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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-8923
HEALTH CARE REIT, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 34-1096634
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE SEAGATE, SUITE 1500, TOLEDO, OHIO 43604
- ------------------------------------- -----
(Address of principal executive office) (Zip Code)
(Registrant's telephone number, including area code) (419) 247-2800
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- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of July 18, 2003, the registrant had 42,356,855 shares of common stock
outstanding.
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INDEX
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets - June 30, 2003 and December 31, 2002 ...................... 3
Consolidated Statements of Income - Three and six months ended June 30, 2003 and 2002 .. 4
Consolidated Statements of Stockholders' Equity - Six months ended June 30, 2003
and 2002 ........................................................................... 5
Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2002 ........ 6
Notes to Unaudited Consolidated Financial Statements ................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .. 12
Item 3. Quantitative and Qualitative Disclosure About Market Risk .............................. 15
Item 4. Controls and Procedures ................................................................ 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .................................... 16
Item 6. Exhibits and Reports on Form 8-K ....................................................... 17
SIGNATURES ...................................................................................... 18
CERTIFICATIONS .................................................................................. 19
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
HEALTH CARE REIT, INC. AND SUBSIDIARIES
JUNE 30 DECEMBER 31
2003 2002
(UNAUDITED) (NOTE)
----------- -----------
ASSETS (IN THOUSANDS)
Real estate investments:
Real property owned
Land $ 131,905 $ 112,044
Buildings & improvements 1,431,662 1,288,520
Construction in progress 35,151 19,833
----------- -----------
1,598,718 1,420,397
Less accumulated depreciation (137,029) (113,579)
----------- -----------
Total real property owned 1,461,689 1,306,818
Loans receivable
Real property loans 202,287 208,016
Subdebt investments 15,965 14,578
----------- -----------
218,252 222,594
Less allowance for losses on loans receivable (5,455) (4,955)
----------- -----------
212,797 217,639
----------- -----------
Net real estate investments 1,674,486 1,524,457
Other assets:
Equity investments 7,492 7,494
Deferred loan expenses 6,187 9,291
Cash and cash equivalents 7,953 9,550
Receivables and other assets 49,982 43,318
----------- -----------
71,614 69,653
----------- -----------
Total assets $ 1,746,100 $ 1,594,110
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Borrowings under unsecured lines of credit obligations $ 156,900 $ 109,500
Senior unsecured notes 615,000 515,000
Secured debt 61,608 51,831
Accrued expenses and other liabilities 17,282 20,547
----------- -----------
Total liabilities 850,790 696,878
Stockholders' equity:
Preferred stock 106,150 127,500
Common stock 41,360 40,086
Capital in excess of par value 821,897 790,838
Cumulative net income 618,855 580,496
Cumulative dividends (690,366) (638,085)
Accumulated other
comprehensive income 79 (170)
Other equity (2,665) (3,433)
----------- -----------
Total stockholders' equity 895,310 897,232
----------- -----------
Total liabilities and stockholders' equity $ 1,746,100 $ 1,594,110
=========== ===========
NOTE: The consolidated balance sheet at December 31, 2002 has been derived from
the audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements.
See notes to unaudited consolidated financial statements
3
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2003 2002 2003 2002
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Rental income $ 42,023 $ 31,528 $ 82,783 $ 60,267
Interest income 5,190 7,107 10,130 13,894
Commitment fees and other income 643 749 1,235 1,306
-------- -------- -------- --------
47,856 39,384 94,148 75,467
Expenses:
Interest expense 13,161 10,026 25,037 19,505
Provision for depreciation 11,856 9,261 23,508 17,554
General and administrative 2,847 2,285 5,457 4,546
Loan expense 680 580 1,315 1,157
Impairment of assets 550 550
Loss on extinguishment of debt 403 403
Provision for loan losses 250 250 500 500
-------- -------- -------- --------
28,794 23,355 55,817 44,215
-------- -------- -------- --------
Income from continuing operations 19,062 16,029 38,331 31,252
Discontinued operations:
Net gain (loss) on sales of properties 145 34 145
Income (loss) from discontinued operations, net 657 (6) 1,323
-------- -------- -------- --------
0 802 28 1,468
Net income 19,062 16,831 38,359 32,720
Preferred stock dividends 2,318 3,341 5,164 6,718
-------- -------- -------- --------
Net income available to common stockholders $ 16,744 $ 13,490 $ 33,195 $ 26,002
======== ======== ======== ========
Average number of common shares outstanding:
Basic 40,546 35,446 40,269 34,196
Diluted 41,136 36,223 40,822 34,954
Earnings per share:
Basic:
Income from continuing operations and
after preferred stock dividends $ 0.41 $ 0.36 $ 0.82 $ 0.72
Discontinued operations, net 0.02 0.04
-------- -------- -------- --------
Net income available to common stockholders $ 0.41 $ 0.38 $ 0.82 $ 0.76
Diluted:
Income from continuing operations and
after preferred stock dividends $ 0.41 $ 0.35 $ 0.81 $ 0.70
Discontinued operations, net 0.02 0.04
-------- -------- -------- --------
Net income available to common stockholders $ 0.41 $ 0.37 $ 0.81 $ 0.74
Dividends declared and paid per common share $ 0.585 $ 0.585 $ 1.17 $ 1.17
See notes to unaudited consolidated financial statements
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
SIX MONTHS ENDED JUNE 30, 2003
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ACCUMULATED
CAPITAL IN OTHER
PREFERRED COMMON EXCESS OF CUMULATIVE CUMULATIVE COMPREHENSIVE
STOCK STOCK PAR VALUE NET INCOME DIVIDENDS INCOME
