1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2 TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994 Commission File No. 1-8923
HEALTH CARE REIT, INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1096634
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One SeaGate, Suite 1950, Toledo, Ohio 43604
(Address of principal executive office) (Zip Code)
(419) 247-2800
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -----------------------
Shares of Common Stock New York Stock Exchange
$1.00 par value
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months; and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of
this Form 10-K.
[ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant on March 31, 1995 was $249,668,563 based on the reported closing
sales price of such shares on the New York Stock Exchange for that date. As of
March 31, 1995, there were 11,649,725 shares outstanding.
This document contains 31 pages.
2
FORM 10-K/A
AMENDMENT NO. 2 TO ANNUAL REPORT
FILED PURSUANT TO SECTION 12, 13 OR 15(D) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
HEALTH CARE REIT, INC.
The undersigned registrant hereby amends the following items,
financial statements, or other portions of its Annual Report on Form 10-K for
the year ended December 31, 1994.
ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITON AND RESULTS OF OPERATIONS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-2-
3
PART I
ITEM 1. BUSINESS
GENERAL
- -------
Health Care REIT, Inc. (the "Company"), founded in 1970, is a real
estate investment trust which invests in health care facilities, primarily
nursing homes. The Company also invests in assisted living and retirement
facilities, behavioral care facilities, speciality care hospitals and primary
care facilities. The Company's investment portfolio is diversified by type of
facility, number of facilities, operators, location and state. At December 31,
1994, the largest aggregate financing to any operator totalled $25,087,000 or
7.7% of real estate related investments. This operator, Olympus Healthcare
Group, Inc., is an unrelated party.
INVESTMENT PORTFOLIO
- --------------------
The following table reflects the diversification of the Company's
investments at December 31, 1994:
Average
Number Invest- Number
Invest- Percentage Number of ment of
Type of ments of of Beds/ Per Bed Number of States
Facility (1)(3)(4) Portfolio Facilities Units / Unit Operators (3)
-------- --------- ---------- ---------- ------ ------- --------- ------
(in 000s)
Nursing Homes $228,588 55% 62 8,032 $ 28,460 32 20
Assisted Living
and Retirement
Facilities 101,778 25 27 2,381 42,746 13 15
Behavioral
Care Facilities 39,453 10 7 696 56,685 3 6
Speciality Care
Hospitals 23,750 6 2 230 103,261 2 1
Primary Care
Facilities 16,296 4 5 N/A N/A 1 3
-------- --- --- -----
TOTALS $409,865 100% 103 11,339
======== === === ======
<FN>
(1) Investments include real estate related investments, unfunded commitments and credit enhancements which amount to
$323,583,000, $66,107,000 and $20,175,000, respectively.
(2) The Company has investments in 25 states.
-3-
4
[FN]
(3) Investments do not include $49,234,000 in commitments for financings
for which the specific site has not yet been approved by the Company.
(4) Due to a number of factors, it is possible that some portion of the
commitments for financings will not result in permanent financing.
NURSING HOMES. These facilities offer a combination of skilled and
intermediate care services. Nursing homes provide long-term care and, more
recently, supplement hospital care by providing subacute services. The Company
believes that a substantial portion of the payments received by operators of
nursing homes financed by the Company is in the form of Medicaid reimbursement.
Remaining payments come from private pay, Medicare, veterans' programs, private
insurance and other sources.
ASSISTED LIVING AND RETIREMENT FACILITIES. Assisted living facilities
offer residential units for the frail elderly who need assistance with certain
activities of daily living, while retirement facilities offer residential units
for active and ambulatory older individuals who need little or no care.
Residents may participate in structured group activities. Meals are provided
(although apartments in most retirement facilities have their own kitchen
areas) and limited health care services are available. Rent and services are
typically paid by the resident.
BEHAVIORAL CARE FACILITIES. These facilities offer comprehensive
in-patient and out-patient psychiatric treatment programs. Programs are
tailored to the individual and include individual, group and family therapy.
Most programs are paid for by insurance programs.
SPECIALTY CARE HOSPITALS. These facilities provide acute in-patient
care to patients suffering from a specific illness or disease. Growth in
demand for these services is due to the need to attain greater cost efficiency.
Services are paid for by government programs (i.e., Medicare, Medicaid or
veterans' programs) as well as private insurance (including "managed care"
insurance providers).
PRIMARY CARE FACILITIES. These facilities are designed to offer
primary care to individuals in a doctor-office setting. These primary care
facilities also offer a number of specialties in one building such as
obstetrics, gynecology, opthamology, and pediatrics. These services are
provided under a group-practice setting and are usually offered in a "managed
care" context. Payment for services is principally through prepaid contracts.
INVESTMENTS
In determining whether to finance a facility, the Company places
primary emphasis on the experience of the operator, the financial strength of
the borrower or lessee, the amount of security available to support the
financing and the amount of capital that is being committed to the project by
the borrower or
-4-
5
lessee. In addition, the Company considers a variety of other factors,
including the site's suitability, appraisal reports of the facility and the
existence of certificate of need procedures or other barriers that limit the
entry of competing facilities into the community.
The Company monitors its investments through a variety of methods
depending on the operator and type of facility. These procedures include the
receipt and review of facility and guarantor financial statements, periodic
site visits, property reviews and conferences with the operators. Such reviews
of operators and facilities generally encompass licensure and regulatory
compliance materials and reports, contemplated building improvements and other
material developments.
Most of the Company's loans and leases are designed with escalating
rate structures that may result in principal payment or purchase prior to
maturity. However, the Company's policy is to structure longer term financing
to maximize returns. The Company believes that appropriate new investments
will be available in the future with substantially the same spreads over its
costs of borrowing regardless of interest rate fluctuations.
Investments are typically structured using mortgage loans or operating
leases which are normally secured by guarantees and/or letters of credit. The
Company typically finances up to 90% of the appraised value of the property.
