financed by the Company through the issuance of $8,300,000 of multi-family tax-exempt revenue bonds in December 1995 that havea total cost offunds$100,000 and 5,000 shares ofapproximately 5.9%. As of December 31, 1996, the Company had acquired all five of the Washington ALFs and had leased them to ALC generating an initial annual rent of approximately $948,000. The Company also acquired for $14,450,000 four skilled nursing facilities in Alabama, Georgia and Tennessee with a total of 472 beds. See Note 5- Other Long-term obligations. During the twelve months ended December 31, 1996, six newly formed limited partnerships, of which the Company, through certain of its subsidiaries, is the general partner, acquired 16 skilled nursing facilities in Alabama, Arizona, Iowa and TexasSeries B Preferred Stock for a total cost ofapproximately $54,063,000. These facilities$97,000. No preferred shares were purchasedsubject to mortgage loans of approximately $9,641,000. Under the partnership agreements, the Company has guaranteed payment of a 10% preferred return to the holders of the $8,932,000 in limited partnership interests. Under certain circumstances, the limited partnership interests can be exchanged, at the option of the holders,during 2002.Our Series C Cumulative Convertible Preferred Stock is convertible into
628,5112,000,000 shares ofthe Company'sour common stock atexercise prices ranging from $13.00$19.25 per share. Dividends are payable quarterly. Total shares reserved for issuance of common stock related to$15.00 commencing in January and July 1997. The mortgage loansthe conversion of$9,641,000 assumed by the Company have an initial average interest rate of 11.64%, are due in 2002-2005 and are currently owned by REMICs formed by the Company in 1993 and 1994. In conjunction with these REMICs, the Company sold senior certificates to third parties in 1993 and 1994 at a blended interest rate of approximately 7.1% and 8.9%, respectively, and retained the remaining certificates. See Note 5- Other Long-term obligations. The Company leases its owned long-term facilities under operating leases generally with an initial term of ten to twelve years. Many of the leases contain renewal options and some contain options that permit the operators to purchase the facilities. The leases provide for a fixed minimum base rent during the initial and renewal periods. Most of the leases provide for annual fixed rent increases or increases based on increases in consumer price indices over the term of the lease. Certain of the Company's leases provide for additional rent through participation in incremental revenues generated by the facilities, over a defined base period, effective at various times during the term of the lease. Each lease is a triple net lease which requires the lessee to provide for the payment of all taxes, insurance, maintenance and other costs of the facilities by the lessee. Contingent rent income for the years ended December 31, 1996, 1995 and 1994 was immaterial. 47LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Future minimum base rents receivable under the remaining non-cancelable terms of operating leases are as follows (dollars in thousands):
YEAR ENDING DECEMBER 31, ------------------------1997 $ 24,520 1998 24,083 1999 24,503 2000 23,553 2001 22,893 Thereafter 100,1035. DEBT OBLIGATIONS SHORT TERM BORROWINGS The Company has a repurchase agreement with an institution (the "Repurchase Agreement") whereby it may borrow up to $84,000,000 for general corporate and real estate investment purposes at LIBOR plus 2.0% subject to annual renewal. Under the Repurchase Agreement, the Company may borrow an amount based on the Company's existing mortgage loans with no additional commitment or unused fees. At December 31, 1996, thereSeries C Preferred Stock were$38,000,000 outstanding borrowings under the Repurchase Agreement. Under the terms of the agreement, borrowings are secured by the mortgage loans of the Company and mature on or before November 15, 1997. However, the Company has historically been able to renew the Repurchase Agreement annually. The Company entered into a $25,000,000 unsecured revolving credit agreement (the "Credit Agreement" as amended) with certain banks to provide the Company with short term borrowings. In May 1996, the terms of the Credit Agreement were amended, including certain financial covenants, to increase the amount of the line to $45,000,000 and to extend the expiration date from December 31, 1996 to May 31, 1998. Revolving credit borrowings, at the option of the Company, accrued interest at the agent bank's base rate or LIBOR plus 1.50%. Under the Credit Agreement, the Company pays a commitment fee equal to .25% per annum of the average unused commitment, an annual agency fee of $25,000 plus a one-time commitment fee. Borrowings under the Credit Agreement must be repaid annually with a 30-day "zero-balance period." The Credit Agreement contains, among other things, certain financial covenants including an interest coverage ratio, ratio of total liabilities to net worth, and ratio of funded debt to total net worth. At December 31, 1996, the Company had $41,400,000 outstanding under the Credit Agreement bearing an interest rate of approximately 7.2%. 48LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) CONVERTIBLE SUBORDINATED DEBENTURES The following is a summary of Convertible Subordinated Debentures outstanding2,000,000 shares at December 31,19962003 and1995:
Conversion Issue Date Interest Rate Maturity Price per share 1996 1995 - ------------- ----------------- ----------------- --------------- ------------------ ---------------1992 9.75% June 2004 $10.00 $ 843,000 $ 3,141,000 1994 8.50% January 2000 $15.00 22,023,000 30,000,000 1995 8.50% January 2001 $15.50 45,157,000 51,500,000 1995 8.25% January 1999 $15.50 10,000,000 10,000,000 1996 7.75% January 2002 $16.50 27,840,000 - 1996 8.25% July 2001 $17.25 29,965,000 - ------------ ----------- $135,828,000 $94,641,000 ============ ===========The 9.75% debentures due 2004 are redeemable by the Company at any time at 100% of the principal plus accrued interest. During the year ended December 31, 1996 and 1995, $2,298,000 and $19,357,000 in principal amount of such debentures converted into 229,800 and 1,935,7002002.In September 2003, we sold 2,200,000 shares of
common stock, respectively. The 8.5% debentures due 2000 are not redeemable by the Company prior to January 1, 1998. During the year ended December 31, 1996, $7,977,000 of debentures converted into 531,794 shares of common stock. No debentures were convertedour Series E Preferred Stock in1995. The 8.5% debentures due 2001 and the 8.25% debentures due 1999 are not redeemable by the Company. During the year ended December 31, 1996, $6,343,000 of debentures converted into 409,224 shares of common stock. No debentures were converted in 1995. On February 5, 1996, the Company sold, througha publicoffering, $30,000,000 aggregate principal amount of 7.75% Convertible Subordinated Debentures due January 1, 2002. The debentures areoffering. We received $52,438,000 in net proceeds which we used to pay in full our Secured Revolving Credit. Our Series E Preferred Stock is convertible at any timeprior to maturityinto shares ofthe Company'sour common stock at a conversion price of$16.50$12.50 per share of common stock, subject toadjustmentsadjustment under certain circumstances.The debenturesOn or after September 19, 2006 and before September 19, 2008, we have the right but not the obligation, upon not less than 30 nor more than 60 days’ written notice, to redeem shares of the Series E Preferred Stock, in whole or in part, if such notice is given within fifteen trading days of the end of the 30 day period in which the closing price of our common stock on the NYSE equals or exceeds 125% of the applicable conversion price for 20 out of 30 consecutive trading days, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends. On or after September 19, 2008, we, at our option, upon not less than 30 nor more than 60 days’ written notice, may redeem shares of the Series E Preferred Stock, in whole or in part, at any time or from time to time, for cash at a redemption price of $25.00 per share, plus all accrued and unpaid dividends thereon. We may not otherwise redeem the Series E Preferred Stock before September 19, 2008, except in order to preserve our status as a real estate investment trust. Dividends are payable quarterly. Total shares reserved for issuance of common stock related to the conversion of Series E Preferred Stock were 4,400,000 at December 31, 2003.In February 2004, we sold 4,000,000 shares of our Series F Preferred Stock in a registered direct placement. Dividends will be payable quarterly, beginning April 15, 2004. We may not
redeemable byredeem theCompanySeries F Preferred Stock prior toJanuary 1, 2001. TheFebruary 23, 2009, except as necessary to preserve our status as a real estate investment trust. On or after February 23, 2009, we may, at our option, redeem the Series F Preferred Stock, in whole or from time to time in part, for $25.00 per Series F Preferred Stock in cash plus any accrued and unpaid dividends to the date of redemption. We received $98,795,000 in net proceedswere usedand we will use approximately $96,500,000 of the proceeds torepay borrowingsredeem all remaining outstandingundershares of our Series A and Series B Preferred Stock.While outstanding, the
Company's linesliquidation preferences ofcredit.the preferred stocks in the table above and our Series F Preferred Stock arepari passu. None have any voting rights, any stated maturity, nor are they subject to any sinking fund or mandatory redemption.Common Stock. During the year ended December 31,
1996, $2,160,000 of debentures converted into 130,908 shares of common stock. On March 15, 1996, the Company filed a shelf-registration statement with the Securities and Exchange Commission covering up to $125,000,000 of debt and equity securities to be sold from time to time in the future. The registration statement was declared effective on April 4, 1996. Pursuant to the shelf registration, the Company, in August 1996, completed the sale of $30,000,000 of 8.25% Convertible Subordinated Debentures due 2001. The debentures are convertible into shares of the Company's common stock at a price of $17.25 and are not redeemable by the Company. Net proceeds from the offering were used to repay short-term borrowings. During the year ended December 31, 1996, $35,000 of debentures converted into 2,028 shares of common stock. 49LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) OTHER LONG-TERM OBLIGATIONS The following information relates to other long-term obligations as of December 31:
1996 1995 ---------------- ---------------Mortgage loans payable, interest rates from 9.25% to 12.00%, maturing 2002 to 2006 $54,205,000 $16,707,000 Multi-family tax-exempt revenue bonds, variable interest (4.35% at 12/31/96), maturing at various dates to 2015 8,300,000 8,300,000 Obligations under capital leases, effective interest rates ---------------- ----------- from 7.49% to 7.92%, maturing at various dates to 2013 5,739,000 5,965,000 ----------- ----------- Totals $68,244,000 $30,972,000 =========== ===========In 1996, the Company provided non-recourse mortgage loans to three of its wholly owned subsidiaries and to certain newly formed limited partnerships in which the Company is a general partner totaling $31,525,000. During 1996, the Company acquired, through the newly formed limited partnerships, 16 skilled nursing facilities. These facilities were purchased subject to mortgage loans of approximately $9,641,000. Also during 1996, the Company paid off one of its outstanding mortgage loans totaling $3,331,000. Aggregate maturities of other long-term obligations, including capitalized leases, are as follows: $630,000 in 1997, $931,000 in 1998, $1,009,000 in 1999, $1,098,000 in 2000, $1,197,000 in 2001 and $63,379,000 thereafter. These obligations are secured by 31 long-term care facilities with a total net book value of $81,915,000. Five of the mortgage loans provide for annual increases in the interest rate in an amount equal to 10 basis points with the interest rates capped at 12%. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The following estimated fair value amounts have been determined using available market information and other valuation methods. However, considerable judgment is required to interpret market data and, therefore, the estimates presented below are not necessarily indicative of the amounts the Company could realize in a current market. Mortgage loans receivable are estimated by discounting future cash flow using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. At December 31, 1996 and 1995, the fair value of real estate mortgages amounted to approximately $189,483,000 and $166,758,000, respectively. The fair value of the Company's REMIC Certificates as of December 31, 1996 and 1995 was estimated at approximately $98,934,000 and $67,600,000, respectively, based upon expected cash flows discounted at a market interest rate, adjusted to reflect the inherent risk of prepayment and credit losses on an investment with similar duration. At December 31, 1996 and 1995, the September 1995 interest rate swap had an unrealized loss of $253,000 and an unrealized gain of $2,424,000, respectively. The November 1996 interest rate swap had an unrealized gain of $251,000, based on valuations from an investment bank. Based on the quoted market price of the Company's common stock and the conversion price of the convertible debentures, the fair value of the debentures was estimated at $159,365,000 at December 31, 1996 and $97,584,000 as of December 31, 1995. 50LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. STOCKHOLDERS' EQUITY REPURCHASE OF COMMON STOCK During 1996, the Company2003, we repurchased and retired120,000482,800 shares of common stock for an aggregate purchase price of approximately$1,831,000. OPTION PLAN$3,246,000, an average of $6.72 per share. TheCompany hasshares were purchased on the open market under a Board authorization to purchase up to 5,000,000 shares. Including these purchases, 2,348,200 shares have been purchased under this authorization. Therefore, we continue to have an open Board authorization to purchase an additional 2,651,800 shares.During 2002 and 2001 we repurchased and retired 338,200 and 7,588,196 shares of common stock, respectively, for an aggregate purchase price of $2,333,000 and $41,737,000, respectively. Of the shares repurchased in 2001, 6,060,996 were purchased pursuant to a tender offer for 6,000,000 shares, plus up to 2% of outstanding shares as allowed by tender offer regulations, at $5.75 per share plus costs.
Subsequent to December 31, 2003, two of our limited partners exercised their conversion rights and exchanged their interests in five of our limited partnerships. In accordance with the partnership agreements, at our option, we issued 175,392 shares of our common stock. Since the market value of the common stock issued was greater than the book value of the partnership interests received, we will recognize in the first quarter of 2004 a $295,000 increase in the basis on the properties underlying the limited partnership interest acquired.
58
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Equity. Other equity consists of the following(amounts in thousands):
December 31, 2003 2002 Notes receivable from stockholders $ (2,792 ) $ (7,227 ) Unamortized balance on deferred compensation — (163 ) Accumulated comprehensive income 2,154 1,278 Total Other Equity $ (638 ) $ (6,112 ) Deferred compensation is the value of restricted stock awards granted to employees. See“Stock Based Compensation Plans”below.