------------------------------------------------------------------------------------
(IN THOUSANDS)
Balances at beginning of period $ 127,500 $ 40,086 $ 790,838 $ 580,496 $(638,085) $ (170)
Comprehensive income:
Net income 38,359
Other comprehensive income:
Unrealized gain (loss) on equity investments (11)
Foreign currency translation adjustment 260
Total comprehensive income
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures 441 10,542
Conversion of preferred stock (21,350) 833 20,517
Restricted stock amortization
Compensation expense related
to stock options
Cash dividends paid (52,281)
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Balances at end of period $ 106,150 $ 41,360 $ 821,897 $ 618,855 $(690,366) $ 79
====================================================================================
SIX MONTHS
ENDED JUNE 30, 2003
--------------------
Other
Equity Total
--------------------
(IN THOUSANDS)
Balances at beginning of period $ (3,433) $ 897,232
Comprehensive income:
Net income 38,359
Other comprehensive income:
Unrealized gain (loss) on equity investments (11)
Foreign currency translation adjustment 260
-----------
Total comprehensive income 38,608
-----------
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures 53 11,036
Conversion of preferred stock 0
Restricted stock amortization 593 593
Compensation expense related
to stock options 122 122
Cash dividends paid (52,281)
--------------------
Balances at end of period $ (2,665) $ 895,310
====================
SIX MONTHS ENDED JUNE 30, 2002
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ACCUMULATED
CAPITAL IN OTHER
PREFERRED COMMON EXCESS OF CUMULATIVE CUMULATIVE COMPREHENSIVE
STOCK STOCK PAR VALUE NET INCOME DIVIDENDS INCOME
-----------------------------------------------------------------------------------
(IN THOUSANDS)
Balances at beginning of period $ 150,000 $ 32,740 $ 608,942 $ 512,837 $(540,946) $ (923)
Comprehensive income:
Net income 32,720
Other comprehensive income:
Unrealized gain (loss) on equity investments (37)
Foreign currency translation adjustment 402
Total comprehensive income
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures 435 9,548
Proceeds from issuance of common shares 4,356 110,970
Conversion of preferred stock (15,000) 585 14,415
Restricted stock amortization
Cash dividends paid (45,723)
-----------------------------------------------------------------------------------
Balances at end of period $ 135,000 $ 38,116 $ 743,875 $ 545,557 $(586,669) $ (558)
===================================================================================
SIX MONTHS ENDED
JUNE 30, 2002
---------------------
OTHER
EQUITY TOTAL
---------------------
(In thousands)
Balances at beginning of period $ (4,780) $ 757,870
Comprehensive income:
Net income 32,720
Other comprehensive income:
Unrealized gain (loss) on equity investments (37)
Foreign currency translation adjustment 402
-----------
Total comprehensive income 33,085
-----------
Proceeds from issuance of common shares
from dividend reinvestment and stock
incentive plans, net of forfeitures (189) 9,794
Proceeds from issuance of common shares 115,326
Conversion of preferred stock 0
Restricted stock amortization 805 805
Cash dividends paid (45,723)
---------------------
Balances at end of period $ (4,164) $ 871,157
=====================
See notes to unaudited consolidated financial statements
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
HEALTH CARE REIT, INC. AND SUBSIDIARIES
SIX MONTHS ENDED
JUNE 30
2003 2002
--------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 38,359 $ 32,720
Adjustments to reconcile net income to
net cash provided from operating
activities:
Provision for depreciation 23,514 18,391
Amortization 1,924 1,961
Provision for loan losses 500 500
Impairment of assets 550
Commitment fees earned
greater than cash received (799)
Rental income in excess of
cash received (7,343) (4,531)
Equity in (earnings) losses of affiliated companies (162) 200
(Gain) loss on sales of properties (34) (145)
Increase (decrease) in accrued expenses and
other liabilities (3,265) (844)
Decrease (increase) in receivables and
other assets 744 (383)
--------- ---------
Net cash provided from (used in) operating activities 54,237 47,620
INVESTING ACTIVITIES
Investment in real property (152,215) (204,682)
Investment in loans receivable
and subdebt investments (35,430) (39,539)
Other investments, net of payments 414 (228)
Principal collected on loans receivable
and subdebt investments 27,339 32,664
Proceeds from sales of properties 289 2,011
Other (77) (58)
--------- ---------
Net cash provided from (used in) investing activities (159,680) (209,832)
FINANCING ACTIVITIES
Net increase (decrease) under unsecured
line of credit arrangements 47,400 99,000
Net increase (decrease) under secured
line of credit arrangements 31,000
Proceeds from issuance of senior notes 100,000
Principal payments on senior notes (40,000)
Principal payments on secured debt (4,204) (7,430)
Net proceeds from the issuance of common stock 11,036 125,120
Decrease (increase) in deferred loan expense 1,895 (325)
Cash distributions to stockholders (52,281) (45,723)
--------- ---------
Net cash provided from (used in) financing activities 103,846 161,642
--------- ---------
Increase (decrease) in cash and cash equivalents (1,597) (570)
Cash and cash equivalents at beginning of period 9,550 9,826
--------- ---------
Cash and cash equivalents at end of period $ 7,953 $ 9,256
========= =========
Supplemental cash flow information-interest paid $ 23,509 $ 21,026
========= =========
See notes to unaudited consolidated financial statements
6
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
HEALTH CARE REIT, INC. AND SUBSIDIARIES
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
for interim financial information and with instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered for a fair
presentation have been included. Operating results for the six months ended June
30, 2003 are not necessarily an indication of the results that may be expected
for the year ending December 31, 2003. For further information, refer to the
financial statements and footnotes thereto included in our annual report on Form
10-K for the year ended December 31, 2002.