Since 1986, the Company's mortgage loan portfolio has substantially grown while
its direct financing lease portfolio has declined significantly. From 1986 to
1994, the Company's mortgage loan portfolio has increased from $34,186,000 to
$230,782,000 while its direct financing lease portfolio has declined from
$91,696,000 to $11,428,000. From 1988 to 1994, the Company's operating lease
portfolio has increased from $7,709,000 to $57,232,000. In addition, the
Company provides construction financing and in the past provided credit
enhancements to facilitate bond financings.
The Company has obtained warrants from three operators to purchase
their common stock. If the market value of such common stock sufficiently
increases, the warrants may have the effect of increasing the Company's return
on its investments. None of the warrants are publicly traded. However, the
underlying common stock that relates to one set of warrants is publicly traded,
and the market price of such stock was below the strike price of the related
warrants at December 31, 1994.
MORTGAGE LOANS. At December 31, 1994, the Company had 52 mortgage
loans on 49 Properties totalling $230,782,000, more than 95% of which are
secured by first mortgages. Generally, the Company's mortgage loans have terms
of five to ten years with a renewal term, and have a 1% commitment fee,
interest payment rates of 350 to 550 basis points over the relevant Treasury
Note rate set at the beginning of the mortgage loan, and a 2% to 3% annual
increase over the initial interest payment rate. Of the 52 mortgage loans, 47
require principal reduction, a feature not required for most mortgage loans
made before 1991. The interest rate on mortgage loans closed through 1991
generally provided for an initial interest payment rate set at 400 to 450 basis
points over the five or seven-year Treasury Note rate set at the beginning of
the mortgage loan plus an additional 100 to 300 basis points of interest which
is added to principal resulting in a repayment of
-5-
6
principal at maturity greater than the original amount. While the Company's
mortgage loans are structured to provide substantially the same economic benefit
(same internal rate of return) as direct financing leases and operating leases
over the life of the loan, the timing on recognition of income is different
among the three types of investments. See the notes to the Consolidated
Financial Statements for an explanation on the recognition of income.
At December 31, 1994, interest rates on the Company's mortgage loans
ranged from 8.75% to 16.97% and earned an average of approximately 11.39%
(excluding prepayment fees) during 1994. The Company's mortgage loans
generally impose a substantial fee upon prepayment equal to 9% of the principal
balance of the mortgage loan in the earliest years of the loan with the amount
of the prepayment fee declining through the last year of the mortgage loan when
the prepayment fee expires. Furthermore, since 1994, the Company has included
an initial period during which no prepayments are permitted. During 1994, the
Company received $32,026,000 in principal pre-payments, which generated
$1,493,000 in pre-payment fees.
At December 31, 1994, the Company had 12 mortgage loans totalling
$44,843,000 which generally provide for both an initial floating rate term with
an interest payment rate of at least 300 basis points over the base rate of a
specified financial institution and a fixed rate term loan with an initial
interest payment rate of at least 500 basis points over the comparative
Treasury Note rate for the initial period and a significantly higher interest
spread on the reset for the remainder of the term. These mortgage loans
generally have a 1% commitment fee and, during the term loan period, a 2% to 3%
annual increase over the term loan interest payment rate.
OPERATING LEASES. The Company actively markets operating leases.
Such leases are priced on a variety of methods which are designed to generate
higher annual rents, either through the use of specified increases or
increasers based on some performance measure of the facility, and with options
to purchase at a price based upon the then fair market value of the facility.
At December 31, 1994, there were nine such leases totalling an investment of
$44,557,000. All leases require the lessee to pay taxes, insurance and
maintenance.
The Company has also utilized operating leases in connection with
managing and operating properties that have been relinquished to the Company by
their previous owners, due to various loan and bond defaults. At December 31,
1994, there were two such leases with a total investment of $12,675,000.
DIRECT FINANCING LEASES. At December 31, 1994, the Company had 6
direct financing leases outstanding with a total investment of $11,428,000.
Generally, the Company's direct financing leases provide for a lease term of 20
years, a 1% commitment fee, rents of 400 to 425 basis points over the five-year
Treasury Note rate set at the beginning of the lease, and a 2% to 3% annual
increase over the initial payment. All leases require the lessee to pay taxes,
insurance and maintenance. Substantially all lease agreements have been
written with option prices that increase 2% to 3% per year from a base equal to
100% of the original investment. All option
-6-
7
prices equal or exceed the Company's original investment in the property.
For an explanation of the Company's accounting policy with respect to
direct financing leases, see Note 1 of Notes to Financial Statements.
CONSTRUCTION, SHORT-TERM AND WORKING CAPITAL LOANS. At December 31,
1994, the Company had six construction loans outstanding totalling $17,074,000.
Construction loans are made only to borrowers to whom the Company has made a
commitment for permanent financing. Generally, construction loans have a 1%
commitment fee and provide for interest at a variable rate equal to at least
250 basis points over the prime interest rate. Construction loans made by the
Company will normally have a term of not more than two years and are secured by
a mortgage on the facility under construction and by guarantees or letters of
credit.
The Company has also entered into other financing arrangements that
involve making short-term and working capital loans. These loans generally had
a 1% commitment fee and provided for interest at a variable rate equal to at
least 200 basis points over the prime interest rate. The Company has not made
any new working capital loans of this type for several years and will make any
future working capital loans only on a very selective basis. Security for such
loans has consisted of second mortgage liens and, in some cases, security
interests in limited partnership interests.
At December 31, 1994, the Company had outstanding construction,
short-term and working capital loans totalling $24,142,000 and unfunded
commitments to provide an additional $33,324,000.
CREDIT ENHANCEMENTS. In 1984 and 1985, the Company provided credit
enhancements to four related parties which facilitated lower cost industrial
development revenue bond financing. These credit enhancements took the form of
agreements to purchase health care facilities or the loans in respect thereof
in the event the owners default upon their obligations. In consideration for
such credit enhancements, the Company receives annual fees of 1.5% of the
original bond amounts ($339,000 recognized in 1994). The Company does not
anticipate offering credit enhancements in the future. As of December 31,
1994, the Company had credit enhancements relating to industrial development
revenue bonds totalling $20,175,000.