Accumulated comprehensive income represents the net increase in fair market value over the carrying value of our available-for-sale securities.
Stock Based Compensation Plans.During 1998 we adopted and our stockholders approved the 1998 Equity Participation Plan under which 500,000 shares of common stock have been reserved for stock based compensation awards. The 1998 Equity Participation Plan and our Restated 1992 Stock Option Plan
(the "Plan"under which 500,000 shares of common stock were reserved (collectively “the Plans”)in whichprovide for the issuance of incentive and nonqualified stock options,may be granted as either incentive or nonqualified options. Incentive options may be granted only to officers and employees of the Company, while nonqualified options may be granted to directors, officers, consultants,restricted stock and otherkey persons who provide services to the Company. In 1995, the Plan was amended ("Amended and Restated Option Plan) to provide for issuance of restricted sharesstock based awards to officers, employees, non-employee directors andother key persons. Underconsultants. The terms of theAmended and Restated Plan,awards granted under the Plans are set by our compensation committee at its discretion; however, in the case of incentive stock options,vest over two to five years and are exercisable within seventhe term may not exceed 10 years from the date ofvesting. In general, each option shallgrant. Total shares available for grant under the Plans as of December 31, 2003, 2002 and 2001 were 53,176, 4,276 and 28,776, respectively. All options outstanding vest over five years from the original date of grant. Unexercised options expireonseven years after the datespecified in theof vesting.Nonqualified stock option
agreement, but not later than the tenth anniversary of the date on which the option was granted. The following summarizes transactions regarding the nonqualified optionsactivity for the years ended December 31,1994, 19952003, 2002 and1996:
Shares Option Price Per Share ($) ---------------- ------------------------------Outstanding at December 31, 1993 624,000 10.000 to 12.250 Granted 215,500 12.200 to 13.250 Exercised - Canceled - - ------- Outstanding at December 31, 1994 839,500 10.000 to 13.250 Granted 27,000 12.000 to 12.250 Exercised (2,000) 12.250 Canceled (3,000) 12.250 ------- Outstanding at December 31, 1995 861,500 10.000 to 13.250 Granted 18,000 15.125 Exercised (3,200) 12.000 to 12.250 Canceled (3,000) 12.250 ------- Outstanding at December 31, 1996 873,300 10.000 to 15.125 ======= Exercisable at December 31, 1994 170,500 10.000 to 12.250 Exercisable at December 31, 1995 272,333 10.000 to 13.250 Exercisable at December 31, 1996 436,466 10.000 to 13.250 Available2001, was as follows:
Shares Weighted Average Price 2003 2002 2001 2003 2002 2001 Outstanding, January 1 569,500 545,000 509,000 $ 5.63 $ 5.41 $ 5.74 Granted — 30,000 102,000 — $ 7.63 $ 5.29 Exercised (245,629 ) — — $ 5.40 — — Canceled (38,000 ) (5,500 ) (66,000 ) $ 5.61 $ 5.26 $ 7.73 Outstanding, December 31 285,871 569,500 545,000 $ 5.63 $ 5.53 $ 5.41 Exercisable, December 31 85,671 214,300 102,000 $ 5.59 $ 5.47 $ 5.55 Restricted stock activity for
grant at December 31, 1994 557,000 Available for grant at December 31, 1995 533,000 Available for grant at December 31, 1996 358,000In 1996,theCompany's Boardyears ended December 31, 2003, 2002 and 2001 was as follows:
2003 2002 2001 Outstanding, January 1 202,664 209,164 265,560 Granted — — — Vested (40,852 ) (6,500 ) (6,500 ) Canceled (10,900 ) — (49,896 ) Outstanding, December 31 150,912 202,664 209,164 Compensation Expense $ 132,000 $ 245,000 $ 24,000 All restricted stock outstanding at December 31, 2003, vests ratably over six years if we meet certain financial objectives and the grantee remains employed by us. If, in any given year, we do not meet the stated financial objectives then the shares scheduled to vest in that year will not vest and the vesting period will be extended by one year. Future compensation expense will be recognized over the service period at the market price per share on the date of
Directors approved the issuance of 160,000vesting. On January 1, 2003, 26,352 shares of restricted stockto certain employeesvested andnon-employee directors pursuant toduring theCompany's Amended and Restated Option Plan. The restricted shares will vest over five years, beginning January 1998. 51year 14,500 vested as a 59
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)— (Continued)result of an employee termination. Since the January 1, 2003, vesting was predicated on reaching certain financial targets at December 31, 2002, we recorded $180,000 compensation expense in 2002, which represented the number of shares vested multiplied by the closing stock price of $6.83 on January 2, 2003. Compensation expense of $132,000 was recognized in 2003 related to shares vesting ratably over five years. Of the $245,000 restricted stock compensation expense recognized in 2002, $180,000 related to shares vesting on January 1, 2003 as previously discussed and $65,000 related to shares vesting ratably over five years. Restricted stock compensation expense in 2001 of $24,000 related to shares vesting ratably over five years.
Dividends are payable on the restricted shares to the extent and on the same date as dividends are paid on all of
the Company'sour common stock.In 1996, the Company adopted the disclosure requirement provision of SFAS 123 in accounting for stock-based compensation issued to employees.As of December 31,
19962003, 2002, and1995,2001, there were44,000285,871, 569,500 and27,000545,000, options outstanding, respectively,that aresubject to the disclosure requirements of SFAS123 disclosure requirements.No. 123. The fair value of these options was estimated utilizing the Black-Scholes valuation modelusing the applicableand assumptions as of each respective grant date.The significant assumptions usedNo options were granted inthe Black-Scholes model include the expected life and volatility of the options and the risk-free interest rate at the grant date.2003. In determining the estimated fairvaluesvalue for the options granted in1996 and 1995,2002, the weighted average expected life assumption wassevenfive years,respectively,the weighted average volatilityassumptions used were 0.15was 0.49 and0.16, respectively, andthe weighted averagerisk-freerisk free interest rateassumptionwas6.6%, respectively. Based on the results of the estimates, the weighted-average3.80%. The weighted average fair value of the options granted was estimated to be$0.63$1.44. In determining the estimated fair value for the options granted in19962001, the weighted average expected life assumption was five years, the weighted average volatility was 0.49 and$0.62 in 1995. Management determined that therethe weighted average risk free interest rate was 4.48%. The weighted average fair value of the options granted was estimated to be $1.46. There was no material pro-forma effect onpro formanet income or earnings per share for the yearsendedending December 31,19962003, 2002, and1995.2001. The weighted average exercise price of the optionswere $13.55was $5.63, $5.46, and$12.45$5.34 and the weighted average remaining contractuallives were 7.7life was 1.6, 2.5, and8.33.4, years as of December 31,19962003, 2002, and1995,2001, respectively.FOUNDERS' STOCKDuring 2003 a total of 245,629 options were exercised at a total option value of $1,327,000 and a total market value as of the exercise dates of $1,772,000. Subsequent to December 31, 2003, a total of 23,200 options were exercised at a total option value of $125,000 and a total market value as of the exercise dates of $343,000.
Effective January 1, 2003, we adopted SFAS No. 148“Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123“Accounting for Stock-Based Compensation” to provide alternative methods of transition to SFAS No. 123’s fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28“Interim Financial Reporting” to require disclosure in the summary of significant accounting policies of the effects of an entity’s accounting policy for stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 provides three transition methods for entities that adopt the fair value recognition provisions of SFAS No. 123 for stock-based employee compensation. In
May 1992, prioraddition to thecompletionprospective method originally provided under SFAS No. 123, SFAS No. 148 provides for a modified prospective method and a retroactive restatement method. We have adopted the prospective method and therefore will recognize compensation expense related to all employee stock-based awards granted, modified or settled after January 1, 2003.Notes Receivable from Stockholders. In 1997, the Board of Directors adopted a loan program designed to encourage executives, key employees, consultants and directors to acquire common stock through the exercise of options. Under the program, we made full recourse, secured loans to participants equal to the exercise price of vested options plus up to 50% of the
initial public offering,taxable income resulting from theCompany issued 300,000exercise of options. Such loans bear interest at the then current Applicable Federal Rate (or AFR). In January 2000, the Board of Directors approved a new loan agreement (or New Agreement) for current executives and directors in the amounts of the then remaining principal balance of the original loans.The new loan agreements provided that the interest rate would be 6.07% (AFR for an equivalent 3 to 9 year instrument) and interest payments were to be paid from dividends received on shares pledged as security for the New Agreements during the quarter in which the interest is due. If the dividend does not fully pay the interest due or if no dividend is paid, the unpaid interest is added to the principal balance. In addition, the notes also require the borrower to reduce principal by one-half of the difference between the most recent dividend received on the pledged shares and the interest paid on the loans from that dividend. During the first quarter of 2003 and all of 2002, the difference between the dividend paid and the current interest due on the outstanding loan balances was added to the loan
60
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
balance in accordance with the loan agreements. No dividend was paid on our common shares in 2001 and all interest due on these loans was added to the principal balances.
During 2001, we granted a stock price adjustment of the loans to officers and Board Members with such loans. The loans were adjusted to the sum of the shares collateralizing the notes times the net book value (or NBV) of a share of common stock as of September 30, 2001. The NBV per share at that date was $8.60 and the closing price as reported by the NYSE was $5.13. This total adjustment amounted to a non-cash charge of $2,453,000. We accounted for the shares underlying the loans that were modified under variable plan accounting as required by SFAS No. 123“Accounting for Stock Based Compensation.”
During 2003, one officer loan was repaid in full and in February 2004 the two additional loans were paid in full. As a result, subsequent to the February 2004 payments, we have no outstanding loans to employees or Board members. The two loans paid in February 2004 were to two Board members who sold shares of our common stock to repay the loans.
At December 31, 2003 we had three notes due from two former officers and the estate of a former Board member. These notes were not modified in 2003, 2002 or 2001 and the interest is paid quarterly and is current on all of these notes. These remaining original notes provide for the same calculation of the periodic principal reductions; however, interest is payable every quarter, regardless of receipt of a dividend. The original notes converted to fully amortizing loans with 16 quarterly payments in 2002. We received $4,444,000 in principal repayments on all notes during 2003. The original notes bear interest rates ranging from 5.77% to 6.63%. In February 2004 one note due from a former officer was repaid in full.
We currently have no loan programs for officers and/or directors and do not provide any guarantee to any officer and/or director or third party relating to purchases and sales of our equity securities.
At December 31, 2003, 2002 and 2001, loans totaling $2,792,000, $7,227,000 and $8,042,000, respectively were outstanding. At December 31, 2003, 2002 and 2001, the market value of the common stock securing these loans was approximately $4,392,520, $5,168,000 and $4,972,000, respectively.