NOTE B - REAL ESTATE INVESTMENTS
During the six months ended June 30, 2003, we invested $136,877,000 in real
property, provided permanent mortgage and loan financings of $31,297,000, made
construction advances of $15,338,000 and funded $4,133,000 of subdebt
investments. As of June 30, 2003, we had approximately $27,549,000 in unfunded
construction commitments. Also during the six months ended June 30, 2003, we
sold real property generating $289,000 of net proceeds and collected $27,339,000
and $414,000 as repayment of principal on loans receivable and subdebt
investments, respectively.
NOTE C - EQUITY INVESTMENTS
We have an investment in Atlantic Healthcare Finance L.P., a property group that
specializes in the financing, through sale and leaseback transactions, of
nursing and care homes located in the United Kingdom. This investment is
accounted for using the equity method of accounting because we have the ability
to exercise significant influence, but not control, over the investee due to our
31% ownership interest.
Other equity investments, which consist of investments in private and public
companies for which we do not have the ability to exercise influence, are
accounted for under the cost method. Under the cost method of accounting,
investments in private companies are carried at cost and are adjusted only for
other-than-temporary declines in fair value, distributions of earnings and
additional investments. For investments in public companies that have readily
determinable fair market values, we classify our equity investments as
available-for-sale and, accordingly, record these investments at their fair
market values with unrealized gains and losses included in accumulated other
comprehensive income, a separate component of stockholders' equity. These
investments represent a minimal ownership interest in these companies.
NOTE D - DISTRIBUTIONS PAID TO COMMON STOCKHOLDERS
On February 20, 2003, we paid a dividend of $0.585 per share to stockholders of
record on January 31, 2003. This dividend related to the period from October 1,
2002 through December 31, 2002.
On May 20, 2003, we paid a dividend of $0.585 per share to stockholders of
record on April 30, 2003. This dividend related to the period from January 1,
2003 through March 31, 2003.
7
NOTE E - DISCONTINUED OPERATIONS
In August 2001, the Financial Accounting Standards Board issued Statement No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, which is
effective for fiscal years beginning after December 15, 2001. We adopted the
standard effective January 1, 2002.
During the six months ended June 30, 2003, we sold one assisted living facility
with a carrying value of $110,000 for a net gain of $34,000. In accordance with
Statement No. 144, we have reclassified the income and expenses attributable to
all properties sold subsequent to January 1, 2002 to discontinued operations.
Expenses include an allocation of interest expense based on property carrying
values and our weighted average cost of debt. The following illustrates the
reclassification impact of Statement No. 144 as a result of classifying the
properties as discontinued operations (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------ ------------------
2003 2002 2003 2002
---- ------ ------ ------
Revenues
Rental income $ 0 $1,304 $ 0 $2,616
Expenses
Interest expense 264 1 526
Provision for depreciation 383 5 767
---- ------ ------ ------
Income (loss) from discontinued operations, net $ 0 $ 657 $ (6) $1,323
==== ====== ====== ======
NOTE F - CONTINGENT LIABILITIES
We have guaranteed the payment of industrial revenue bonds for one assisted
living facility, in the event that the present owner defaults upon its
obligations. In consideration for this guaranty, we receive and recognize fees
annually related to this agreement. This guaranty expires upon the repayment of
the industrial revenue bonds which currently mature in 2009. At June 30, 2003,
we were contingently liable for $3,195,000 under this guaranty.
In addition, we have an outstanding letter of credit issued to a bank, which
bank provided additional financing for a residential retirement community
project. We have also guaranteed the payment of certain loans made by the bank
on this project. The letter of credit currently matures in 2004 and the
guaranties expire upon the repayment of the loans, which currently mature in
2004. At June 30, 2003, obligations under these agreements for which we were
contingently liable aggregated approximately $4,650,000.
As of June 30, 2003, we had approximately $27,549,000 of unfunded construction
commitments.