ALLOWANCE FOR LOSSES
- --------------------
The Company maintains an allowance for possible losses which is
reevaluated quarterly to determine its adequacy. See Note 1 of Notes to
Financial Statements. At December 31, 1994, $2,450,000 of the total allowance
of $5,150,000 was allocated to three specific properties. One of the three
properties, a New Mexico retirement facility, is owned by a partnership in
which an affiliate holds a partnership interest. The Company believes this
allowance to be adequate.
-7-
8
CERTAIN GOVERNMENT REGULATIONS
- ------------------------------
The Company invests in single purpose health care facilities. The
Company's customers must comply with the licensing requirements of federal,
state and local health agencies, and with the requirements of municipal
building codes, health codes and local fire departments. In granting and
renewing a facility's license, the state health agency considers, among other
things, the physical buildings and equipment, the qualifications of the
administrative personnel and clinical staffs, the quality of health care
programs and compliance with applicable laws.
Many of the facilities operated by the Company's customers receive a
substantial portion of their revenues from the federal Medicare program and
state Medicaid programs; therefore, the Company's revenues may be indirectly
affected by changes in these programs. The amounts of program payments can be
changed by legislative or regulatory actions and by determinations by agents
for the programs. Since Medicaid programs are funded by both the states and
the federal government, the amount of payments can be affected by changes at
either the state or federal level. There is no assurance that payments under
these programs will remain at levels comparable to present levels or be
sufficient to cover costs allocable to these patients.
Under Medicare and Medicaid programs, acute care hospitals are
generally paid a fixed amount per discharge (based on the patient's diagnosis)
for inpatient services. Behavioral and rehabilitation hospitals are generally
paid on a cost basis, subject to certain limitations on allowable costs;
however, proposals have been made to change the system to a diagnosis-based
fixed payment per discharge.
Medicare and Medicaid programs have traditionally reimbursed nursing
facilities for the reasonable direct and indirect allowable costs incurred in
providing routine services (as defined by the programs), subject to certain
cost ceilings. However, many states have converted to a system based on
prospectively determined fixed rates, which may be based in part on historical
costs. The Medicare program has been working to develop a
fixed-payment-per-discharge system for nursing facilities similar to that used
for acute care hospitals.
Medicare and Medicaid regulations could adversely affect the resale
value of the Company's health care facilities. Medicare regulations provide
that when a facility changes ownership (by sale or under certain lease
transactions), reimbursement for depreciation and interest will be based on the
lesser of the cost to the new owner or the historical cost of the original
owner. Medicaid regulations allow a limited increase in the valuation of the
facility during the time the seller owned the facility. Other Medicare and
Medicaid regulations provide that upon resale, facilities are responsible to
pay back prior depreciation reimbursement payments that are "recaptured" as a
result of the sale.
-8-
9
Health care facilities that participate in Medicare or Medicaid must
meet extensive program requirements, including physical plant and operational
requirements, which are revised from time to time. (Such requirements may
include a duty to admit Medicare and Medicaid patients, limiting the ability of
the facility to increase its private pay census.) Medicare and Medicaid
facilities are regularly inspected to determine compliance, and may be excluded
from the programs--in some cases without a prior hearing--for failure to meet
program requirements.
Under the Medicare program, "peer review organizations" have been
established to review the quality and appropriateness of care rendered by
health care providers. These organizations may not only deny claims that fail
to meet their criteria, but can also fine and/or recommend termination of
participation in the program.
Recent changes in the Medicare and Medicaid programs will likely
result in increased use of "managed care" networks to meet the needs of program
beneficiaries. These networks selectively contract with health care
facilities, resulting in some facilities being excluded from the ability to
serve program beneficiaries.
Health care facilities also receive a substantial portion of their
revenues from private insurance carriers, health maintenance organizations,
preferred provider organizations, self-insured employees and other health
benefit payment arrangements. Such payment sources increasingly pay facilities
under contractual arrangements that include a limited panel of providers and/or
discounted or other special payment arrangements, including arrangements that
shift the risk of high utilization to the providers. A number of states have
established rate-setting agencies which control inpatient health care facility
rates, including private pay rates.
A number of states have established rate-setting agencies which
control inpatient health care facility rates, including private pay rates.
Congress is considering several proposals that would substantially
alter health care delivery and payment systems, both public and private. These
reform proposals involve increased reliance on managed care plans that
selectively contract with providers, increased incentives for individuals to be
cost-conscious, limitations on tax deductions for employee health benefits,
provider or insurer price controls, emphasis on outpatient and home-based
alternatives to inpatient care, and/or substantial reductions in payments to
Medicare and Medicaid facilities. In addition, proposals to reduce taxes for
the middle class and/or the proposed constitutional amendment to require a
balanced federal budget could result in Medicare and Medicaid spending
reductions. It is impossible to predict with certainty what form federal
health care legislation may ultimately take. However, it is likely that some
steps will be taken to reduce the rate of growth in both the utilization and
the cost of health care facility services.
-9-
10
In order to meet a federal requirement, most states required providers
to obtain certificates of need prior to construction of inpatient facilities
and certain outpatient facilities. However, in 1987, the federal requirement
was repealed, and some states have repealed these requirements, resulting in
increased competition.
Nursing facilities compete with other subacute care providers,
including rehabilitation centers and hospitals. Many of these providers have
underutilized facilities and are converting some or all of their facilities
into nursing facilities. Some of these entities operate on a tax-exempt basis,
which gives them a capital cost advantage. Furthermore, some states have
granted rest homes the ability to provide limited nursing care services.