13. Commitments and Contingencies
It is our current policy and we intend to continue this policy that all borrowers of funds from us and lessees of any of our properties secure adequate comprehensive property and general and professional liability insurance that covers us as well as the borrower and/or lessee. Even though that is our policy, certain borrowers and lessees have been unable to obtain general and professional liability insurance because the cost of such insurance has increased substantially and some insurers have stopped offering such insurance for long term care facilities. Additionally, insurance companies have filed for bankruptcy protection leaving certain of our borrowers and/or lessees without coverage for periods that were believed to be covered prior to such bankruptcies. The unavailability and associated exposure as well as increased cost of such insurance could have a material adverse effect on the lessees and borrowers, including their ability to make lease or mortgage payments. Although we contend that as a non-possessory landlord we are not generally responsible for what takes place on real estate we do not possess, claims including general and professional liability claims, may still be asserted against us which may result in costs and exposure for which insurance is not available. Certain risks may be uninsurable, not economically insurable or insurance may not be available and there can be no assurance that we, a borrower or lessee will have adequate funds to cover all contingencies. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of our properties, we could be subject to an adverse claim including claims for general or professional liability, could lose the capital that we have invested in the properties, as well as the anticipated future revenue for the properties and, in the case of debt which is with recourse to us, we would remain obligated for any mortgage debt or other financial obligations related to the properties. Certain losses such as losses due to floods or seismic activity if insurance is available may be insured subject to certain
restrictionslimitations including large deductibles orforfeitures,co-payments and policy limits.At December 31, 2003, we had a contingent commitment to
the Foundersprovide Alterra $2,500,000 to be spent on improvements to properties we own and lease to Alterra. The money is to be spent over a three year period and will result in a rental rate increase equal to 10% of theCompany.amount funded. Themarket valueagreement also provides for an additional $2,500,00061
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
funding by us over the following three years to be spent on mutually agreed upon property expansion with a rental rate increase equal to 10% of
shares awarded (estimated at $5.00 per share) has been recorded as unearned stock grant compensation and has been recorded as a reduction in capital in excess of par value. The unearned compensation is being charged to expense over a vesting period ranging from two to five years. Fortheyears ended December 31, 1996, 1995 and 1994, the Company recorded an expense totaling $114,000, $221,000, and $372,000, respectively. 8. DISTRIBUTIONS The Companyamount funded. SeeNote 3. Major Operatorsfor further discussions.14. Distributions
We must distribute at least
95%90% ofitsour taxable income in order to continue to qualify as areal estate investment trust. Distributions in a givenREIT. This distribution requirement can be satisfied by current yearmay exceed the Company's earnings and profits due to non-cash expenses such as depreciation and amortization. Under special tax rules for real estate investment trusts, dividends declareddistributions or by distributions in thelast quarter of the calendar year and paid by January 31 of thefollowingyearyear.For federal tax purposes, distributions to stockholders are treated as
paid on December 31ordinary income, capital gains, return of capital or a combination thereof. Distributions for 2003 and 2002 were cash distributions. There were no distributions to common stockholders in 2001.The federal income tax classification of the
year declared. Distributionsper share common stock distributions arebroken down according to the following categories for(unaudited):
Year Ended 2003 2002 2001 Ordinary income $ — $ 0.379 $ — Non-taxable distribution 0.650 — — Section 1250 capital gain — 0.021 — Long term capital gain — — — Total $ 0.650 $ 0.400 $ — 15. Net (Loss) Income Per Share
Basic and diluted net income
tax purposes:
1996 1995 1994 ------------ ------------ ------------Ordinary income $1.228 $1.05 $1.10 Non-taxable distribution 0.107 .16 - ------ ----- ----- Total $1.335 $1.21 $1.10 ====== ===== =====52(loss) per share were as follows(in thousands except per share amounts):
For the year ended December 31, 2003 2002 2001 Net income (loss) $ 24,319 $ 31,803 $ (2,908 ) Preferred stock redemption (1,241 ) — — Preferred dividends (16,596 ) (15,042 ) (15,077 ) Net income (loss) for basic net income per share 6,482 16,761 (17,985 ) 7.75% debentures due 2002 — — — Other dilutive securities — — — Net income (loss) for diluted net income (loss) per share $ 6,482 $ 16,761 $ (17,985 ) Shares for basic net income per share 17,836 18,371 23,924 Stock options 139 143 — 7.75% debentures due 2002 — — — Other dilutive securities — — — Shares for diluted net income per share 17,975 18,514 23,924 Basic net income (loss) per share $ 0.36 $ 0.91 $ (0.75 ) Diluted net income (loss) per share $ 0.36 $ 0.91 $ (0.75 ) 62
LTC PROPERTIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED) 9. Transactions with Assisted Living Concepts, Inc. In 1996, the Company's Board of Directors authorized an increase in the Company's investment in assisted living facilities ("ALFs") from 10% to 20% of its adjusted gross real estate investment portfolio (adjusted to include the mortgage loans to third parties underlying the investment in REMIC Certificates). In addition, the Board of Directors also authorized an increase in the Company's investment in properties operated by Assisted Living Concepts, Inc. ("ALC"), an owner, operator— (Continued)16. Quarterly Financial Information (Unaudited)
For the quarter ended March 31, June 30, September 30, December 31, (in thousands except per share amounts) 2003Revenues(1) $ 15,860 $ 15,751 $ 15,920 $ 15,916 Net (loss) income from discontinued operations $ (24 ) $ 663 $ (185 ) $ 2,013 Net income available to common stockholders(2) $ 123 $ 2,624 $ 2,129 $ 1,606 Net (loss) income per common share from continuing operations net of preferred dividends: Basic $ 0.01 $ 0.11 $ 0.13 $ (0.02 ) Diluted $ 0.01 $ 0.11 $ 0.13 $ (0.02 ) Net income (loss) per common share from discontinued operations: Basic $ — $ 0.04 $ (0.01 ) $ 0.11 Diluted $ — $ 0.04 $ (0.01 ) $ 0.11 Net income (loss) per common share available to common stockholders: Basic $ 0.01 $ 0.15 $ 0.12 $ 0.09 Diluted $ 0.01 $ 0.15 $ 0.12 $ 0.09 Dividends per share $ 0.10 $ 0.15 $ 0.15 $ 0.25 2002Revenues(1) $ 16,973 $ 16,780 $ 17,306 $ 17,078 Net income (loss) from discontinued operations $ (80 ) $ 13,204 $ 232 $ 589 Net income available to common stockholders(3) $ 2,423 $ 10,601 $ 2,792 $ 945 Net income (loss) per common share from continuing operations net of preferred dividends: Basic $ 0.14 $ (0.14 ) $ 0.14 $ 0.02 Diluted $ 0.14 $ (0.14 ) $ 0.14 $ 0.02 Net income per common share from discontinued operations: Basic $ — $ 0.72 $ 0.01 $ 0.03 Diluted $ — $ 0.67 $ 0.01 $ 0.03 Net income per common share available to common stockholders: Basic $ 0.13 $ 0.58 $ 0.15 $ 0.05 Diluted $ 0.13 $ 0.55 $ 0.15 $ 0.05 Dividends per share $ 0.10 $ 0.10 $ 0.10 $ 0.10
(1) As required by SFAS No. 144, revenues related to properties sold in 2003 and 2002 have been reclassified to discontinued operations for all periods presented. (2) Includes impairment charges totaling $1,260.See Note 5. Impairment Charge for further discussion. (3) Includes impairment charges totaling $7,807.See Note 5. Impairment Charge for further discussion.
NOTE: Quarterly and year-to-date computations of per share amounts are made independently. Therefore, the sum of per share amounts for the quarters may not agree with the per share amounts for the year. Computations of per share amounts from continuing operations, discontinued operations and net income (loss) are made independently. Therefore, the sum of per share amounts from continuing operations and discontinued operations may not agree with the per share amounts from net income (loss) available to common stockholders. 63
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.
Item 9A. Controls and Procedures Disclosure Controls and
developer of ALFs whose securities are listed on the American Stock Exchange, from 5% to 10% of its adjusted gross real estate investment portfolio (which was approximately $626,516,000 as of December 31, 1996). Currently, two of the Company's executive officers serve as members of the Board of Directors of ALC. As of December 31, 1996, three executive officers of the Company own approximately 5.5% of ALC's common stock. The Company has discussed with its Board of Directors and anticipates increasing the percentage of its adjusted gross real estate investment portfolio that can be invested in ALFs and properties operated by ALC to 30% and 15%, respectively, during 1997. At December 31, 1996, the Company had investments in ALFs and properties operated by ALC of approximately 10.64% and 6.48%, respectively of the Company's total adjusted gross real estate investment portfolio. In July 1996, in connection with obtaining a $50,180,000 firm commitment to purchase assisted living facilities through sale leaseback transactions with ALC, the Company agreed to sell back four ALFs it acquired during 1996 in Texas to ALC for approximately $7,589,000. There was no gain or loss recognized on the sale, however, the Company received an administration fee of approximately $214,000 in conjunctionprocedures:Our management, with thesaleparticipation of our Chief Executive Officer and Chief Financial Officer, have evaluated thefour ALF facilities. In connection with the commitment, the Company entered into a one-year forward ten-year interest rate swap agreementeffectiveness of our disclosure controls and procedures (as such term is defined inNovember 1996 to hedge the firm commitment to purchase the assisted living facilities. The terms of the commitment provide for an initial lease term of twelve yearsRules 13a-15(e) andan lease rate of 9.90% on each facility acquired. The Company will finance this commitment with fixed rate financing, and as such, has utilized an interest rate swap to "lock-in" the rate at which such financing will be obtained. Interest rate swaps are contractual agreements between the Company and third parties to exchange fixed and floating interest payments periodically without the exchange of the underlying principal amounts (notional amounts). Under the November 1996 Agreement, the Company will be credited with interest at the three-month LIBOR and will incur interest at a fixed rate of 6.835% on a $40,000,000 notional amount beginning on November 7, 1997. The November 1996 Agreement will be terminated on or before November 7, 1998 which is the latest date on which the Company expects to fully fund the commitment and have long-term financing in place. At December 31, 1996, the Company had an unrealized gain of $251,00015d-15(e) under theNovember 1996 Agreement. 10. SUBSEQUENT EVENTS On January 15, 1997, the Company sold, through a public offering, 1,000,000 sharesSecurities and Exchange Act ofcommon stock at $17.75 per share. Of the total net proceeds, $17,300,000 was used to pay borrowings under the Company's unsecured line of credit. During January 1997, the Company provided mortgage loans totaling approximately $18,530,000 and acquired one skilled nursing facility for $2,556,000.1934, as amended (or Exchange Act”). As ofFebruary 1, 1997, the Company had outstanding investment commitments totaling $82,790,000, consisting of approximately $22,650,000 in commitments to make mortgage loans and commitments for the acquisition of one nursing and 25 53LTC PROPERTIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) assisted living facilities for an aggregate purchase price of approximately $60,140,000, including the remaining $35,330,000 commitment to Assisted Living Concepts, Inc. discussed in Note 8. The Company expects to fund substantially all of these commitments bythe end of1997. During January 1997, an additional $26,358,000 in principal amount of debentures converted into 1,614,153 sharesthe period covered by this report based on such evaluation our Chief Executive Officer and Chief Financial Officer have concluded that, as of theCompany's common stock. 11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.In the fourth quarter of 2003, we engaged IC Consulting Services, LLC, an independent risk consulting and internal audit firm, to assist us in evaluating and documenting our controls and procedures.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The
following quarterly financial data summarizes the unaudited quarterly results for the years ended December 31, 1996 and 1995:
QUARTER ENDED (RESTATED) --------------------------------------------------------------------------------- March 31 June 30 September 30 DECEMBER 31 --------------- -------------- -------------------- -------------------- 1996 (In thousands, except per share amounts) - ----Revenues $12,363 $12,920 $14,292 $15,355 Net income 11,831 4,906 5,636 6,337 Net income per share 0.63 0.26 0.29 0.32 Dividends per share 0.315 0.34 0.34 0.34
QUARTER ENDED (1) --------------------------------------------------------------------------------- 1995 March 31 June 30 September 30 DECEMBER 31 - ---- -------------------- ------------ -------------------- --------------------(In thousands, except per share amounts) Revenues $7,505 $8,560 $9,232 $10,272 Net income 4,718 5,199 4,971 5,152 Net income per share 0.26 0.29 0.27 0.28 Dividends per share 0.29 0.29 0.315 0.315(1) The Company has restated its results of operations for the year ended December 31, 1995 (See Note 1) which reflects a revisioninformation with respect to directors, set forth inreported net incomeour Proxy Statement relating to$18,384,000 from the previously reported amount of $20,040,000. Earnings per share has been revised to $1.01 per share from $1.10 per share. The quarterly information presented above for 1995 has not been revised to reflect the restatement because the quarterly data necessary to reflect the restatement is not available. 54ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Incorporated herein by reference from the Company's definitive proxy statement forthe Annual Meeting of Stockholders to be held May19,18, 2004 under the caption “Election of Directors” is incorporated herein by reference. Our executive officers are:
Name Age Position Andre C. Dimitriadis 63 Chairman, Chief Executive Officer, President and Director Wendy L. Simpson 54 Vice Chairman, Chief Financial Officer and Director Christopher T. Ishikawa 40 Executive Vice President and Chief Investment Officer Alex J. Chavez 39 Senior Vice President and Treasurer Andre C. Dimitriadis founded LTC Properties in 1992 and has been our Chairman and Chief Executive Officer since inception. In 2000 Mr. Dimitriadis also assumed the position of President. Mr. Dimitriadis is a director of Assisted Living Concepts, Inc.
Wendy L. Simpson has been Vice Chairman since April 2000 and Vice Chairman and Chief Financial Officer since July 2000. Prior to that she was a financial advisor to Coram Healthcare Corporation, a health care organization, from November 1999 through March 31, 2000. Ms. Simpson joined Coram as Executive Vice President and Chief Financial Officer in March 1998 and resigned in November 1999. Prior to joining Coram, Ms. Simpson was Executive Vice President, Chief Financial Officer, Chief Operating Officer and director of Transitional Hospitals Corporation from December 1994 to August 1997 and Senior Vice President and Chief Financial Officer from July 1994 to December 1994. Coram Healthcare commenced bankruptcy proceedings in August 2000. Ms. Simpson has been a director since 1995.
Christopher T. Ishikawa has served as Executive Vice President and Chief Investment Officer since February 2001. Mr. Ishikawa served as Senior Vice President and Chief Investment Officer from September 1997 through January 2001 and prior to that, he served as Vice President and Treasurer of LTC Properties since April 1995.
Alex J. Chavez has served as Senior Vice President and Treasurer since February 2001 and Vice President and Treasurer since December 1999. Prior to that, he served as Director of Finance since June 1996 and became Vice President in September 1997. Prior to joining LTC, he was employed by the international accounting firm of Ernst & Young LLP, where he served as an Audit Manager specializing in the health care and real estate industries from 1990 to 1996.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics (or Code of Ethics) that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, as well as directors, officers and employees. The Code of Ethics is posted on our website(www.ltcproperties.com)
64
and is available in print free of charge to any stockholder who requests a copy. Interested parties may address a written request for a printed copy of the code of Ethics to: Investor Relations. LTC Properties, Inc., 22917 Pacific Coast Hwy. Suite 350, Malibu, California 90265. We intend to satisfy the disclosure requirement regarding any amendment to, or a waiver of, a provision of the Code of Ethics for our principal executive officer, principal financial officer or controller, or persons performing similar functions by posting such information on our website.Section 16(a) Compliance
Information with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be
filed pursuant to Regulation 14A. ITEM 11. EXECUTIVE COMPENSATION Incorporatedheld on May 18, 2004 under the caption “Security Ownership of Certain Beneficial Owners and Management — Section 16(a) Beneficial Ownership Reporting Compliance,” is incorporated herein byreference fromreference.