On November 20, 2002, Doctors Community Health Care Corporation and five
subsidiaries filed for Chapter 11 bankruptcy protection. Doctors has stated that
the bankruptcy filing was due to the bankruptcy of National Century Financial
Enterprises and affiliates, who halted payments to health care providers,
including Doctors. We have provided mortgage financing to Doctors in the form of
a loan secured by Pacifica Hospital of the Valley in Sun Valley, CA, a property
that is owned by one of the debtor subsidiaries. The outstanding principal
balance of the loan is approximately $18.8 million at June 30, 2003. Based upon
a recent appraisal and the historical performance of Pacifica Hospital, we
expect to receive payment in full before December 31, 2003, of the outstanding
principal and accrued interest, which we believe we are entitled to as an
oversecured creditor. Doctors did not make an interest payment for the six
months ended June 30, 2003. As previously announced, we do not currently intend
to recognize any interest on the loan if payment is not received.
Alterra Healthcare Corporation filed for Chapter 11 bankruptcy protection on
January 23, 2003. We have a master lease with Alterra for 45 assisted living
facilities with a depreciated book value of $104.8 million at June 30, 2003.
Alterra has remained current on rental payments through July 2003. Alterra filed
its plan of reorganization and disclosure statement on March 27, 2003 and
indicated its intention to assume the master lease at current rental levels.
Based on Alterra's plan and disclosure statement, we expect confirmation by
September 30, 2003.
8
NOTE G - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
Numerator for basic and diluted earnings
per share - net income available to common
stockholders $16,744 $13,490 $33,195 $26,002
======= ======= ======= =======
Denominator for basic earnings per
share - weighted average shares 40,546 35,446 40,269 34,196
Effect of dilutive securities:
Employee stock options 366 522 329 503
Non-vested restricted shares 224 255 224 255
------- ------- ------- -------
Dilutive potential common shares 590 777 553 758
------- ------- ------- -------
Denominator for diluted earnings per
share - adjusted weighted average shares 41,136 36,223 40,822 34,954
======= ======= ======= =======
Basic earnings per share $ 0.41 $ 0.38 $ 0.82 $ 0.76
======= ======= ======= =======
Diluted earnings per share $ 0.41 $ 0.37 $ 0.81 $ 0.74
======= ======= ======= =======
The diluted earnings per share calculation excludes the dilutive effect of 0 and
50,000 shares for the three and six month periods ended June 30, 2003,
respectively, and 10,000 and 10,000 shares for the same periods in 2002, because
the exercise price was greater than the average market price. The Series C
Cumulative Convertible Preferred Stock was not included in this calculation as
the effect of the conversion was anti-dilutive.
NOTE H - OTHER EQUITY
Other equity consists of the following (in thousands):
JUNE 30
----------------------
2003 2002
------- -------
Accumulated compensation expense related
to stock options $ 122 $ 0
Unamortized restricted stock (2,787) (4,164)
------- -------
$(2,665) $(4,164)
======= =======
Unamortized restricted stock represents the unamortized value of restricted
stock granted to employees and directors. Expense, which is recognized as the
shares vest based on the market value at the date of the award, totaled $593,000
and $805,000 for the six months ended June 30, 2003 and June 30, 2002,
respectively.
In December 2002, the Financial Accounting Standards Board issued Statement No.
148, Accounting for Stock-Based Compensation - Transition and Disclosure, that
we are required to adopt for fiscal years beginning after December 15, 2002,
with transition provisions for certain matters. This Statement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
Statement amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. Effective January 1, 2003, we commenced
recognizing compensation expense in accordance with Statement 123 on a
prospective basis. Accumulated option compensation expense represents the amount
of amortized compensation costs related to stock options awarded to employees
and directors in 2003.
9
The following table illustrates the effect on net income available to common
stockholders if we had applied the fair value recognition provisions of
Statement No. 123 to stock-based compensation for options granted since 1995 but
prior to adoption at January 1, 2003 (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------- ---------------------
2003 2002 2003 2002
------- ------- ------- -------
Numerator:
Net income available to common
stockholders - as reported $16,744 $13,490 $33,195 $26,002
Deduct: Stock based employee
compensation expense determined
under fair value based method for
all awards 103 136 212 272
Net income available to common
------- ------- ------- -------
stockholders - pro forma $16,641 $13,354 $32,983 $25,730
======= ======= ======= =======
Denominator:
Basic weighted average shares -
as reported and pro forma 40,546 35,446 40,269 34,196
Effect of dilutive securities:
Employee stock options - pro forma 284 465 259 425
Non-vested restricted shares 224 255 224 255
------- ------- ------- -------
Dilutive potential common shares 508 720 483 680
Diluted weighted average shares -
------- ------- ------- -------
pro forma 41,054 36,166 40,752 34,876
======= ======= ======= =======
Net income available to common
stockholders per share - as reported
Basic $ 0.41 $ 0.38 $ 0.82 $ 0.76
Diluted 0.41 0.37 0.81 0.74
Net income available to common
stockholders per share - pro forma
Basic $ 0.41 $ 0.38 $ 0.82 $ 0.75
Diluted 0.41 0.37 0.81 0.74
NOTE I - ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income includes unrealized gains or losses on
our equity investments and foreign currency translation adjustments. These items
are included as components of stockholders' equity. Other comprehensive income
for the three and six months ended June 30, 2003 totaled $423,000 and $249,000,
respectively, and $437,000 and $365,000 for same periods in 2002.
10
NOTE J - SIGNIFICANT CHANGES AND EVENTS
In March 2003, we sold $100,000,000 of 8.0% unsecured senior notes, maturing in
September 2012, at an effective yield of 7.40%. These notes were an add-on to
the $150,000,000 senior unsecured notes sold in September 2002. The aggregate
principal amount of outstanding notes of this series is now $250,000,000.