Certain states have adopted pre-admission screening and other programs
to promote utilization of outpatient and home-based services as an alternative
to inpatient facility services. Recent changes in Medicaid regulations allow
states to use Medicaid funding for home and community-based alternatives to
inpatient care.
TAXATION
General
-------
A corporation, trust or association meeting certain requirements may
elect to be treated as a "real estate investment trust." Beginning with its
first fiscal year, which commenced on May 1, 1971, and in all subsequent years,
the Company has elected to be treated as a real estate investment trust under
Sections 856 to 860, inclusive, of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company intends to operate in such manner as to
continue to qualify as a real estate investment trust for federal income tax
purposes. No assurance can be given that the actual results of the Company's
operations for any one taxable year will satisfy such requirements.
To qualify as a real estate investment trust, the Company must satisfy
a variety of complex requirements each year, including organizational and stock
ownership tests and percentage tests relating to the sources of its gross
income, the nature of its assets and the distribution of its income.
Generally, for each taxable year during which the Company qualifies
as a real estate investment trust, it will not be taxed on the portion of its
taxable income (including capital gains) that is distributed to stockholders.
Any undistributed income or gains will be taxed to the Company at regular
corporate tax rates. The Company will be subject to tax at the highest
corporate rate on its net income from foreclosure property, regardless of the
amount of its distributions. The highest corporate tax rate is currently 35%.
Subject to certain limitations, the Company will also be subject to an
additional tax equal to 100% of the net income, if any, derived from prohibited
transactions. A prohibited transaction is defined as a sale or disposition of
inventory-type
-10-
11
property or property held by the Company primarily for sale to customers in the
ordinary course of its trade or business, which is not property acquired on
foreclosure.
The Company is subject to a nondeductible federal excise tax equal to
4% of the amount, if any, by which 85% of its ordinary income plus 95% of its
capital gain net income (plus distribution deficiencies from prior years)
exceeds distributions actually paid or treated as paid to stockholders during
the taxable year, plus current year income upon which the Company pays tax and
any overdistribution from prior years. Due to the growth of the Company's
income, primarily as a result of large capital gains from the exercise of
purchase options under leases, the Company did not satisfy this requirement in
1993 and 1994 and incurred an excise tax of approximately $132,000 and
$575,000, respectively, in those years. There is a cumulative
underdistribution of $18,029,000 that will carry over to 1995 and later years
until reduced by distributions in a subsequent year that exceed the percentage
of that year's income that is required to be distributed currently.
Failure To Qualify
------------------
While the Company intends to operate so as to qualify as a real estate
investment trust under the Code, if in any taxable year the Company fails to
qualify, and certain relief provisions do not apply, its taxable income would
be subject to tax (including alternative minimum tax) at corporate rates. If
that occurred, the Company might have to dispose of a significant amount of its
assets or incur a significant amount of debt in order to pay the resulting
federal income tax. Further distributions to its stockholders would not be
deductible by the Company nor would they be required to be made.
Distributions out of the Company's current or accumulated earnings and
profits would be taxable to stockholders as dividends and would be eligible for
the dividends received deduction for corporations. No portion of any
distributions would be eligible for designation as a capital gain dividend.
Unless entitled to relief under specific statutory provisions, the
Company also will be disqualified from taxation as a real estate investment
trust for the four taxable years following the year during which qualification
was lost.
Summary
-------
The foregoing is only a summary of some of the significant federal
income tax considerations affecting the Company and is qualified in its
entirety by reference to the applicable provisions of the Code, the rules and
regulations promulgated thereunder, and the administrative and judicial
interpretations thereof. Stockholders of the Company are urged to consult
their own tax advisors as to the effects of these rules and regulations on
them. In particular, foreign stockholders should consult with their tax
advisors concerning the tax consequences of ownership of shares in
-11-
12
the Company, including the possibility that distributions with respect to the
shares will be subject to federal income tax withholding.
HCRI Pennsylvania Properties, Inc.
- ---------------------------------
On November 1, 1993, the Company formed a wholly-owned subsidiary,
HCRI Pennsylvania Properties, Inc. This subsidiary was created to own real
estate in the State of Pennsylvania.
THE MANAGER
- -----------
First Toledo Corporation (the "Predecessor Manager") was organized in
April 1970 under the laws of the State of Ohio for the purpose of administering
and managing the daily affairs of the Company and advising the Company with
respect to investments. Effective June 1, 1994, First Toledo Corporation spun
off, on a tax-free basis, the management agreement (defined below) and certain
other assets to First Toledo Advisory Company. Therefore, beginning June 1,
1994, First Toledo Advisory Company became the Manager. The Company has seven
employees, all of whom are also employees of the Manager. Messrs. Wolfe and
Thompson are Directors of the Manager and each owns 50% of the outstanding
common stock of the Manager. In addition, Robert J. Pruger, Chief Financial
Officer of the Company, is also a Director and Treasurer of the Manager. Erin
C. Ibele, Vice President and Corporate Secretary of the Company, is also a
Director, Vice President and Corporate Secretary of the Manager. George L.
Chapman, Executive Vice President and General Counsel of the Company, is also
Executive Vice President and General Counsel of the Manager. The ownership
percentages, titles and duties of each individual noted above are the same for
the Manager and the Predecessor Manager.
-12-
13
Pursuant to the Management Agreement (the "Agreement"), the Manager
assists the Company in establishing investment policies and in selecting and
negotiating the terms of the Company's investments. The Manager also
administers the day-to-day affairs of the Company. The Agreement is renewed
annually upon the approval of a majority of the Directors, and is ratified
annually by the holders of a majority of the outstanding shares of common
stock. The Agreement, or any extension thereof, may be terminated at any time
without penalty upon sixty days written notice by the Company by action of a
majority of the Directors of the Company or by the Manager. Both the By-Laws
of the Company and the Agreement require the Company to change its name to one
which does not include the words "Health Care REIT" or "Health Care Fund" in
the event First Toledo Advisory Company ceases to act as Manager. However,
pursuant to the agreement in principal (discussed below), the Company will
obtain the rights to its names.