Item 11. EXECUTIVE COMPENSATION Information relating to executive compensation, set forth in our Proxy Statement relating to the
Company's definitive proxy statement forAnnual Meeting of Stockholders to be held on May 18, 2004 under the caption “Executive Compensation,” is incorporated herein by reference. The Comparative Performance Graph and the Compensation Committee Report on Executive Compensation also included in the Proxy Statement are expressly not incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information relating to the security ownership of management and certain beneficial owners, set forth our Proxy Statement relating to the Annual Meeting of Stockholders to be held May
19, 1997, to be filed pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated18, 2004 under the caption “Security Ownership of Certain Beneficial Owners and Management,” is incorporated herein byreference fromreference.Information relating to securities authorized for issuance under our equity compensation plans, set forth in Item 5 of this report under the
Company's definitive proxy statement forcaption “Equity Compensation Plan Information,” is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to certain relationships and related transactions, set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May
19, 1997, to be filed pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated18, 2004 under the caption “Certain Relationships and Related Transactions,” is incorporated herein byreference fromreference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information relating to the
Company's definitive proxy statement forfees paid to our accountant, set forth in our Proxy Statement relating to the Annual Meeting of Stockholders to be held on May19, 1997, to be filed pursuant to Regulation 14A. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 118, 2004 under the caption “Audit Committee — Audit and2. Consolidated Financial Statements and ConsolidatedNon-Audit Fees,” is incorporated herein by reference.
Item 15. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K (a) Financial Statement Schedules
The
consolidated financial statements and consolidatedfinancial statement schedules listed in the accompanying index toconsolidated financial statements and consolidatedfinancial statement schedules are filed as part of this annual report.3.(b) Exhibits
The exhibits listed in the accompanying index to exhibits are filed as part of this annual report.
(b)(c) Reports on Form 8-K
A report on Form 8-K was filed on January 30, 1996 reporting the Company's financial results for the year ended December 31, 1995. 55None.
65
LTC PROPERTIES, INC.
INDEX TO FINANCIAL
STATEMENTS AND FINANCIALSTATEMENT SCHEDULES(ITEM 14(a)(Item 15(a))
Page ---------- 1. Financial Statements: --------------------Report of Independent Auditors.................................................... 31 Consolidated Balance Sheets at December 31, 1996 and 1995......................... 32 Consolidated Statements of Income for the years ended December 31, 1996, 33 1995 and 1994............................................................... Consolidated Statements of Stockholders' Equity for the years ended 34 December 31, 1996, 1995 and 1994............................................ Consolidated Statements of Cash Flows for the years ended December 31, 35 1996, 1995 and 1994.............................................................. Notes to Consolidated Financial Statements........................................ 36 2. Financial Statement Schedules: VIII.II. Valuation and Qualifying Accounts........................................ 58 XI.Accounts67 III. Real Estate and Accumulated Depreciation.................................... 59 XII.Depreciation68 IV. Mortgage Loans on Real Estate............................................... 62Estate73 All other schedules have been omitted since the required information is not present or not present in amounts sufficient to require submission of the schedule.
5666
LTC PROPERTIES, INC.
SCHEDULE
VIIIIIVALUATION AND QUALIFYING ACCOUNTS
December 31, 1996 (In(in thousands)
Additions Balance ---------------------------------- Balance at Beginning Charged to Charged to at end Description of period Operations other accounts Deductions of period --------------------------------------------------------------------------------------------------------------1994 Allowance for doubtful accounts $447 550 - - $997 ======== ======== ======== ======== ======== 1995 Allowance for doubtful accounts $997 - - - $997 ======== ======== ======== ======== ======== 1996 Allowance for doubtful accounts $997 3 - - $1,000 ======== ======== ======== ======== ========57
Balance at Charge to Balance at Beginning of Period Operations End of Period Allowance for Doubtful Accounts: 2003 $ 1,280 $ — $ 1,280 2002 $ 1,250 $ 30 $ 1,280 2001 $ 1,250 $ — $ 1,250 67
LTC PROPERTIES, INC.
SCHEDULE
XIIIIREAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
Initial Cost to Gross Amount at which Carried Company At Close of period ---------------------------- Cost Capitalized ----------------------------------------- Building and Subsequent to Building and Description Encumbrances Land Improvements Acquisition Land Improvements Total (1) - ------------- -------------------- ----------------------------------------------- -----------------------------------------Long-term care nursing facilities: Nursing Homes: Demopolis, AL $ 10,668,066.99 (3) $ 70,786 $ 2,141,276 $ - $ 70,786 $ 2,141,276 $ 2,212,062 Fort Payne, AL (3) 37,178 3,587,724 - 37,178 3,587,724 3,624,903 Jackson, AL (3) 63,641 2,620,000 - 63,641 2,620,000 2,683,640 Madison, AL (3) 30,083 2,327,808 - 30,083 2,327,808 2,357,891 Phoenix, AL (3) 59,089 2,122,670 - 59,089 2,122,670 2,181,760 Phoenix, AZ 7,797,583.12 431,750 6,764,084 - 431,750 6,764,084 7,195,834 Tucson, AZ 6,592,231.54 145,614 3,931,592 - 145,614 3,931,592 4,077,206 East Whittier, CA - 169,929 1,741,775 - 169,929 1,741,775 1,911,704 West Whittier, CA - 726,448 1,185,257 - 726,448 1,185,257 1,911,705 Yuba City, CA - 521,083 3,033,975 - 521,083 3,033,975 3,555,058 Bradenton, FL - 330,498 2,720,250 - 330,498 2,720,250 3,050,748 Clearwater, FL - 454,114 2,902,381 - 454,114 2,902,381 3,356,495 Crestview, FL - 140,000 2,305,979 - 140,000 2,305,979 2,445,979 San Destin, FL - 175,155 3,874,653 - 175,155 3,874,653 4,049,808 Gulf Breeze, FL - 600,000 6,020,146 - 600,000 6,020,146 6,620,146 Lecanto, FL - 350,795 2,664,455 2,251,990 350,795 4,916,445 5,267,240 Pensacola, FL - 190,000 4,295,297 - 190,000 4,295,297 4,485,297 Pensacola, FL 230,000 4,663,032 - 230,000 4,663,032 4,893,032 Starke, FL - 113,000 4,782,546 - 113,000 4,782,546 4,895,546 Chicago Heights, IL - 220,905 6,406,254 - 220,905 6,406,254 6,627,159 Alamagordo, NM - 314,215 3,567,268 - 314,215 3,567,268 3,881,483 Roswell, NM - 85,000 2,932,213 - 85,000 2,932,213 3,017,213 Great Falls, MT 4,335,297.45 397,217 3,433,391 397,217 3,433,391 3,830,608 Rusk, TX - 34,174 2,399,045 - 34,174 2,399,045 2,433,219 Chesapeake, VA - 372,667 3,298,218 372,667 3,298,218 3,670,885 Richmond, VA - 372,667 3,298,218 - 372,667 3,298,218 3,670,885 Tappahannock, VA - 372,667 3,298,218 - 372,667 3,298,218 3,670,885 Toppanish, WA 2,628,853 (4) 132,152 2,653,758 - 132,152 2,653,758 2,785,910 Vancouver, WA (4) 60,000 3,032,720 - 60,000 3,032,720 3,092,720 Jefferson, IA 10,554,832 (5) 36,272 1,932,778 - 36,272 1,932,778 1,969,050 Houston, TX 201,744 4,457,951 - 201,744 4,457,951 4,659,695 Houston, TX 361,655 3,771,839 - 361,655 3,771,839 4,133,493 Montgomery, AL 3,939,977 (6) 143,724 5,425,566 - 143,724 5,425,566 5,569,290 Carroll, IA (5) 60,016 1,020,271 - 60,016 1,020,271 1,080,287 Houston, TX 201,744 4,457,951 - 201,744 4,457,951 4,659,695 Woodbury, TN 100,000 2,900,000 - 100,000 2,900,000 3,000,000 Whiteright, TX 1,126,791 100,000 2,922,653 - 100,000 2,922,653 3,022,653 Granger, IA (5) 92,725 1,325,421 - 92,725 1,325,421 1,418,146 Bedford, TX (5) 344,683 3,195,303 - 344,683 3,195,303 3,539,985 Midland, TX 2,041,265 32,446 2,285,110 - 32,446 2,285,110 2,317,556 Tiptonville, TN 100,000 2,450,000 - 100,000 2,450,000 2,550,000 Gardendale, AL 83,660 6,316,340 - 83,660 6,316,340 6,400,000 Polk City, IA (5) 88,238 1,351,428 - 88,238 1,351,428 1,439,666
Accum. Orig. Construc- Deprec tion/renovation Date Description (2) (3) Date Acquired - ------------- ---------- ------------- ----------Long-term care nursing facilities: Nursing Homes: Demopolis, AL $112,246 1972 Jun. 1995 Fort Payne, AL 202,835 1967/1973 Jun. 1995 Jackson, AL 133,842 1964 Jun. 1995 Madison, AL 127,640 1964/1974 Jun. 1995 Phoenix, AL 119,802 1969 Jun. 1995 Phoenix, AZ 655,290 1985/1992 May 1994 Tucson, AZ 504,450 1985 Mar. 1993 East Whittier, CA 161,433 1964 Sep. 1994 West Whittier, CA 124,898 1964 Sep. 1994 Yuba City, CA 555,383 1970 Jan. 1993 Bradenton, FL 305,559 1989 Sep. 1993 Clearwater, FL 387,360 1965/1993 Sep. 1993 Crestview, FL 198,998 1988 Jun. 1994 San Destin, FL 262,305 1986 Feb. 1995 Gulf Breeze, FL 518,010 1984 Jun. 1994 Lecanto, FL 445,201 1988 Sep. 1993 Pensacola, FL 375,378 1972 Jun. 1994 Pensacola, FL 401,645 1991 Jun. 1994 Starke, FL 410,182 1989 Jun. 1994 Chicago Heights, IL 524,818 1988 Sep. 1994 Alamagordo, NM 485,440 1985 Mar. 1993 Roswell, NM 511,603 1979 Nov. 1992 Great Falls, MT 604,046 1960/1990 Dec. 1992 Rusk, TX 279,030 1969 Mar. 1994Accum. Orig. Construc- Deprec tion/renovation Date Description (2) (3) Date Acquired - ------------- ---------- ------------- ----------Chesapeake, VA 173,090 1977 Oct. 1995 Richmond, VA 173,090 1970/1975/1980 Oct. 1995 Tappahannock, VA 173,090 1977/1978 Oct. 1995 Toppanish, WA 146,429 1960/1970 Jun. 1995 Vancouver, WA 172,831 1952/1994 Jun. 1995 Jefferson, IA 64,105 1968/1972 Jan. 1996 Houston, TX 90,254 1961 Jun. 1996 Houston, TX 75,971 1964/1968 Jun. 1996 Montgomery, AL 183,761 1967/1974 Jan. 1996 Carroll, IA 35,324 1969 Jan. 1996 Houston, TX 79,880 1967 Jun. 1996 Woodbury, TN 62,200 1972/75/90 May 1996 Whiteright, TX 106,990 1962/64/65 Jan. 1996 Granger, IA 45,973 1979 Jan. 1996 Bedford, TX 114,291 1960 Jan. 1996 Midland, TX 82,770 1973 Feb. 1996 Tiptonville, TN 56,833 1975 May 1996 Gardendale, AL 121,781 1976/1984 May 1996 Polk City, IA 44,981 1976 Jan. 199658(in thousands)