On July 9, 2003, we closed on a public offering of 4,000,000 shares of 7.875%
Series D Cumulative Redeemable Preferred Stock, which generated net proceeds of
approximately $96,600,000. The shares have a liquidation value of $25 per share.
The preferred stock, which has no stated maturity, may be redeemed by us at par
on or after July 9, 2008. A portion of the proceeds from this offering were used
to redeem all 3,000,000 shares of our 8.875% Series B Cumulative Redeemable
Preferred Stock on July 15, 2003, at a redemption price of $25 per share plus
accrued and unpaid dividends.
In July 2003, we issued 1,583,100 shares of common stock, $1 par value, at a
price of $30.32 per share, which generated net proceeds of approximately
$47,950,000.
In July 2003, we issued 594,000 shares of common stock, $1 par value, under our
dividend reinvestment and stock purchase plan's waiver program, which generated
net proceeds of approximately $17,900,000.
The holder of our Series C Cumulative Convertible Preferred Stock converted
854,000 shares into 833,000 shares of common stock during the quarter ended June
30, 2003, and 300,000 shares into 293,000 shares of common stock in July 2003.
NOTE K - NEW ACCOUNTING POLICIES
In April 2002, the Financial Accounting Standards Board issued Statement
No. 145, Rescission of FASB Statements No. 4, 44, and 62, Amendment of FASB
Statement No. 13, and Technical Corrections. Statement 145 requires gains and
losses on extinguishments of debt to be classified as income or loss from
continuing operations rather than as extraordinary items as previously required
under Statement 4. Extraordinary treatment will be required for certain
extinguishments as provided in APB Opinion No. 30. Statement 145 is effective
for fiscal years beginning after December 15, 2002. We adopted the standard
effective January 1, 2003.
Effective January 1, 2003, we commenced recognizing compensation expense for
employee stock options in accordance with Statement 123 on a prospective basis.
See Note H.
In January 2003, the Financial Accounting Standards Board issued interpretation
No. 46, Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin No. 51 (the Interpretation). The Interpretation
requires the consolidation of variable interest entities in which an enterprise
absorbs a majority of the entity's expected losses, receives a majority of the
entity's expected residual returns, or both, as a result of ownership,
contractual or other financial interests in the entity. Currently, entities are
generally consolidated by an enterprise that has a controlling financial
interest through ownership of a majority voting interest in the entity. We are
currently evaluating the effects, if any, of the issuance of the Interpretation.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, our net real estate investments totaled approximately
$1,674,486,000 and included 166 assisted living facilities, 96 skilled nursing
facilities and eight specialty care facilities. Depending upon the availability
and cost of external capital, we anticipate making additional investments in
health care related facilities. New investments are funded from temporary
borrowings under our unsecured lines of credit arrangements, internally
generated cash and the proceeds derived from asset sales. Permanent financing
for future investments, which replaces funds drawn under the unsecured lines of
credit arrangements, is expected to be provided through a combination of public
and private offerings of debt and equity securities and the incurrence of
secured debt. We believe our liquidity and various sources of available capital
are sufficient to fund operations, meet debt service and dividend requirements
and finance future investments.
In March 2003, we sold $100,000,000 of 8.0% unsecured senior notes, maturing in
September 2012, at an effective yield of 7.40%. These notes were an add-on to
the $150,000,000 senior unsecured notes sold in September 2002. The aggregate
principal amount of outstanding notes of this series is now $250,000,000.
On July 9, 2003, we closed on a public offering of 4,000,000 shares of 7.875%
Series D Cumulative Redeemable Preferred Stock, which generated net proceeds of
approximately $96,600,000. The shares have a liquidation value of $25 per share.
The preferred stock, which has no stated maturity, may be redeemed by us at par
on or after July 9, 2008. A portion of the proceeds from this offering were used
to redeem all 3,000,000 shares of our 8.875% Series B Cumulative Redeemable
Preferred Stock on July 15, 2003, at a redemption price of $25 per share plus
accrued and unpaid dividends.
In July 2003, we issued 1,583,100 shares of common stock, $1 par value, at a
price of $30.32 per share, which generated net proceeds of approximately
$47,950,000.
In July 2003, we issued 594,000 shares of common stock, $1 par value, under our
dividend reinvestment and stock purchase plan's waiver program, which generated
net proceeds of approximately $17,900,000.
The holder of our Series C Cumulative Convertible Preferred Stock converted
854,000 shares into 833,000 shares of common stock during the quarter ended June
30, 2003, and 300,000 shares into 293,000 shares of common stock in July 2003.
As of June 30, 2003, we had stockholders' equity of $895,310,000 and a total
outstanding debt balance of $833,508,000, which represents a debt to total book
capitalization ratio of 0.48 to 1.0.