The Agreement provides that the Manager is to be compensated for its
services at the monthly rate of one-tenth of one percent of the average
invested assets of the Company less long- and short-term debt obligations
(excluding accrued expense and other liabilities). Average invested assets are
defined as the average of the aggregate book value of the assets of the Company
invested in equity interests in and loans secured by real estate before
allowances for doubtful amounts or allowances to reduce certain leases to
option prices or other similar non-cash allowances, computed by taking the
average of such value at the end of each month. The Manager is also entitled
to receive an incentive fee equal to 10% of the amount of net profits which
exceed 10% of the average net worth of the Company as defined in the Agreement.
For the years ended December 31, 1994, 1993 and 1992, management fees
amounted to $3,087,000, $2,427,000, and $1,969,000, respectively. Of such
amounts, $807,000, $771,000, and $550,000, respectively, related to the profit
based incentive fee. The fees for each year do not include $22,500, $22,500
and $19,500 for 1994, 1993 and 1992, respectively, that were paid directly by
the Company to certain employees for certain services.
The Manager pays all charges, including salaries, wages, payroll
taxes, costs of employee benefit plans and charges for incidental help,
attributable to its own operations in connection with providing services under
the Agreement. The Manager also pays its own accounting fees and related
expenses, legal fees, insurance, rent, telephone, utilities and travel expenses
of its officers and employees.
Under the Agreement, the Company is required to indemnify the Manager
and its officers, directors and employees from any liabilities arising out of
the performance of the Manager's duties under the Agreement unless such
liabilities resulted from the bad faith, willful malfeasance, gross negligence
or reckless disregard of its duties.
-13-
14
On February 6, 1995, the Company's Board of Directors approved in
principle the acquisition of the Manager. Under the agreement in principle,
the Company would issue 215,514 shares of common stock as consideration for the
acquisition of the Manager, subject to adjustment under certain circumstances.
In connection with the closing of the acquisition, Messrs. Thompson and Wolfe
would enter into five-year service agreements and would each purchase 84,191
shares of common stock at a price of $21.38 per share with funds loaned by the
Company. Under the stock purchase and loan arrangements, 20% of each loan
could be forgiven each year if continued service and stock price performance
tests are met. This agreement is subject to, among other things, stockholder
approval and is anticipated to close in the second quarter of 1995.
ITEM 2. PROPERTIES
The Company's headquarters are currently located at One SeaGate, Suite
1950, Toledo, Ohio 43604. Office space, equipment and services are furnished
by the Manager.
As part of its investment portfolio, at December 31, 1994, the Company
owned and leased to qualified professional operators 11 nursing homes, seven
assisted living facilities, and three primary care facilities. These
facilities are located in Arizona, Connecticut, Florida, Illinois, Indiana,
Kentucky, Missouri, North Carolina, Ohio, Pennsylvania, Texas, Virginia and
West Virginia. The foregoing properties are also part of the Company's
investment portfolio. See Item 1. BUSINESS - "Investment Portfolio" above.
-14-
15
ITEM 6. SELECTED FINANCIAL DATA
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
Gross Income $ 42,732 $ 36,018 $ 28,908 $ 29,248 $ 26,874
Net Income 24,953 20,055 16,515 13,126 11,544
Loans Receivable 254,924 185,282 151,414 123,812 93,689
Investment in Operating-Lease
Properties and Other 57,232 42,776 10,301 14,800 14,850
Investment in Direct Financing Leases 11,428 52,950 65,411 68,391 78,140
Total Assets 324,102 285,024 226,207 207,204 189,720
Borrowings Under Line of Credit
Arrangements 70,900 35,000 78,900 62,200 74,100
Senior Notes and Other Long-Term
Obligations 57,373 61,311 24,819 28,144 35,563
Shareholders' Equity 189,180 184,132 118,948 113,956 76,621
Cash Distributions to Shareholders 23,127 18,252 15,922 12,042 10,566
Cash Flows From Operating Activities
Available for Distribution (1) 31,697 22,780 18,654 14,927 13,308
Average Number of Shares Outstanding 11,519 9,339 8,629 6,828 6,151
Per Share:
Net Income 2.17 2.15 1.91 1.92 1.88
Distributions 2.01 1.93 1.85 1.77 1.72
<FN>
In thousands, except per share amounts
(1) Cash Flows From Operating Activities Available for Distribution is defined as net cash provided from operating activities,
but does not consider the effects of changes in operating assets and liabilities such as other receivables and accrued
expenses. The Company uses Cash Flows From Operating Activities Available for Distribution in evaluating investments and
the Company's operating performance. Cash Flows From Operating Activities Available for Distribution does not represent
cash generated from operating activities in accordance with generally accepted accounting principles, is not necessarily
indicative of cash available to fund cash needs, and should not be considered as an alternative to net income as an
indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity.
-3-
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Loan interest payments, lease payments and loan and commitment fees
are the Company's primary sources of cash from operating activities. Net cash
provided from operating activities has been increasing in each of the three
most recent years totalling $31,977,000 in 1994; $23,180,000 in 1993; and
$18,309,000 in 1992. These increases arose primarily from an increase in the
Company's net income. However, there are differences between the recognition
of income for financial reporting purposes and cash receipts for both leases
and mortgage loans which cause period-to-period changes in net cash provided
from operating activities.
The level of the Company's investing activities varies over time due
to a number of factors, including economic conditions in the health care
financing market, the availability of capital resources, and the timing of
principal payments. Investing activities in loans receivable and leases, and
net of principal collected on loans for the years 1994, 1993 and 1992 were
$84,797,000, $67,720,000 and $36,441,000, respectively. Investing activity in
1994 and 1993 was higher than 1992 due to significantly increased marketing
activity.