Initial Cost to Gross Amount at which Carried at Company Costs December 31, 2003 Capitalized Construction/ Building and Subsequent Building and Accum. Renovation Acq. Encumbrances Land Improvements to Acquisition Land Improvements Total(1) Deprec.(2) Date Date Skilled Nursing Facilities: Alamogordo, NM $ 4,559 $ 210 $ 2,590 $ 3 $ 210 $ 2,593 $ 2,803 $ 143 1985 Dec-01 Altoona, IA (3) 105 2,309 186 105 2,495 2,600 655 1973 Jan-96 Atlanta, GA 4,525 (7) 175 1,282 3 175 1,285 1,460 259 1968 Sep-99 Atmore, AL (4) 131 2,877 — 131 2,877 3,008 766 1967/1974 Jan-96 Bedford, TX(13) (3) 283 511 404 283 915 1,198 706 1960/2002 Jan-96 Bradenton, FL — 330 2,720 87 330 2,807 3,137 897 1989/2002 Sep-93 Canyon, TX(13) — 196 506 211 196 717 913 166 1985/86 Jun-00 Carroll, IA (3) 47 1,033 95 47 1,128 1,175 285 1969 Jan-96 Chesapeake, VA — 388 3,469 8 388 3,477 3,865 1,127 1977/2002 Oct-95 Clovis, NM — 561 5,539 — 561 5,539 6,100 331 1970 Dec-01 Clovis, NM 2,744 598 5,902 — 598 5,902 6,500 352 1969/95 Dec-01 Coffeyville, KS(13) — 100 (100 ) — 100 (100 ) — — 1962 May-97 Des Moines, IA(13) — 115 2,096 1,308 115 3,404 3,519 542 1972 Sep-99 Dresden, TN — 31 1,529 123 31 1,652 1,683 190 1966/2002 Nov-00 Gardendale, AL — 84 6,316 — 84 6,316 6,400 1,572 1976/1984 May-96 Gardner, KS 5,300 (10) 896 4,478 316 896 4,794 5,690 632 1961/1974 Dec-99 Grapevine, TX — 431 1,449 100 431 1,549 1,980 121 Jan-02 Granger, IA (3) 62 1,356 80 62 1,436 1,498 369 1979 Jan-96 Griffin, GA — (7) 500 2,900 — 500 2,900 3,400 480 1969 Sep-99 Hereford, TX(13) — 106 (106 ) 2 106 (104 ) 2 2 1985 Oct-01 Holyoke, CO — 211 1,513 257 211 1,770 1,981 309 1963 Nov-00 Houston, TX 6,742 (6) 202 4,458 612 202 5,070 5,272 1,324 1961 Jun-96 Houston, TX 5,688 365 3,769 545 365 4,314 4,679 1,226 1964/1968 Jun-96 Houston, TX (6) 202 4,458 612 202 5,070 5,272 1,324 1967 Jun-96 Jefferson, IA 9,998 (3) 86 1,883 176 86 2,059 2,145 523 1968/1972 Jan-96 Jacksonville, FL 486 1,981 30 486 2,011 2,467 144 Mar-02 Jessup, GA — (10) 35 465 63 35 528 563 77 1953 Dec-99 Lecanto, FL — 351 2,665 2,251 351 4,916 5,267 1,430 1988 Sep-93 Manchester, TN — 50 954 87 50 1,041 1,091 157 1957/67/78/2002 Nov-00 Mesa, AZ — 305 6,909 1,695 305 8,604 8,909 1,975 1975/1996 Jun-96 Mesa, AZ(13) 420 3,258 36 420 3,294 3,714 739 1972 Oct-97 Midland, TX 1,934 33 2,285 — 33 2,285 2,318 644 1973 Feb-96 Montgomery, AL 3,587 (4) 242 5,327 — 242 5,327 5,569 1,418 1967/1974 Jan-96 Nacogdoches, TX — 100 1,738 74 100 1,812 1,912 418 1973 Oct-97 Norwalk, IA (3) 47 1,033 70 47 1,103 1,150 283 1975 Jan-96 Olathe, KS — 520 1,872 43 520 1,915 2,435 288 1968 Sep-99 Phoenix, AZ 6,951 300 9,703 50 300 9,753 10,053 1,185 1985 Aug-00 Polk City, IA (3) 63 1,376 41 63 1,417 1,480 369 1976 Jan-96 Portland, OR — 100 1,925 457 100 2,382 2,482 582 1956/1974 Jun-97 Richland Hills, TX — 144 1,656 181 144 1,837 1,981 106 1976 Dec-01 Richmond, VA — 356 3,180 300 356 3,480 3,836 1,053 1970/1975/ 1980/2002 Oct-95 Ripley, TN — 20 985 87 20 1,072 1,092 148 1951/2002 Nov-00 Roswell, NM 3,853 568 5,232 3 568 5,235 5,803 288 1975 Dec-01 Rusk, TX — 34 2,399 115 34 2,514 2,548 873 1969 Mar-94 Sacramento, CA — 220 2,929 — 220 2,929 3,149 774 1968 Feb-97 Salina, KS — 100 1,153 502 100 1,655 1,755 385 1985 May-97 Tappahannock, VA(13) — 375 1,327 65 375 1,392 1,767 847 1977/1978 Oct-95 Toppenish, WA — 67 2,719 — 67 2,719 2,786 811 1960/1970 Jun-95 Tucson, AZ 5,876 276 8,924 50 276 8,974 9,250 1,090 1985/92 Aug-00 Tucumcari, NM — 122 1,144 — 122 1,144 1,266 15 1976 Jun-03 Vancouver, WA 133 3,017 122 133 3,139 3,272 901 1952/1994 Jun-95 Whitewright, TX(13) 100 1,457 3 100 1,460 1,560 760 1962/1964/1965 Jan-96 Skilled Nursing Facilities 61,757 11,982 142,350 11,453 11,982 153,803 165,785 32,061 68
LTC PROPERTIES, INC.SCHEDULE
XIIIIREAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996
Initial Cost to Company ---------------------------------------- Cost Capitalized Building and Subsequent to Description Encumbrances Land Improvments Acquisition - ----------------------------- --------------- -----------------------------------------------------------Atmore, AL (6) 23,142 2,985,308 - Mesa, AZ 4,519,902 304,707 6,908,762 - Houston, TX 571,889 5,964,457 - Roberta, GA 100,000 2,400,000 - Norwalk, IA (5) 45,486 1,034,802 - Altoona, IA (5) 102,152 2,312,354 - ----------- ----------- ------------ ---------- Sub-total 54,204,799 10,295,110 163,422,497 2,251,990 ----------- ----------- ------------ ---------- Assisted-living facilities: Dodge City, KS 1,678,763 87,500 1,662,500 - Great Bend, KS 1,415,908 86,842 1,563,159 - McPherson, KS 1,231,666 75,000 1,575,000 - Salina, KS 1,413,023 71,739 1,578,261 - Longview, TX - 38,256 1,568,492 - Marshall, TX - 38,256 1,568,492 - Walla Walla, WA 8,300,000 (7) 100,000 1,940,000 - Greenville, TX 42,098 1,565,286 - Camas, WA (7) 100,000 2,175,000 - Grandview, WA (7) 100,000 1,940,000 - Vancouver, WA (7) 100,000 2,785,000 - Athens, TX 95,678 1,511,707 - Lufkin, TX 100,000 1,950,000 - Kennewick. WA (7) 100,000 1,940,000 - Gardendale, AL 16,340 1,233,660 - Jacksonville, TX 100,000 1,900,000 - Kelso, WA 100,000 2,500,000 - Battleground, WA 100,000 2,500,000 - Hayden, ID 100,000 2,450,000 - Klamath Falls, OR 100,000 2,300,000 - Newport, OR 100,000 2,050,000 - Tyler, TX 100,000 1,800,000 - Wichita Falls, TX 100,000 1,850,000 - Ada, OK 100,000 1,650,000 - ----------- ----------- ------------ ---------- Subtotal 14,039,359 2,051,709 45,556,557 - ----------- ----------- ------------ ---------- Grand total $68,244,158 $12,346,818 $208,979,053 $2,251,990 =========== =========== ============ ==========Gross Amount at which Carried At Close of Period -------------------------------------------- Accum. Orig. Construc- Building and Deprec tion/renovation Date Description Land Improvments Total (1) (2)(3) Date Acquired - ---------------------------- -------------------------------------------- ---------- --------------- ----------Atmore, AL 23,142 2,985,308 3,008,450 98,518 1967/1974 Jan. 1996 Mesa, AZ 304,707 6,908,762 7,213,468 110,103 1975/1996 Jun. 1996 Houston, TX 571,889 5,964,457 6,536,346 131,548 1967 Jun. 1996 Roberta, GA 100,000 2,400,000 2,500,000 53,333 1964 May 1996 Norwalk, IA 45,486 1,034,802 1,080,287 35,548 1975 Jan. 1996 Altoona, IA 102,152 2,312,354 2,414,509 75,619 1973 Jan. 1996 ----------- ------------ ------------ ----------- Sub-total 10,295,110 165,674,487 175,969,597 10,915,707 ----------- ------------ ------------ ----------- Assisted-living facilities: Dodge City, KS 87,500 1,662,500 1,750,000 49,896 1995 Dec. 1995 Great Bend, KS 86,842 1,563,158 1,650,000 46,921 1995 Dec. 1995 McPherson, KS 75,000 1,575,000 1,650,000 47,259 1994 Dec. 1995 Salina, KS 71,739 1,578,261 1,650,000 47,352 1994 Dec. 1995 Longview, TX 38,256 1,568,492 1,606,749 50,482 1995 Oct. 1995 Marshall, TX 38,256 1,568,492 1,606,748 50,482 1995 Oct. 1995 Walla Walla, WA 100,000 1,940,000 2,040,000 39,981 1996 Apr. 1996 Greenville, TX 42,098 1,565,286 1,607,384 43,192 1995 Jan. 1996 Camas, WA 100,000 2,175,000 2,275,000 34,524 1996 May 1996 Grandview, WA 100,000 1,940,000 2,040,000 44,424 1996 Mar. 1996 Vancouver, WA 100,000 2,785,000 2,885,000 44,043 1996 Jun. 1996 Athens, TX 95,678 1,511,707 1,607,384 41,435 1995 Jan. 1996 Lufkin, TX 100,000 1,950,000 2,050,000 40,169 1996 Apr. 1996 Kennewick. WA 100,000 1,940,000 2,040,000 48,866 1996 Feb. 1996 Gardendale, AL 16,340 1,233,660 1,250,000 23,786 1988 May 1996 Jacksonville, TX 100,000 1,900,000 2,000,000 44,003 1996 Mar. 1996 Kelso, WA 100,000 2,500,000 2,600,000 11,218 1996 Nov. 1996 Battleground, WA 100,000 2,500,000 2,600,000 5,609 1996 Nov. 1996 Hayden, ID 100,000 2,450,000 2,550,000 5,505 1996 Dec. 1996 Klamath Falls, OR 100,000 2,300,000 2,400,000 5,192 1996 Dec. 1996Gross Amount at which Carried At Close of Period -------------------------------------------- Accum. Orig. Construc- Building and Deprec tion/renovation Date Description Land Improvments Total (1) (2)(3) Date Acquired - ---------------------------- -------------------------------------------- ---------- --------------- ----------Newport, OR 100,000 2,050,000 2,150,000 0 1996 Dec. 1996 Tyler, TX 100,000 1,800,000 1,900,000 0 1996 Dec. 1996 Wichita Falls, TX 100,000 1,850,000 1,950,000 0 1996 Dec. 1996 Ada, OK 100,000 1,650,000 1,750,000 0 1996 Dec. 1996 ----------- ------------ ------------ ----------- Subtotal 2,051,709 45,556,557 47,608,266 724,339 ----------- ------------ ------------ ----------- Grand total $12,346,818 $211,231,043 $223,577,863 $11,640,046 =========== ============ ============ ===========59(in thousands)
�� Initial Cost to Gross Amount at which Carried at Company Costs December 31, 2003 Capitalized Construction/ Building and Subsequent Building and Accum. Renovation Acq. Encumbrances Land Improvements to Acquisition Land Improvements Total(1) Deprec.(2) Date Date Assisted Living Residences: Ada, OK — 100 1,650 — 100 1,650 1,750 324 1996 Dec-96 Arlington, OH (12) 629 6,973 — 629 6,973 7,602 381 1993 Dec-01 Arvada, CO 6,626 (8) 100 2,810 276 100 3,086 3,186 519 1997 Aug-97 Athens, TX — 96 1,510 1 96 1,511 1,607 332 1995 Jan-96 Bakersfield, CA 9,013 834 11,986 20 834 12,006 12,840 755 1998/2002 Dec-01 Battleground, WA — 100 2,500 — 100 2,500 2,600 479 1996 Nov-96 Beatrice, NE — 100 2,173 — 100 2,173 2,273 371 1997 Oct-97 Bexley, OH 15,938 (12) 306 4,196 — 306 4,196 4,502 229 1992 Dec-01 Bullhead City, AZ — 100 2,500 — 100 2,500 2,600 428 1997 Aug-97 Burley, ID — 100 2,200 — 100 2,200 2,300 381 1997 Sep-97 Caldwell, ID — 100 2,200 — 100 2,200 2,300 381 1997 Sep-97 Camas, WA (5) 100 2,175 — 100 2,175 2,275 447 1996 May-96 Central, SC — 100 2,321 — 100 2,321 2,421 280 1998 Mar-99 Cordele, GA — 153 1,455 82 153 1,537 1,690 211 1987/88/2002 Jul-00 Denison, IA — 100 2,713 — 100 2,713 2,813 401 1998 Jun-98 Dodge City, KS 1,208 84 1,666 — 84 1,666 1,750 397 1995 Dec-95 Durant, OK — 100 1,769 — 100 1,769 1,869 329 1997 Apr-97 Edmond, OK (9) 100 1,365 526 100 1,891 1,991 326 1996 Aug-97 Elkhart, IN — 100 2,435 — 100 2,435 2,535 396 1997 Dec-97 Erie, PA (11) 850 7,477 — 850 7,477 8,327 1,070 1998 Oct-99 Eugene, OR — 100 2,600 — 100 2,600 2,700 445 1997 Sep-97 Fremont,OH — 100 2,435 — 100 2,435 2,535 423 1997 Aug-97 Ft. Collins, CO — 100 2,961 — 100 2,961 3,061 387 1998 Mar-99 Ft. Collins, CO — 100 3,400 — 100 3,400 3,500 398 1999 Jul-99 Ft. Meyers, FL — 100 2,728 9 100 2,737 2,837 423 1998 Mar-98 Gardendale, AL — 16 1,234 — 16 1,234 1,250 307 1988 May-96 Goldsboro, NC — 100 2,385 1 100 2,386 2,486 261 1998 Mar-99 Grandview, WA (5) 100 1,940 — 100 1,940 2,040 415 1996 Mar-96 Great Bend, KS 1,008 80 1,570 17 80 1,587 1,667 380 1995 Dec-95 Greeley, CO — 100 2,310 270 100 2,580 2,680 443 1997 Aug-97 Greenville, NC — 100 2,478 2 100 2,480 2,580 315 1998 Mar-99 Greenville, TX — 42 1,565 — 42 1,565 1,607 343 1995 Jan-96 Greenwood, SC — 100 2,638 100 2,638 2,738 340 1998 Mar-99 Hayden, ID — 100 2,450 243 100 2,693 2,793 508 1996 Dec-96 Hoquiam, WA — 100 2,500 — 100 2,500 2,600 435 1997 Aug-97 Jacksonville, TX — 100 1,900 — 100 1,900 2,000 410 1996 Mar-96 Kelso, WA — 100 2,500 — 100 2,500 2,600 536 1996 Nov-96 Kennewick. WA (5) 100 1,940 — 100 1,940 2,040 419 1996 Feb-96 Klamath Falls, OR — 100 2,300 — 100 2,300 2,400 439 1996 Dec-96 Lake Havasu, AZ — 100 2,420 — 100 2,420 2,520 421 1997 Aug-97 Lakeland, FL — 519 2,313 82 519 2,395 2,914 342 1968/74/96/2002 Jul-00 Longmont, CO (8) 100 2,640 — 100 2,640 2,740 397 1998 Jun-98 Longview, TX — 38 1,568 1 38 1,569 1,607 350 1995 Oct-95 Loveland, CO (8) 100 2,865 270 100 3,135 3,235 519 1997 Sep-97 Lufkin, TX — 100 1,950 — 100 1,950 2,050 413 1996 Apr-96 Madison, IN — 100 2,435 — 100 2,435 2,535 412 1997 Oct-97 Marshall, TX — 38 1,568 451 38 2,019 2,057 435 1995 Oct-95 McPherson, KS 862 79 1,571 — 79 1,571 1,650 376 1994 Dec-95 Millville, NJ — 100 2,825 — 100 2,825 2,925 487 1997 Aug-97 Nampa, ID — 100 2,240 23 100 2,263 2,363 431 1997 Jan-97 New Bern, NC — 100 2,427 1 100 2,428 2,528 271 1998 Mar-99 Newark, OH — 100 2,435 — 100 2,435 2,535 412 1997 Oct-97 Newport Richey, FL — 100 5,845 296 100 6,140 6,241 1,066 1986/1995 Jan-98 69