In May 2003, we announced the amendment and extension of our primary unsecured
revolving line of credit. The line of credit was expanded to $225,000,000,
expires in May 2006 (with the ability to extend for one year at our discretion
if we are in compliance with all covenants) and currently bears interest at the
lender's prime rate or LIBOR plus 1.3% at our option. Also in May 2003, we
repaid our $4,000,000 secured note and terminated this agreement. At the same
time, we increased our $25,000,000 unsecured line of credit to $30,000,000. It
bears interest at the lender's prime rate and expires in May 2004. Also, at June
30, 2003, we had a secured line of credit in the amount of $60,000,000 bearing
interest at the lender's prime rate or LIBOR plus 2.0%, at our option, with a
floor of 7.0% and which expires in April 2004. At June 30, 2003, we had
$156,900,000 in borrowings outstanding under the unsecured lines of credit
arrangements.
As of July 18, 2003, we had an effective shelf registration on file with the
Securities and Exchange Commission under which we may issue up to $137,557,819
of securities including debt securities, common and preferred stock and
warrants. Depending upon market conditions, we anticipate issuing securities
under our shelf registration to invest in additional health care facilities and
to repay borrowings under our unsecured lines of credit arrangements.
12
RESULTS OF OPERATIONS
Revenues were comprised of the following:
Three months ended Change Year to date through Change
---------------------------- -------------------- ---------------------------- --------------------
Jun. 30, 2003 Jun. 30, 2002 $ % Jun. 30, 2003 Jun. 30, 2002 $ %
------------- -------------- ----------- -------- ------------- -------------- ----------- --------
(in thousands)
Rental income $ 42,023 $ 31,528 $10,495 33% $ 82,783 $ 60,267 $22,516 37%
Interest income 5,190 7,107 (1,917) -27% 10,130 13,894 (3,764) -27%
Commitment fees
and other income 643 749 (106) -14% 1,235 1,306 (71) -5%
------------- -------------- ----------- -------- ------------- -------------- ----------- --------
Totals $ 47,856 $ 39,384 $ 8,472 22% $ 94,148 $ 75,467 $18,681 25%
============= ============== =========== ======== ============= ============== =========== ========
For the three and six months ended June 30, 2003, we generated increased rental
income as a result of the acquisition of properties for which we receive rent.
This offset a reduction in interest income due to the repayment of mortgage
loans.
Expenses were comprised of the following:
Three months ended Change Year to date through Change
---------------------------- -------------------- ---------------------------- --------------------
Jun. 30, 2003 Jun. 30, 2002 $ % Jun. 30, 2003 Jun. 30, 2002 $ %
------------- -------------- ----------- -------- ------------- -------------- ----------- --------
(in thousands)
Interest expense $ 13,161 $ 10,026 $ 3,135 31% $ 25,037 $ 19,505 $ 5,532 28%
Provision for
depreciation 11,856 9,261 2,595 28% 23,508 17,554 5,954 34%
General and
administrative 2,847 2,285 562 25% 5,457 4,546 911 20%
Loan expense 680 580 100 17% 1,315 1,157 158 14%
Impairment of assets 550 (550) n/a 550 (550) n/a
Loss on extinguishment
of debt 403 (403) n/a 403 (403) n/a
Provision for
loan losses 250 250 0 0% 500 500 0 0%
------------- -------------- ----------- -------- ------------- -------------- ----------- --------
Totals $ 28,794 $ 23,355 $ 5,439 23% $ 55,817 $ 44,215 $11,602 26%
============= ============== =========== ======== ============= ============== =========== ========
The increase in interest expense from 2002 to 2003 was primarily due to higher
average borrowings in 2003. This was partially offset by an increase in the
amount of capitalized interest offsetting interest expense.
We capitalize certain interest costs associated with funds used to finance the
construction of properties owned directly by us. The amount capitalized is based
upon the borrowings outstanding during the construction period using the rate of
interest that approximates our cost of financing. Our interest expense is
reduced by the amount capitalized. Capitalized interest for the three and six
months ended June 30, 2003 totaled $380,000 and $638,000, respectively, as
compared with none for the same periods in 2002.
The provision for depreciation increased primarily as a result of additional
investments in properties owned directly by us.
General and administrative expenses as a percentage of revenues (including
revenues from discontinued operations) for the three and six months ended June
30, 2003 were 5.95% and 5.79%, respectively, as compared with 5.63% and 5.83%
for the same periods in 2002.
The increase in loan expense was primarily due to the additional amortization of
costs related to the unsecured line of credit renewal and the unsecured senior
notes issued in 2002.
During the three months ended June 30, 2002, it was determined that the
projected undiscounted cash flows from a parcel of land did not exceed its
related net book value and an impairment charge of $550,000 was recorded to
reduce the property to its estimated fair market value. The estimated fair
market value of the property was determined by an offer to purchase received
from a third party.
In April 2002, we purchased $35,000,000 of our outstanding unsecured senior
notes that were due in 2003 and recorded a charge of $403,000 in connection with
this early extinguishment. Effective January 1, 2003, in accordance with FASB
13
Statement No. 145, we reclassified the loss on extinguishment of debt in 2002 to
income from continuing operations rather than as an extraordinary item as
previously required under FASB Statement No. 4.