The Company's investing activities are financed principally by
borrowings, proceeds from the exercise of lease purchase options, loan
repayments, and equity issuances, including issuances pursuant to the Company's
dividend reinvestment plan and the Company's employee incentive stock option
plan. On April 8, 1993, the Company issued $52,000,000 of Senior Notes (the
"Senior Notes") to a group of institutional investors, the Company's first such
debt offering. These Senior Notes were issued in three tranches with an
initial effective interest rate of 7.63% and an average maturity of
approximately seven years.
In September 1994, the Company entered into an amended and restated
credit agreement for $150,000,000 with ten banks which agreement matures March
31, 1997. The agreement specifies that borrowings under the revolving credit
are subject to interest rates, at the Company's option, based on either the
agent bank's prime rate of interest or 1 1/2% over LIBOR interest rate. The
Company is primarily utilizing the LIBOR pricing option with a weighted average
LIBOR interest rate of 7.94% at December 31, 1994. In addition, the Company
pays a commitment fee at an annual rate of 1/2% of the unused line and an
annual agent's fee of $75,000. At December 31, 1994, the Company had
$53,000,000 outstanding under the revolving credit agreement.
The revolving credit agreement limited the amount of borrowings
available to 75% of the Company's borrowing base. The Company's borrowing base
consisted of mortgage loans and leases not in default which, with the consent
of the banks, are assigned to the lenders' collateral pool. Each borrowing
base property was valued generally at the lower of the Company's cost or the
market value of the underlying property with substantially all such properties
valued at cost. As of
-17-
17
December 31, 1994, the borrowing base under the revolving credit agreement
limited the amount of the borrowing to $88,000,000. The Company's borrowing
availability was limited by the exclusion of certain assets from the borrowing
base such as construction loans. The Company anticipates that the completion
of facilities under construction and the inclusion of leases and mortgage loans
relating to completed facilities in its borrowing base will enable it to
increase its borrowings to the $150,000,000 maximum availability. At December
31, 1994, the Company had $135,141,000 of unfunded commitments.
The revolving credit agreement contains covenants which require the
Company to maintain a ratio of net operating income to interest expense of not
less than 2 to 1 in any quarter; a ratio of total funded debt to sum of net
worth and convertible subordinated indebtedness of not more than 1.3 to 1; and
a tangible net worth of $180,000,000. The Company was in compliance with those
and all other covenants at December 31, 1994.
At December 31, 1994, the Company had two unsecured lines of credit
with two banks for a total of $18,500,000. One line was increased by
$10,000,000 in early January 1995. Borrowings under these lines are made
pursuant to notes payable, are due on each bank's demand and are subject to
interest at each bank's prime rate of interest. The Company had $17,900,000
outstanding at December 31, 1994 under these lines of credit.
Historically, the Company also used tax-exempt indebtedness or
individual mortgage loans to provide the funds to support specific financings.
At December 31, 1994, these individual obligations totalled $5,373,000, of
which $3,620,000 related to industrial development bonds maturing at various
dates to 2004, and $1,753,000 related to mortgage loans maturing at various
dates to 2005. The industrial development bonds and mortgage loans are
required to be repaid when the related financing is repaid. This type of
specific long-term financing transaction is not currently available, and the
Company expects the overall level of these obligations to decline.
The Company uses interest rate swap contracts solely to accomplish the
Company's policy of reducing its interest rate risk, and thereby maintain a
more consistent, predictable interest rate margin. The Company monitors the
amount of its variable interest rate assets and debt and uses interest rate
swap contracts to partially balance the amount of variable interest rate debt
with its variable interest rate assets. Interest rate swap contracts permit
the Company to match either by fixing interest rates on a portion of its line
of credit borrowings, or converting a portion of its fixed rate debt to
variable rate. At December 31, 1994, the Company had two five-year interest
rate swap contracts which expire in 1996 and 1997, which hedge the Company's
interest rate risk relating to $30,000,000 of variable interest rate
borrowings. Also, at December 31, 1994, the Company had one two-year variable
interest rate swap contract which expires in May, 1995, which hedges the
Company's interest rate risk relating to $40,000,000 of fixed rate senior
notes. At December 31, 1994, the Company was at risk for declining interest
rates because its variable interest rate assets exceeded its variable interest
rate debt.
-18-
18
Proceeds from the exercise of purchase options were approximately
$38,330,000, $12,085,000, and $15,534,000 for the years 1994, 1993 and 1992,
respectively. At December 31, 1994, the Company had a limited number of direct
financing leases and, therefore, anticipates that proceeds from the exercise of
purchase options will be significantly reduced.
In the last three years, the Company has had one public offering of
Common Stock. In 1993, the Company issued 2,500,000 shares of Common Stock
which provided net proceeds of $59,085,000 at $23.63 per share. The proceeds
were initially used to pay down the Company's bank lines of credit.
The dividend reinvestment plan and, to a lesser extent, the employee
incentive stock option plan together represent a significant source of capital
for the Company. During 1994, 1993 and 1992, issuance of Common Stock pursuant
to these plans generated $3,222,000, $4,296,000, and $4,400,000, respectively,
in cash for the Company.
The Company believes that funds provided from operating activities,
together with funds from scheduled loan repayments and equity issuances under
Company stock plans, will be sufficient to meet current operating requirements
and existing commitments.
RESULTS OF OPERATIONS
- ---------------------
Gross income increased $6,714,000 and $7,110,000 in 1994 and 1993,
respectively, though it declined $340,000 in 1992. In 1994, interest income on
loans receivable, operating lease rents, and loan and commitment fees each
increased while direct financing lease income decreased when compared to 1993.
The increases in interest income on loans receivable, operating lease rents,
and loan and commitment fees are attributable to the growth in the loan and
operating lease properties portfolio, a long-term trend which the Company
anticipates will continue. The decrease in direct financing lease income is a
reflection of another long-term trend which should also continue due to greater
market acceptance of mortgage loans and operating leases.