LTC PROPERTIES, INC.SCHEDULE
XIIIIREAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1996 (1) The aggregate cost for federal income tax purposes. (2) Depreciation for building is calculated using a 35 year depreciation life for nursing facilities and 40 year life for assisted living facilities and additions to facilities (Lecanto, Florida). Depreciation for furniture and fixtures is calculated based on a 7- year life for all facilities. (3) This is a single note backed by five facilities(in
Alabama. (4) This is a singlethousands)
Initial Cost to Gross Amount at which Carried at Company Costs December 31, 2003 Capitalized Construction/ Building and Subsequent Building and Accum. Renovation Acq. Encumbrances Land Improvements to Acquisition Land Improvements Total(1) Deprec.(2) Date Date Newport, OR — 100 2,050 — 100 2,050 2,150 394 1996 Dec-96 Niceville, FL — 100 2,680 — 100 2,680 2,780 403 1998 Jun-98 Norfolk, NE — 100 2,123 — 100 2,123 2,223 378 1997 Jun-97 Portland, OR 3,961 100 7,622 359 100 7,981 8,081 1,112 1986/2002 Jun-98 Rio Rancho, NM — 100 8,300 40 100 8,340 8,440 1,232 1998 Mar-98 Rocky Mount, NC — 100 2,494 1 100 2,495 2,595 292 1998 Mar-99 Rocky River, OH 10,485 (11) 760 6,963 — 760 6,963 7,723 955 1998 Oct-99 Roseville, CA — 100 7,300 8 100 7,308 7,408 1,037 1998/2002 Jun-98 Salina, KS 1,006 79 1,571 — 79 1,571 1,650 376 1994 Dec-95 San Antonio, TX (9) 100 1,900 — 100 1,900 2,000 351 1997 May-97 San Antonio, TX (9) 100 2,055 — 100 2,055 2,155 372 1997 Jun-97 Shelby, NC — 100 2,805 2 100 2,807 2,907 420 1998 Jun-98 Spring Hill, FL — 100 2,650 — 100 2,650 2,750 398 1998 Jun-98 Springfield, OH — 100 2,035 270 100 2,305 2,405 393 1997 Aug-97 Sumter, SC — 100 2,351 — 100 2,351 2,451 293 1998 Mar-99 Tallahassee, FL — (9) 100 3,075 — 100 3,075 3,175 466 1998 Apr-98 Tiffin, OH — 100 2,435 — 100 2,435 2,535 423 1997 Aug-97 Troy, OH — 100 2,435 306 100 2,741 2,841 483 1997 May-97 Tulsa, OK (9) 200 1,650 — 200 1,650 1,850 317 1997 Feb-97 Tulsa, OK (9) 100 2,395 — 100 2,395 2,495 428 1997 Jun-97 Tucson, AZ — 100 8,700 8 100 8,708 8,808 1,230 1998/2002 Jun-98 Tyler, TX 10,996 (9) 100 1,800 — 100 1,800 1,900 351 1996 Dec-96 Vacaville, CA 8,500 1,662 11,634 19 1,662 11,653 13,315 743 1998/2002 Dec-01 Vancouver, WA (5) 100 2,785 — 100 2,785 2,885 571 1996 Jun-96 Waco, TX — 100 2,235 — 100 2,235 2,335 402 1997 Jun-97 Wahoo, NE — 100 2,318 — 100 2,318 2,418 405 1997 Jul-97 Walla Walla, WA 6,640 (5) 100 1,940 — 100 1,940 2,040 411 1996 Apr-96 Watauga, TX — 100 1,668 — 100 1,668 1,768 296 1996 Aug-97 Wetherford, OK — 100 1,669 592 100 2,261 2,361 384 1996 Aug-97 Wheelersburg, OH — 100 2,435 — 100 2,435 2,535 413 1997 Sep-97 Wichita Falls, TX — 100 1,850 — 100 1,850 1,950 359 1996 Dec-96 Wichita Falls, TX — 100 2,750 — 100 2,750 2,850 469 1997 Sep-97 Worthington, OH (12) — 6,102 — — 6,102 6,102 323 1993 Dec-01 Worthington, OH (12) — 3,402 — — 3,402 3,402 199 1995 Dec-01 York, NE — 100 2,318 — 100 2,318 2,418 405 1997 Aug-97 Assisted Living Residences 76,243 13,265 263,505 4,176 13,265 267,681 280,946 39,880 Schools Trenton, NJ — 100 6,000 3,170 100 9,170 9,270 1,435 1930/1998 Dec-98 Schools — 100 6,000 3,170 100 9,170 9,270 1,435 $ 138,000 $ 25,347 $ 411,855 $ 18,799 $ 25,347 $ 430,654 $ 456,001 $ 73,376
(1) The aggregate cost for federal income tax purposes. (2) Depreciation for building is calculated using a 35 year life for skilled nursing facilities and 40 year life for assisted living residences and additions to facilities. Depreciation for furniture and fixtures is calculated based on a 7 year life for all facilities. (3) Single note backed by six facilities in Iowa and one facility in Texas. (4) Single note backed by two facilities in Alabama. (5) Single note backed by five facilities in Washington. (6) Single note backed by two facilities in Texas. (7) Single note backed by two facilities in Georgia 70
LTC PROPERTIES, INC.SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in
Washington. (5) This is a single note backed by a total of seven facilities: Sixthousands)
(8) Single note backed by three facilities in Colorado (9) Single note backed by one facility in Florida, three facilities in Oklahoma, and three facilities in Texas
(10) Single note backed by one facility in Kansas and two facilities in Georgia (11) Single note backed by one facility in Ohio and one facility in Pennsylvania. (12) Single note backed by four facilities in Ohio. (13) An impairment charge totaling $9,643 was taken against 8 facilities based on our estimate of the excess carrying value over the fair value of assets to be held and used, and the carrying value over the fair value less cost to sell in instances where management has determined that the company will dispose of the property as required by Statement of Accounting Standard No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” 71
LTC PROPERTIES, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in
Iowa and one in Texas (6) This is a single note backed by two facilities in Alabama. (7) This is a single note backed by five facilities in Washington. (8) The activitiesthousands)Activity for the years ended December 31,
1994, 19952001, 2002 and1996 are2003 is as follows:
Real Estate Accumulated & Equipment Depreciation Balance at December 31, 2000 $ 468,498 $ 47,181 Additions 73,107 13,695 Conversion of mortgage loans into owned properties 3,899 — Impairment Charges (16,755 ) — Cost of real estate sold (32,625 ) (2,293 ) Balance at December 31, 2001(1) 496,124 58,583 Additions 2,893 14,197 Conversion of mortgage loans into owned properties 3,967 — Impairment Charges (1,710 ) — Cost of real estate sold (31,618 ) (8,464 ) Balance at December 31, 2002 $ 469,656 $ 64,316 Additions 2,075 12,711 Additions purchased form Center Healthcare, Inc. 1,612 72 Conversion of mortgage loans into owned properties — — Impairment Charges — — Cost of real estate sold (17,342 ) (3,723 ) Balance at December 31, 2003 $ 456,001 $ 73,376
Real Estate Accumulated & Equipment Depreciation ------------ ------------Beginning balance $ 28,560,689 $ 768,213 Additions during period - Additions 44,557,538 1,722,148 Deductions during period - Cost of real estate sold - - ------------ ----------- Balance at December 31, 1994 73,118,227 2,490,361 Additions during period - Additions 44,150,274 2,996,167 Deductions during period - Cost of real estate sold - - ------------ ----------- Balance at December 31, 1995 117,268,501 5,486,528 Additions during period - Additions 113,959,361 6,214,190 Deductions during period - Cost of real estate sold (7,650,000) (60,672) ------------ ----------- Balance at December 31, 1996 $223,577,862 $11,640,046 ============ ===========(1) Includes amounts classified as properties held for sale as required by SFAS No. 144. 6072
LTC PROPERTIES, INC.
SCHEDULE
XIIIVMORTGAGE LOANS ON REAL ESTATE
DECEMBER(dollars in thousands)
Principal Amount of Loans Current Carrying Subject to Number of Final Monthly Face Amount of Delinquent Interest Maturity Balloon Debt Amount of Mortgages Principal or State Properties Beds/Units Rate(1) Date Amount(2) Service Mortgages December 31, 2003 Interest CO 2 230 12.00 2007 $ 5,412 $ 64 $ 6,000 $ 5,661 — OH 1 150 10.89 2006 4,579 51 5,200 4,761 — CA 1 212 10.66 2018 — 35 3,500 3,137 — NE 1 47 11.91 2008 3,071 33 3,243 3,159 — FL 1 94 10.52 2007 2,879 31 3,290 3,065 — FL 1 191 12.25 2017 — 50 4,500 2,977 — NE 1 44 11.91 2008 2,875 31 3,036 2,957 — CA 1 151 10.40 2018 — 32 3,171 2,851 — NE 1 44 10.73 2008 2,343 26 2,700 2,517 — IA 1 44 11.91% 2009 2,273 24 2,400 2,342 — SD 1 34 11.91% 2009 2,221 24 2,346 2,291 — MT 1 34 12.15% 2013 2,078 24 2,346 2,284 — AZ 1 144 12.40% 2004 2,174 26 2,400 2,186 — Various 24 2,631 9.51%-12.55% 2003-2018 18,835 9,595 36,619 31,277 — 38 (3) 4,050 $ 48,740 $ 10,046 $ 80,751 $ 71,465 —
(1) Represents current stated interest rate. Generally, the loans have 25-year amortization with principal and interest payable at varying amounts over the life to maturity with annual interest adjustments through specified fixed rate increases effective either on the first anniversary or calendar year of the loan. (2) Balloon payment is due upon maturity, generally the 10th year of the loan, with various prepayment penalties (as defined in the loan agreement). (3) Includes 37 first-lien mortgage loans as follows:
# of Loans Original Loan Amounts 19 $247-$2,000 10 $2,001-$3,000 5 $3,001-$4,000 1 $4,001-$5,000 2 $5,001-$6,000 0 $6,001-$11,250 73
Activity for the years ended December 31,
19962001, 2002 and 2003 is as follows:
Balance at 2000 $ 107,399 (1) Conversion of notes to owned properties (3,288 ) Impairment charges (1,250 ) Collections of principal (9,250 ) Balance at 2001 93,611 Conversion of notes to owned properties (3,832 )(1) Conversion of other notes to mortgage notes 518 Impairment charges (1,600 ) Collections of principal (6,022 ) Balance at 2002 82,675 Acquisition of mortgage note 1,707 Impairment charges (31 ) Collections of principal (12,886 ) Balance at 2003 $ 71,465
Final Number(1) As required by SFAS No. 144, a mortgage loan of Number of Interest Maturity Balloon STATE Facilities Beds Rate (A) Date Amount (B) - --------- ---------- --------- ------------- -------- ------------Long-term care facilities: FL 2 251 10.750% Mar. 2006 $ 7,326,841 FL 1 180 9.158% Dec. 2006 6,212,944 MS 3 400 10.320% Oct. 2006 10,656,431 SC 5 509 11.700% Feb. 2003 11,118,772 Various (2) 73 7,920 9.75%-13.2% Jun. 1997 - 134,891,128 Oct. 2017 -------- -------- ----------- --------- ------------ 84 9,260 $170,206,116 ======== ======== ============Loan Subject Carrying Amount$1,500 that converted toDelinquent Current Face Amount of Mortgages at Principal Monthly STATE of Mortgages December 31, 1995 or Interest Debt Service - -------- ------------ ----------------- ------------- ------------Long-term care facilities: FL $ 8,200,000 $ 8,154,021 $ - 78,891.60 FL 7,200,000 7,200,000 - 61,203.05 MS 11,250,000 11,240,003 - 101,397.29 SC 11,250,000 11,229,957 - 113,127.66 Various (2) 141,790,842 140,437,709 1,666,420 1,379,781.10 ------------ --------------- ------------ ------------ $179,690,842 $ 178,261,690 (1)(3)(4) $ 1,666,420 1,734,401.00 ============ =============== ============ ============an owned property and was sold in 2002 has been reclassified to discontinued operations for all periods presented.(A) Represents current stated interest rate. Generally, the loans have 25-year amortization with principal and interest payable at varying amounts over the life to maturity with annual interest adjustments through specified fixed rate increases effective either on the first anniversary or calendar year of the loan. (B) Balloon payment is due upon maturity, principally on the 10th year of the loan, wtih various prepayment penalties (as defined in the loan agreement). (1) The aggregate cost for federal income tax purposes. (2) Includes 63 first-lien mortgage loans secured by skilled nursing facilities and assisted living facilities as follows:
No. of loans Original loan amounts:37 $ 305,000 - $2,000,000 12 $2,000,001 - $3,000,000 5 $3,000,001 - $4,000,000 5 $4,000,001 - $5,000,000 4 $5,000,001 - $5,861,0006174
LTC PROPERTIES, INC.