Other items: Three months ended Change Year to date through Change
---------------------------- -------------------- ---------------------------- --------------------
Jun. 30, 2003 Jun. 30, 2002 $ % Jun. 30, 2003 Jun. 30, 2002 $ %
------------- -------------- ----------- -------- ------------- -------------- ----------- --------
(in thousands)
Gain (loss) on sales
of properties $ 0 $ 145 $ (145) n/a $ 34 $ 145 $ (111) -77%
Discontinued
operations, net 657 (657) n/a (6) 1,323 (1,329) -100%
Preferred dividends (2,318) (3,341) 1,023 -31% (5,164) (6,718) 1,554 -23%
------------- -------------- ----------- -------- ------------- -------------- ----------- --------
Totals $ (2,318) $ (2,539) $ 221 -9% $ (5,136) $ (5,250) $ 114 -2%
============= ============== =========== ======== ============= ============== =========== ========
During the six months ended June 30, 2003, we sold one property with a carrying
value of $110,000 for a gain of $34,000. This property generated a net loss of
$6,000 after deducting depreciation and interest expense from rental income for
the six months ended June 30, 2003. All properties sold from January 1, 2002
through June 30, 2003 generated $1,323,000 of income after deducting
depreciation and interest expense from rental income for the six months ended
June 30, 2002.
During the three months ended June 30, 2003, the holder of our Series C
Cumulative Convertible Preferred Stock converted 854,000 shares into 833,000
shares of common stock, leaving 1,246,000 shares outstanding at June 30, 2003 as
compared to 2,100,000 at June 30, 2002. The decrease in preferred dividends is
due to the reduction in outstanding preferred shares.
As a result of the various factors mentioned above, net income available to
common stockholders for the three and six months ended June 30, 2003 was
$16,744,000, or $0.41 per diluted share, and $33,195,000, or $0.81 per diluted
share, respectively, as compared with $13,490,000, or $0.37 per diluted share,
and $26,002,000, or $0.74 per diluted share, for the same periods in 2002.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
This report on Form 10-Q of the Company may contain "forward-looking" statements
as defined in the Private Securities Litigation Reform Act of 1995. These
forward-looking statements concern the possible expansion of our portfolio; the
performance of our operators and properties; our ability to enter into
agreements with new viable tenants for properties which we take back from
financially troubled tenants, if any; our ability to make distributions; our
policies and plans regarding investments, financings and other matters; our tax
status as a real estate investment trust; our ability to appropriately balance
the use of debt and equity; and our ability to access capital markets or other
sources of funds. When we use words such as "believe," "expect," "anticipate,"
or similar expressions, we are making forward-looking statements.
Forward-looking statements are not guarantees of future performance and involve
risks and uncertainties. Our expected results may not be achieved, and actual
results may differ materially from our expectations. This may be a result of
various factors, including, but not limited to: 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. Other
important factors are identified in our Annual Report on Form 10-K for the year
ended December 31, 2002, including factors identified under the headings
"Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Finally, we assume no obligation to update or revise any
forward-looking statements or to update the reasons why actual results could
differ from those projected in any forward-looking statements.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including the potential loss arising
from adverse changes in interest rates. We seek to mitigate the effects of
fluctuations in interest rates by matching the terms of new investments with new
long-term fixed rate borrowings to the extent possible. The following section is
presented to provide a discussion of the risks associated with potential
fluctuations in interest rates.
We historically borrow on our unsecured and secured lines of credit arrangements
to make acquisitions of, loans to or to construct health care facilities. Then,
as market conditions dictate, we will issue equity or long-term fixed rate debt
to repay the borrowings under the unsecured and secured lines of credit
arrangements.
A change in interest rates will not affect the interest expense associated with
our fixed rate debt. Interest rate changes, however, will affect the fair value
of our fixed rate debt. A 1% increase in interest rates would result in a
decrease in fair value of our senior unsecured notes by approximately $15
million at June 30, 2003 ($15 million at June 30, 2002). Changes in the interest
rate environment upon maturity of this fixed rate debt could have an effect on
our future cash flows and earnings, depending on whether the debt is replaced
with other fixed rate debt, variable rate debt, or equity or repaid by the sale
of assets.
Our variable rate debt, including our unsecured and secured lines of credit
arrangements, is reflected at fair value. At June 30, 2003, a 1% increase in
interest rates related to this variable rate debt (assuming no changes in
outstanding balances) would result in increased annual interest expense of
$1,569,000 ($990,000 at June 30, 2002).
We are subject to risks associated with debt financing, including the risk that
existing indebtedness may not be refinanced or that the terms of refinancing may
not be as favorable as the terms of current indebtedness. The majority of our
borrowings were completed under indentures or contractual agreements that limit
the amount of indebtedness we may incur. Accordingly, in the event that we are
unable to raise additional equity or borrow money because of these limitations,
our ability to acquire additional properties may be limited.
We may or may not elect to use financial derivative instruments to hedge
variable interest rate exposure. These decisions are principally based on our
policy to match our variable rate investments with comparable borrowings, but
are also based on the general trend in interest rates at the applicable dates
and our perception of the future volatility of interest rates.
ITEM 4. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing this Quarterly Report on Form 10-Q,
an evaluation was performed under the supervision and with the participation of
our management, including the chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on that evaluation, our chief executive officer
and chief financial officer concluded that our disclosure controls and
procedures were effective as of June 30, 2003, and the evaluation date. There
have been no significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our
evaluation.