In 1993, interest income on loans receivable, operating lease rents,
and loan and commitment fees each increased while direct financing lease income
decreased when compared to 1992. These changes in components of gross income
reflect the trend of change in the components of the investment portfolio
discussed above.
Net income, which totalled $24,953,000 in 1994; $20,055,000 in 1993;
and $16,515,000 in 1992 is the result of a number of factors. The principal
factors are the difference between the Company's average earnings on assets
versus its average cost of borrowings and the Company's debt-to-equity ratio.
The secondary factors are management fees, other operating expenses and the
provision for losses.
The 1994 increase in net income was due in large part to the growth in
net interest margin. The Company's average earnings on assets increased
approximately 67 basis points from the same period in 1993, while the Company's
average cost of borrowing increased approxi-
-19-
19
mately 37 basis points, thereby resulting in a 30 basis point increase in net
interest margin. The increase in the average earnings on assets was solely due
to gains on exercise of options and prepayment fees. Without those items,
average earnings on assets would have declined approximately 45 basis points in
1994 versus 1993. The increase in average cost of borrowing was due to a
general rise in interest rates in 1994 over 1993 as well as an increase in the
LIBOR interest rate spread in the Company's amended and expanded revolving line
of credit agreement. The Company anticipates that its average earnings on
assets and its average cost of debt will both increase in 1995.
The Company's 1994 net income was also affected by a decrease in the
average quarter-end, debt-to-equity ratio from 1 to 1 in 1993 to .65 to 1 in
1994. During 1994, the Company was proportionally using less debt as a source
of funds. Therefore, the Company proportionally incurred less interest
expense, and therefore, the Company increased its net interest margin and net
income.
The 1993 increase in net income was due in large part to the growth in
net interest margin. The Company's average earnings on assets declined 53
basis points from the same period in 1992, while the Company's average cost of
borrowing decreased 130 basis points; thereby, resulting in a 77 basis point
increase in net interest margin. Both these reductions resulted primarily from
an overall decline in interest rates. However, the decline in average cost of
borrowing was enhanced by the Company's greater use of its lines of credit, its
lowest cost of debt financing. The 1993 net interest margin was also affected
by the collection of prepayment fees and the cost recognized to unwind an
interest rate swap - two types of events which occur infrequently and which, on
a net basis, slightly increased the net interest margin in 1993 over 1992.
The Company's 1993 net income was also marginally affected by an
increase in the Company's interest-related expenses that resulted from an
increase in the average quarter-end, debt-to-equity ratio from .8 to 1 in 1992
to 1 to 1 in 1993. During 1993, the Company was proportionally using more debt
as a source of funds. However, the fourth quarter equity offering (discussed
above) reduced the December 31, 1993 debt-to-equity ratio to .55 to 1.
Management fees and other operating expenses were $5,072,000 in 1994,
$3,878,000 in 1993, and $3,005,000 in 1992. The increases in management fees
were primarily attributable to the 1993 equity offering which substantially
increased shareholder equity. The increases in other operating expenses in
1994 and 1993 resulted from the increased level of marketing activity, general
growth of the Company, and increased professional fees. The Company
anticipates that if the proposed agreement to acquire the Manager is
consummated, the management fees for 1995 would be reduced significantly. In
addition, the Company anticipates the expenses that it would incur if
self-advised would be less than the management fee under the present terms of
the management agreement.
The provision for losses was $1,000,000, $150,000, and $602,000 in
1994, 1993, 1992, respectively. The increased provision in 1994 over 1993
reflected the difficulty the Company began to experience in
-20-
20
1994 with two investments, one in Florida and a second in Michigan. In
addition, the Company has several working capital loans totalling $2,356,000
at December 31, 1994 to a New Mexico retirement center, which has been on a
non-accrual status for several years. The retirement center's financial
performance has improved in recent years, and therefore, the Company presently
intends to take no action.
IMPACT OF INFLATION
- -------------------
During the past three years, inflation has not significantly affected
the earnings of the Company because of the moderate inflation rate.
Additionally, earnings of the Company are primarily long-term investments with
fixed interest rates. These investments are mainly financed with a combination
of equity, senior notes and borrowings under the revolving lines of credit, of
which a portion is hedged with interest rate swaps. During inflationary
periods, which generally are accompanied by rising interest rates, the
Company's ability to grow may be adversely affected because the yield on new
investments may increase at a slower rate than new borrowing costs. Presuming
the current inflation rate remains moderate and long-term interest rates do not
increase significantly, the Company believes that equity and debt financing
will be available.
-21-
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
REPORT OF INDEPENDENT AUDITORS
Shareholders and Directors
Health Care REIT, Inc.
We have audited the accompanying consolidated balance sheets of Health Care
REIT, Inc. as of December 31, 1994 and 1993, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1994. Our audits also include the
financial statement schedule listed in the Index at Item 14(d). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Health
Care REIT, Inc. at December 31, 1994 and 1993, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth herein.
ERNST & YOUNG LLP
Toledo, Ohio
February 8, 1995
-4-
22
HEALTH CARE REIT, INC.