SCHEDULE XII MORTGAGE LOANS ON REAL ESTATE DECEMBER 31, 1996 The loans (each of which is less than 3% of the total carrying amount) are secured by properties located in Alabama, Arizona, Arkansas, California, Colorado, Florida, Georgia, Illinois, Iowa, Kansas, Louisiana, Missouri, Nebraska, Nevada, North Carolina, Ohio, Oklahoma, Oregon, Tennessee,Texas and Washington. (3) Mortgage loans on real estate reconciliation:
Balance at December 31, 1993 $ 78,499,874 Additions during period: New Mortgage loans 120,472,000 Deletions during period: Sales of notes to REMIC (127,639,788) Collections of principal (8,549,726) ------------- Balance at December 31, 1994 62,782,360 Additions during period: New Mortgage loans 101,907,720 Deletions during period: Collections of principal (2,633,765) ------------- Balance at December 31, 1995 $ 162,056,315 Additions during period: New Mortgage loans 130,964,857 Deletions during period: Sales of notes to REMIC (112,487,255) Collections of principal $ (2,272,227) ------------- Balance at December 31, 1996 178,261,690 =============4) None of the Company's mortgage loans have any prior liens. One mortgage loan with a principal amount of $1,666,420 is subject to delinquent principal of $11,095 and interest of $221,984 as of December 31, 1995. No loan has been renewed or extended. 5) The Company has established a general reserve totaling $1,000,000. No loan has been written off against this reserve. 62INDEX TO EXHIBITS
(Item 15(b))
Exhibit Number Description 3 .1 Amended and Restated Articles of Incorporation of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Current Report on Form 8-K dated June 19, 1997) 3 .2 Amended and Restated By-Laws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Form 10-Q for the quarter ended June 30, 1996) 3 .3 Articles Supplementary Classifying 3,080,000 shares of 9.5% Series A Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.’s Current Report on Form 8-K dated June 19, 1997) 3 .4 Articles of Amendment of LTC Properties, Inc. (incorporated by reference to Exhibit 3.3 to LTC Properties, Inc.’s Current Report on Form 8-K dated June 19, 1997) 3 .5 Articles Supplementary Classifying 2,000,000 Shares of 9.0% Series B Cumulative Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 2.5 to LTC Properties, Inc.’s Registration Statement on Form 8-A filed on December 15, 1997) 3 .6 Certificate of Amendment to Amended and Restated Bylaws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 3 .7 Articles Supplementary Classifying 2,000,000 Shares of 8.5% Series C Cumulative Convertible Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 3 .8 Articles Supplementary Classifying 40,000 shares of Series D Junior Participating Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 4.7 to LTC Properties, Inc.’s Registration Statement on Form 8-A filed on May 9, 2000) 3 .9 Articles Supplemental reclassifying 5,000,000 shares of Common Stock into Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.’s Registration Statement on Form S-3 filed June 27, 2003) 3 .10 Certificate of Amendment to Amended and Restated Bylaws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.10 to LTC Properties, Inc.’s Registration Statement on Form S-3, Amendment No. 2 filed August 29, 2003) 3 .11 Articles Supplementary Classifying 2,200,000 shares of 8.5% Series E Cumulative Convertible Preferred Stock of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.’s Registration Statement on Form 8-K filed September 16, 2003) 4 .1 Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee (incorporated by reference to Exhibit 4.2 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1994) 4 .2 Second Supplemental Indenture dated as of September 21, 1995 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $51,500,000 in principal amount of 8.5% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 10.17 to LTC Properties, Inc.’s Form 10-Q for the quarter ended September 30, 1995) 4 .3 Third Supplemental Indenture dated as of September 26, 1995 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 (incorporated by reference to Exhibit 10.19 to LTC Properties, Inc.’s Form 10-Q for the quarter ended September 30, 1995) 4 .4 Fourth Supplemental Indenture dated as of February 5, 1996 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $30,000,000 in principal amount of 7.75% Convertible Subordinated Debentures due 2002 (incorporated by reference to Exhibit 4.6 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1995) 4 .5 Fifth Supplemental Indenture dated as of August 23, 1996 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $30,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 4.5 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998) 75
LTC PROPERTIES, INC.INDEX TO EXHIBITS
(ITEM 12(A))
Exhibit NUMBER DESCRIPTION -----------3.1 Amended and Restated Articles of Incorporation of LTC Properties, Inc. (incorporated by reference to Exhibit 3.1 to Pre-Effective Amendment No. 4 to LTC Properties, Inc.'s Registration Statement on Form S-11 filed on August 7, 1992 (File No. 33-48085) 3.2 By-Laws of LTC Properties, Inc. (incorporated by reference to Exhibit 3.2 to LTC Properties, Inc.'s initial Registration Statement on Form S-11 filed on May 22, 1992 (File No. 33-48085) 3.3 Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.1 to LTC Properties, Inc.'s form 10-Q for the quarter ended June 30, 1996) 4.1 Indenture dated August 25, 1992 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to 9.75% Convertible Subordinated Debentures due 2004 (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1992) 4.2 Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee (incorporated by reference to Exhibit 4.2 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 4.3 First Supplemental Indenture dated as of September 23, 1994 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $30,000,000 in principal amount of 8.5% Convertible Subordinated Debentures due 2000 (incorporated by reference to Exhibit 4.3 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 4.4 Second Supplemental Indenture dated as of September 21, 1995 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $51,500,000 in principal amount of 8.5% Convertible Subordinated Debentures due 2001 (incorporated by reference to Exhibit 10.17 to LTC Properties, Inc.'s Form 10-Q for the quarter ended September 30, 1995) 4.5 Third Supplemental Indenture dated as of September 26, 1995 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 (incorporated by reference to Exhibit 10.19 to LTC Properties, Inc.'s Form 10-Q for the quarter ended September 30, 1995) 4.6 Fourth Supplemental Indenture dated as of February 5, 1996 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $30,000,000 in principal amount of 7.75% Convertible Subordinated Debentures due 2002 (incorporated by reference to Exhibit 4.6 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1995) 10.1 Employment contract with Andre C. Dimitriadis (incorporated by reference to Exhibit 10.2 to Pre-Effective Amendment No. 4 to LTC Properties, Inc.'s Registration Statement on Form S-11 filed on August 7, 1992 (File No. 33-48085) 10.2 Employment contract with William McBride III (incorporated by reference to Exhibit 10.3 to Pre-Effective Amendment No. 4 to LTC Properties, Inc.'s Registration Statement on Form S-11 filed on August 7, 1992 (File No. 33-48085) 10.3 1992 Stock Option Plan (incorporated by reference to Exhibit 10.4 to Post-Effective Amendment No. 4 to LTC Properties, Inc.'s Registration Statement on Form S-11 filed on August 7, 1992 (File No. 33-48085)63— Continued
Exhibit Number Description 4 .6 Sixth Supplemental Indenture dated as of December 30, 1998 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 (incorporated by reference to Exhibit 4.6 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998) 4 .7 Seventh Supplemental Indenture dated as of January 14, 1999 to Indenture dated September 23, 1994 between LTC Properties, Inc. and Harris Trust and Savings Bank, as trustee with respect to $10,000,000 in principal amount of 8.25% Convertible Subordinated Debentures due 1999 (incorporated by reference to Exhibit 4.7 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998) 4 .8 Rights Agreement dated as of May 2, 2000 (incorporated by reference to Exhibit 4.1 to LTC Properties, Inc.’s Registration Statement on Form 8-A filed on May 9, 2000) 10 .1 Pooling and Servicing Agreement, dated as of July 20, 1993, among LTC REMIC Corporation, as depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc., as Special Servicer and originator and Union Bank, as trustee (incorporated by reference to Exhibit 10.11 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1994) 10 .2 Pooling and Servicing Agreement, dated as of November 1, 1994, among LTC REMIC Corporation, as depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc., as Special Servicer and originator and Marine Midland Bank, as trustee (incorporated by reference to Exhibit 10.13 to LTC Properties, Inc.’s Form 10-K dated December 31, 1994) 10 .3 Amended Deferred Compensation Plan (incorporated by reference to Exhibit 10.17 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1995) 10 .4 Pooling and Servicing Agreement dated as of March 1, 1996, among LTC REMIC Corporation, as depositor, GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc., as Special Servicer and Originator, LaSalle National Bank, as Trustee and ABN AMRO Bank, N.V., as fiscal agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Form 10-Q for the quarter ended March 31, 1996) 10 .5 Amended and Restated 1992 Stock Option Plan (incorporated by reference to Exhibit 10.22 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1996) 10 .6 Subservicing Agreement dated as July 20, 1993 by and between Bankers Trust Company, as Master Servicer and LTC Properties, Inc., as Special Servicer (incorporated by reference to Exhibit 10.25 to LTC Properties, Inc.’s Form 10-K/A for the year ended December 31, 1996) 10 .7 Custodial Agreement dated as of July 20, 1993 by and among Union Bank, as Trustee, LTC REMIC Corporation, as Depositor, and Bankers Trust Company as Master Servicer and Custodian (incorporated by reference to Exhibit 10.26 to LTC Properties, Inc.’s Form 10-K/A for the year ended December 31, 1996) 10 .8 Form of Certificates as Exhibit as filed herewith to the Pooling and Servicing Agreement dated as of July 20, 1993 among LTC REMIC Corporation, as Depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and Union Bank as Trustee (incorporated by reference to Exhibit 10.11 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1994) 10 .9 Form of Certificates, Form of Custodial Agreement and Form of Subservicing Agreement as Exhibits as filed herewith to the Pooling and Servicing Agreement dated as of November 1, 1994 among LTC REMIC Corporation, as Depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and Marine Midland Bank as Trustee (incorporated by reference to Exhibit 10.13 to LTC Properties, Inc.’s Form 10-K for the year ended December 31, 1994) 10 .10 Form of Certificates, Form of Custodial Agreement and Form of Subservicing Agreement as Exhibits as filed herewith to the Pooling and Servicing Agreement dated as of March 1, 1996 among LTC REMIC Corporation, as Depositor, GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and LaSalle National Bank as Trustee and ABN AMRO Bank N.V., as Fiscal Agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Form 10-Q for the quarter ended March 31, 1996) 10 .11 Subservicing Agreement dated as of May 14, 1998, by and between GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc. as Subservicer (incorporated by reference to Exhibit 10.3 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 76
LTC PROPERTIES, INC.INDEX TO EXHIBITS
(CONTINUED)
EXHIBIT NUMBER DESCRIPTION -----------10.4 Master Repurchase Agreement dated May 14, 1993 between LTC Properties, Inc. and Goldman Sachs Mortgage Company (incorporated by reference to Exhibit 10.5 to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1993) 10.5 Purchase Agreement dated July 28, 1993 between LTC Properties, Inc., LTC REMIC Corporation and Goldman Sachs Mortgage Company (incorporated by reference to Exhibit 10.6 to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1993) 10.6 Master Repurchase Agreement dated December 15, 1993 between LTC Properties, Inc. and Goldman Sachs Mortgage Company (incorporated by reference to Exhibit 10.7 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.7 Amended and Restated 1992 Stock Option Plan (incorporated by reference to Exhibit 10.8 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.8 Revolving Credit Agreement dated as of January 18, 1995 among LTC Properties, Inc., the lenders named therein and Sanwa Bank California, as agent for such lenders (incorporated by reference to Exhibit 10.9 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.9 Transfer and Repurchase Agreement, dated as of July 20, 1993, between LTC Properties, Inc. and LTC REMIC Corporation (incorporated by reference to Exhibit 10.10 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.10 Pooling and Servicing Agreement, dated as of July 20, 1993, among LTC REMIC Corporation, as depositor, Bankers Trust Company, as master servicer, LTC Properties, Inc., as special servicer and originator and Union Bank, as trustee (incorporated by reference to Exhibit 10.11 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.11 Transfer and Repurchase Agreement, dated as of November 1, 1994, between LTC Properties, Inc. and LTC REMIC Corporation (incorporated by reference to Exhibit 10.12 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.12 Pooling and Servicing Agreement, dated as of November 1, 1994, among LTC REMIC Corporation, as depositor, Bankers Trust Company, as master servicer, LTC Properties, Inc., as special servicer and originator and Marine Midland Bank, as trustee (incorporated by reference to Exhibit 10.13 to LTC Properties, Inc.'s Form 10-K dated December 31, 1994) 10.13 Deferred Compensation Plan of LTC Properties, Inc. (incorporated by reference to Exhibit 10.14 to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1995) 10.14 Swap Agreement by and between Goldman Sachs Capital Markets, L.P., Goldman Sachs Group, L.P. and LTC Properties, Inc. dated May 23, 1995 (incorporated by reference to Exhibit 10.15 to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1995) 10.15 Swap Agreement by and between Goldman Sachs Capital Markets, L.P., Goldman Sachs Group, L.P. and LTC Properties, Inc. dated September 12, 1995 (incorporated by reference to Exhibit 10.16 to LTC Properties, Inc.'s Form 10-Q for the quarter ended September 30, 1995) 10.16 Amended and Restated Revolving Credit Agreement dated as of October 17, 1995 among LTC Properties, Inc., the lenders named therein and Sanwa Bank California, as agent for such lenders (incorporated by reference to Exhibit 10.19 to LTC Properties, Inc.'s Form 10-Q for the quarter ended September 30, 1995) 10.17 Amended Deferred Compensation Plan (incorporated by reference to Exhibit 10.17 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1995)64— Continued