15
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our annual meeting of stockholders was duly called and held on May 1, 2003 in
Toledo, Ohio. Proxies for the meeting were solicited on behalf of the Board of
Directors pursuant to Regulation 14A of the General Rules and Regulations of the
Commission. There was no solicitation in opposition to the Board's nominees for
election as directors as listed in the Proxy Statement, and all such nominees
were elected.
Votes were cast at the meeting upon the proposals described in the Proxy
Statement for the meeting (filed with the Commission pursuant to Regulation 14A
and incorporated herein by reference) as follows:
Proposal #1 - The election of three directors for a term of three years:
Nominee For Against
Pier C. Borra 38,312,377 591,516
George L. Chapman 38,134,391 769,502
Sharon M. Oster 37,020,633 1,883,260
Proposal #2 - An amendment to our Second Restated Certificate of
Incorporation to increase the number of authorized shares of common
stock from 75,000,000 to 125,000,000:
For 35,628,718
Against 2,950,039
Abstain 325,136
Proposal #4 - The ratification of the appointment of Ernst & Young LLP
as independent auditors for the fiscal year 2003:
For 36,719,321
Against 2,020,177
Abstain 164,395
With respect to Proposal #3, an amendment to our Second Restated Certificate of
Incorporation to increase the number of authorized shares of preferred stock
from 10,000,000 to 25,000,000, the annual meeting was adjourned until May 23,
2003 to give the proxy solicitors more time to solicit proxies directly from the
holders. The reconvened meeting was held on May 23, 2003, and votes were cast at
the meeting upon the proposal as follows:
For 24,013,347
Against 5,684,165
Abstain 419,461
</Table>
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
99.1 Certification pursuant to 18 U.S.C. Section 1350 by
Chief Executive Officer.
99.2 Certification pursuant to 18 U.S.C. Section 1350 by
Chief Financial Officer.
99.3 The Company issued a press release announcing the sale
of common stock and other capital activity.
(b) Reports on Form 8-K
Date of Report Item Description
-------------- ---- -----------
May 1, 2003 12 The Company issued a press release
announcing earnings results for the
quarter ended March 31, 2003.
May 12, 2003 5 The Company issued a press release
announcing the election of directors and
the passage of three proposals at the annual
stockholders meeting and the adjournment
of the meeting with respect to a fourth
proposal.
May 15, 2003 5 The Company reported the following: (1) it
had amended an existing credit facility
and entered into an additional credit
facility; (2) it had filed an amendment to
its Second Restated Certificate of
Incorporation on June 5, 2003 to increase
the number of authorized shares of common
and preferred stock; (3) it issued a press
release that announced its intent to offer
additional preferred shares under a newly
designated Series D Cumulative Redeemable
Preferred Stock and to redeem all
outstanding shares of its 8 7/8% Series B
Cumulative Redeemable Preferred Stock; and
(4) it entered into an underwriting
agreement for the sale and purchase of
4,000,000 shares of 7 7/8% Series D
Cumulative Redeemable Preferred Stock,
priced such shares and issued a press
release announcing the same and the use of
a portion of the proceeds from the sale of
such shares to redeem its 8 7/8% Series B
Cumulative Redeemable Preferred Stock.
July 8, 2003 5 The Company announced that it had filed
the Certificate of Designation for its 7
7/8% Series D Cumulative Redeemable
Preferred Stock.
July 8, 2003 5 The Company reported the following: (1) it
issued a press release announcing investments
for the quarter ended June 30, 2003; (2) Arnold &
Porter issued a tax opinion to the Company in
connection with the Company's sale of 4,000,000
shares of its 7 7/8% Series D Cumulative
Redeemable Preferred Stock; and (3) the Company
had signed a purchase agreement for the purchase
and sale of 1,583,100 shares of common stock.
July 15, 2003 12 The Company issued a press release
announcing earnings results for the
quarter ended June 30, 2003.
17
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTH CARE REIT, INC.
Date: July 21, 2003 By: /S/ GEORGE L. CHAPMAN
------------------------ ---------------------------------
George L. Chapman,
Chairman and Chief Executive Officer
Date: July 21, 2003 By: /S/ RAYMOND W. BRAUN
------------------------ ---------------------------------
Raymond W. Braun,
President and Chief Financial Officer
Date: July 21, 2003 By: /S/ MICHAEL A. CRABTREE
------------------------ ---------------------------------
Michael A. Crabtree,
Chief Accounting Officer
18
CERTIFICATE OF CHIEF EXECUTIVE OFFICER
I, GEORGE L. CHAPMAN, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Health Care REIT,
Inc.;
2. Based on my knowledge, the quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: July 21, 2003
----------------
/s/ GEORGE L. CHAPMAN
--------------------------
George L. Chapman,
Chief Executive Officer
19
CERTIFICATE OF CHIEF FINANCIAL OFFICER
I, RAYMOND W. BRAUN, certify that:
7. I have reviewed this quarterly report on Form 10-Q of Health Care REIT,
Inc.;
8. Based on my knowledge, the quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
9. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
10. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
d) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
e) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
f) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
11. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
c) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize, and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
d) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
12. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Dated: July 21, 2003
----------------
/s/ RAYMOND W. BRAUN
---------------------------
Raymond W. Braun,
Chief Financial Officer
20