Exhibit Number Description 10 .12 Pooling and Servicing Agreement dated as of April 20, 1998 among LTC REMIC IV Corporation, LaSalle National Bank and LTC Properties, Inc. (incorporated by reference to Exhibit 10.4 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10 .13 Distribution Agreement, dated as of September 30, 1998, by and between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.5 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10 .14 Intercompany Agreement, dated as of September 30, 1998, by and between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.7 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10 .15 Tax Sharing Agreement, dated as of September 30, 1998, by and between LTC Properties, Inc. and LTC Healthcare, Inc. (incorporated by reference to Exhibit 10.8 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1998) 10 .16 LTC Properties, Inc. 1998 Equity Participation Plan (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998) 10 .17 Second Amended and Restated Employment Agreement between Andre C. Dimitriadis and LTC Properties, Inc. dated March 26, 1999 (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998), as amended by Amendment No. 1 thereto dated June 23, 2000 10 .18 Amended and Restated Employment Agreement between James J. Pieczynski and LTC Properties, Inc. dated March 26, 1999 (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998), as superceded by Separation Agreement effective July 1, 2000 10 .19 Amended and Restated Employment Agreement between Christopher T. Ishikawa and LTC Properties, Inc. dated March 26, 1999 (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1998), as amended by Amendment No. 1 thereto dated June 23, 2000 10 .20 Amended and Restated Employment Agreement between Julia L. Kopta and LTC Properties, Inc. dated January 1, 2000 (incorporated by reference to Exhibit 10.33 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 1999), as amended by Amendment No. 1 thereto dated June 23, 2000 10 .21 Amended and Restated Employment Agreement between Wendy L. Simpson and LTC Properties, Inc. dated April 10, 2000, as amended by Amendment No. 1 thereto dated June 23, 2000 (incorporated by reference to Exhibit 10.22 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000) 10 .22 Promissory Note dated January 1, 2000, executed by Andre C. Dimitriadis in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.23 to LTC Properties, Inc.’s Annual Report on Form 10-K for the 10 .23 year ended December 31, 2000) Promissory Note dated January 1, 2000, executed by James J. Pieczynski in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.24 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000) 10 .24 Promissory Note dated January 1, 2000, executed by Wendy L. Simpson in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.25 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000) 10 .25 Promissory Note dated January 1, 2000, executed by Christopher T. Ishikawa in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.26 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000) 10 .26 Promissory Note dated January 1, 2000, executed by Edmund C. King in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.27 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000) 10 .27 Promissory Note dated January 1, 2000, executed by Sam Yellen in favor of LTC Properties, Inc. (incorporated by reference to Exhibit 10.28 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000) 77
LTC PROPERTIES, INC.INDEX TO EXHIBITS
(CONTINUED)
EXHIBIT NUMBER DESCRIPTION -----------10.18 Pooling and Servicing Agreement dated as of March 1, 1996, among LTC REMIC Corporation, as depositor, GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc., as Special Servicer and Originator, LaSalle National Bank, as Trustee and ABN AMRO Bank, N.V., as fiscal agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Form 10-Q for the quarter ended March 31, 1996) 10.19 Transfer and Repurchase Agreement by and between LTC Properties, Inc. and LTC REMIC Corporation dated as of March 1, 1996 (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.'s Form 10-Q for the quarter ended March 31, 1996) 10.20 Second Amended and Restated Revolving Credit Agreement between LTC Properties, Inc. and Sanwa Bank California, as agent, dated as of May 21, 1996 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1996) 10.21 Guarantee Agreement between Kansas-LTC Corporation, L-Tex GP, Inc., and L-Tex LP, Inc., Rusk-Tex, LP, Inc., Texas-LTC Limited Partnership, as guarantors, and Sanwa Bank California, as the agent, dated as of May 21, 1996 (incorporated by reference to LTC Properties, Inc.'s Form 10-Q for the quarter ended June 30, 1996) 10.22 Amended and Restated 1992 Stock Option Plan (incorporated by reference to Exhibit 10.22 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1996) 10.23 Swap Agreement by and between Goldman Sachs Capital Markets, L.P., Goldman Sachs Group, L.P. and LTC Properties, Inc. dated November 15, 1996 (incorporated by reference to Exhibit 10.23 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1996) 10.24 Swap Agreement by and between Goldman Sachs Capital Markets, L.P., Goldman Sachs Group, L.P. and LTC Properties, Inc. dated February 11, 1997 (incorporated by reference to Exhibit 10.24 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1996) 10.25 Subservicing Agreement dated as July 20, 1993 by and between Bankers Trust Company, as Master Servicer and LTC Properties, Inc., as Special Servicer as filed herewith 10.26 Custodial Agreement dated as of July 20, 1993 by and among Union Bank, as Trustee, LTC REMIC Corporation, as Depositor, and Bankers Trust Company as Master Servicer and Custodian as filed herewith 10.27 Form of Certificates as Exhibit as filed herewith to the Pooling and Servicing Agreement dated as of July 20, 1993 among LTC REMIC Corporation, as Depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and Union Bank as Trustee (incorporated by reference to Exhibit 10.11 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.28 Purchase Agreement dated November 16, 1994 between LTC REMIC Corporation, LTC Properties, Inc. and Goldman Sachs & Co. as filed herewith 10.29 Form of Certificates, Form of Custodial Agreement and Form of Subservicing Agreement as Exhibits as filed herewith to the Pooling and Servicing Agreement dated as of November 1, 1994 among LTC REMIC Corporation, as Depositor, Bankers Trust Company, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and Marine Midland Bank as Trustee (incorporated by reference to Exhibit 10.13 to LTC Properties, Inc.'s Form 10-K for the year ended December 31, 1994) 10.30 Purchase Agreement dated March 27, 1996 between LTC REMIC Corporation, LTC Properties, Inc. and Goldman Sachs & Co. as filed herewith 10.31 Form of Certificates, Form of Custodial Agreement and Form of Subservicing Agreement as Exhibits as filed herewith to the Pooling and Servicing Agreement dated as of March 1, 1996 among LTC REMIC Corporation, as Depositor, GMAC Commercial Mortgage Corporation, as Master Servicer, LTC Properties, Inc. as Special Servicer and Originator and LaSalle National Bank as Trustee and ABN AMRO Bank N.V., as Fiscal Agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.'s Form 10-Q for the quarter ended March 31, 1996) 11.1 Computation of Net Income Per Share for the years ended December 31, 1996, 1995 and 1994 as filed herewith 21.1 List of Subsidiaries as filed herewith 23.1 Consent of Ernst & Young LLP with respect to the financial information of the Company as filed herewith 27 Financial Schedules as filed herewith65— Continued
Exhibit Number Description 10 .28 Senior Secured Revolving Credit Agreement dated October 31, 2000 (incorporated by reference to Exhibit 10.29 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2000) 10 .29 First Amendment to Revolving Credit Agreement dated March 23, 2001 (incorporated by reference to Exhibit 10 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001) 10 .30 Second Amendment to Revolving Credit Agreement dated May 29, 2001 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001) 10 .31 Secured Term Loan with Heller Healthcare Financial, Inc. dated June 29, 2001 (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001) 10 .32 Second Amended and Restated Promissory Note with LTC Healthcare, Inc. dated June 8, 2001 (incorporated by reference to Exhibit 10.3 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001) 10 .33 Security Agreement with LTC Healthcare, Inc. dated June 8, 2001 (incorporated by reference to Exhibit 10.4 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2001) 10 .34 Form of Individual Indemnity Agreements between LTC Properties and Andre Dimitriadis; Christopher Ishikawa; Julia Kopta; Wendy Simpson; Bary Bailey and Steven Stuart dated March 18, 2001 (incorporated by reference to Exhibit 10.34 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001) 10 .35 Employment Agreement between Alex J. Chavez and LTC Properties, Inc. dated September 4, 2001 (incorporated by reference to Exhibit 10.35 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001) 10 .36 Promissory Note between LTC Properties, Inc. and Healthcare Holdings, Inc. dated December 31, 2001 (incorporated by reference to Exhibit 10.36 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001) 10 .37 Security Agreement between LTC Properties, Inc. and Healthcare Holdings, Inc. dated December 31, 2001 (incorporated by reference to Exhibit 10.37 to LTC Properties, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001) 10 .38 Promissory Note dated January 30, 2002 between LTC Properties, Inc. and LTC-Fort Tucum, Inc. (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002) 10 .39 Security Agreement dated January 30, 2002 between LTC Properties, Inc. and LTC-Fort Tucum, Inc. (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002) 10 .40 Stock Purchase Agreement dated January 30, 2002 between LTC Properties, Inc. and LTC-Fort Tucum, Inc. (incorporated by reference to Exhibit 10.3 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2002) 10 .41 First Amendment to Second Amended and Restated Promissory Note dated October 1, 2002 between LTC Properties, Inc. and CLC Healthcare, Inc. (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002) 10 .42 Purchases, Warranties, Participation and Servicing Agreement dated August 1, 2002 between Beal Bank, SSB and LTC BBCO, Inc. (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002) 10 .43 Severance Agreement between LTC Properties, Inc. and Julia Kopta dated April 1, 2003 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003) 10 .44 Amended and Restated Promissory Note between LTC Properties, Inc. and Healthcare Holdings, Inc. dated July 9, 2003 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003) 78
LTC PROPERTIES, INC.INDEX TO EXHIBITS — Continued
Exhibit Number Description 10 .45 Amended and Restated Security Agreement between LTC Properties, Inc. and Healthcare Holdings, Inc. dated July 9, 2003 (incorporated by reference to Exhibit 10.2 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003) 10 .46 Second Amendment to Second Amended and Restated Promissory Note between LTC Properties, Inc. and CLC Healthcare, Inc. dated September 30, 2003 (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003) 10 .47 Credit Agreement dated as of December 26, 2003 among LTC Properties, Inc. and Bank of Montreal, Chicago Branch, as Administrative Agent, Harris Nesbitt Corp. as Co-Lead Arranger and Book Manager and Key Corporate Capital, Inc. as Co-Lead Arranger and Syndication Agent (incorporated by reference to Exhibit 10.1 to LTC Properties, Inc.’s Current Report on Form 8-K dated January 26, 2004) 21 .1 List of subsidiaries 23 .1 Consent of Ernst & Young LLP with respect to the financial information of the Company 31 .1 Certification of the Chief Executive Officer of LTC Properties, Inc. pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) 31 .2 Certification of the Chief Financial Officer of LTC Properties, Inc. pursuant to Rule 13a-14 of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) 32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of 2002 (furnished herewith). 79
LTC PROPERTIES, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
LTC Properties, Inc. Registrant
LTC Properties, Inc. Registrant Dated:
December 6, 1997 By: /s/ JAMES J. PIECZYNSKI --------------------------- JAMES J. PIECZYNSKI President and Chief FinancialMarch 12, 2004
By: /s/ WENDY L. SIMPSON
WENDY L. SIMPSON Vice Chairman, Chief Financial Officer and Director
/s//s/ ANDRE C. DIMITRIADIS
ANDRE C. DIMITRIADISChairman of the Board, Chief Executive December 6, 1997 - ----------------------------------------Officer and DirectorANDRE C. DIMITRIADIS /s/ NEAL M. ELLIOTTMarch 12, 2004 /s/ WENDY L. SIMPSON
WENDY L. SIMPSONVice Chairman, Chief Financial Officer
and DirectorDecember 6, 1997 - ---------------------------------------- NEAL M. ELLIOTT /s/March 12, 2004 /s/ EDMUND C. KING - ----------------------------------------
EDMUND C. KINGDirector December 6, 1997 /s/ WENDY L. SIMPSON - ---------------------------------------- WENDY L. SIMPSONMarch 12, 2004 /s/ TIMOTHY J. TRICHE
TIMOTHY TRICHEDirector December 6, 1997 /s/March 12, 2004 /s/ SAM YELLEN - ----------------------------------------
SAM YELLENDirector December 6, 1997March 12, 2004 66
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