CONSOLIDATED BALANCE SHEETS
December 31
1994 1993
---------------------------
ASSETS
Real estate related investments:
Loans receivable, including amounts from
related parties of $29,283,939 and
$29,212,780 at December 31, 1994 and
1993, respectively $254,923,711 $185,281,601
Investment in operating-lease properties,
less accumulated depreciation of $2,803,787
and $1,772,288 at December 31, 1994 and
1993, respectively 57,231,651 42,776,361
Investment in direct financing leases 11,427,721 52,950,188
------------ ------------
323,583,083 281,008,150
Less allowance for losses 5,150,000 4,150,000
------------ ------------
Net real estate related investments 318,433,083 276,858,150
Other assets:
Deferred loan expenses 2,469,260 1,579,134
Cash and cash equivalents 935,449 4,896,314
Receivables and other assets 2,264,197 1,690,783
------------ ------------
5,668,906 8,166,231
------------ ------------
Total assets $324,101,989 $285,024,381
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit arrangements $ 70,900,000 $ 35,000,000
Senior notes 52,000,000 52,000,000
Other long-term obligations 5,372,790 9,311,115
Accrued expenses and other liabilities 6,649,424 4,581,438
------------ ------------
Total liabilities 134,922,214 100,892,553
Shareholders' equity:
Preferred Stock, $1.00 par value:
Authorized - 10,000,000 shares in 1994
Issued and outstanding - None
Common stock, $1.00 par value:
Authorized - 40,000,000 shares and
15,000,000 shares in 1994 and 1993,
respectively
Issued and outstanding - 11,595,115
shares in 1994 and 11,446,249 shares
in 1993 11,595,115 11,446,249
Capital in excess of par value 161,086,758 158,013,957
Undistributed net income 16,497,902 14,671,622
------------ ------------
Total shareholders' equity 189,179,775 184,131,828
Commitments and contingencies ------------ ------------
Total liabilities and shareholders' equity $324,101,989 $285,024,381
============ ============
See accompanying notes.
23
HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
1994 1993 1992
----------- ----------- -----------
Gross income, including amounts from
related parties of $3,810,340,
$3,611,580, and $4,783,393 for 1994,
1993 and 1992, respectively
Interest on loans receivable $26,038,471 $21,603,573 $15,285,337
Direct financing leases:
Lease income 4,353,192 8,094,184 9,696,873
Gain on exercise of options 5,389,399 2,175,334 721,538
Operating leases:
Rents 5,480,232 2,812,468 1,458,630
Gain on exercise of options 100,029 1,030,898
Loan and commitment fees 1,184,024 1,202,516 668,552
Interest and other income 186,684 130,132 46,021
----------- ----------- -----------
42,732,031 36,018,207 28,907,849
Expenses:
Interest:
Line of credit arrangements 3,537,555 3,819,054 3,443,698
Senior notes and other long-term
obligations 6,146,589 6,997,992 4,716,320
Loan expense 637,625 328,187 243,728
Management fees 3,086,988 2,426,639 1,968,666
Provision for depreciation 1,385,077 790,471 382,466
Provision for losses 1,000,000 150,000 601,511
Other operating expenses 1,985,279 1,450,926 1,036,449
----------- ----------- -----------
17,779,113 15,963,269 12,392,838
----------- ----------- -----------
Net income $24,952,918 $20,054,938 $16,515,011
=========== =========== ===========
Net income per share $ 2.17 $ 2.15 $ 1.91
Average number of shares outstanding 11,519,123 9,339,081 8,629,144
See accompanying notes.
24
HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Capital in
Common Excess of Undistributed
Stock Par Value Net Income Total
----------- ----------- ------------- ------------
Balances at January 1, 1992 $ 8,521,515 $ 93,158,295 $ 12,275,771 $113,955,581
Net income 16,515,011 16,515,011
Proceeds from issuance of 230,457
shares under the dividend rein-
vestment and stock option plans 230,457 4,169,298 4,399,755
Cash dividends paid--$1.85 per
share (15,922,353) (15,922,353)
----------- ------------ ------------ ------------
Balances at December 31, 1992 8,751,972 97,327,593 12,868,429 118,947,994
Net income 20,054,938 20,054,938
Proceeds from the sale of
2,500,000 shares less related
expenses of $3,727,470 2,500,000 56,585,030 59,085,030
Proceeds from issuance of 194,277
shares under the dividend rein-
vestment and stock option plans 194,277 4,101,334 4,295,611
Cash dividends paid--$1.93 per
share (18,251,745) (18,251,745)
----------- ------------ ------------ ------------
Balances at December 31, 1993 11,446,249 158,013,957 14,671,622 184,131,828
Net income 24,952,918 24,952,918
Proceeds from issuance of 148,866
shares under the dividend rein-
vestment and stock option plans 148,866 3,072,801 3,221,667
Cash dividends paid $2.01 per
share (23,126,638) (23,126,638)
----------- ------------ ------------ ------------
Balances at December 31, 1994 $11,595,115 $161,086,758 $ 16,497,902 $189,179,775
=========== ============ ============ ============
See accompanying notes.
25
HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1994 1993 1992
-----------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 24,952,918 $ 20,054,938 $ 16,515,011
Adjustments to reconcile net income to
net cash provided from operating
activities:
Amortization of loan and organization
expenses 639,781 328,546 243,728
Provision for losses 1,000,000 150,000 557,664
Provision for depreciation 1,385,077 790,471 408,502
Loan and commitment fees earned
less than cash received 693,213 494,292 528,050
Direct financing lease income less
than cash received 905,860 376,046 431,167
Operating lease income less than
cash received 1,079,711
Interest income less than (in
excess of) cash received 2,120,035 586,092 (1,109,841)
------------ ------------ ------------
Cash Flows from Operating Activities
Available for Distribution 31,696,884 22,780,385 18,653,992
Increase in accrued expenses and
other liabilities 856,127 547,715 106,703
Increase in receivables and other
assets (575,571) (148,487) (451,589)
------------ ------------ ------------
Net cash provided from operating activities 31,977,440 23,179,613 18,309,106
INVESTING ACTIVITIES
Investment in loans receivable (118,204,990) (90,650,648) (40,597,098)
Investment in operating-lease properties (14,053,050) (20,766,000) (5,700,000)
Investment in direct financing leases (1,300,000)
Principal collected on loans 48,760,717 43,696,715 9,856,237
Proceeds from exercise of purchase
options 38,330,065 12,085,262 15,533,527
Other 135,000 454,387
------------ ------------ ------------
Net cash used in investing activities (46,467,258) (55,499,671) (20,452,947)
FINANCING ACTIVITIES
Increase in borrowings under line of
credit arrangements 266,900,000 209,400,000 121,500,000
Principal payments on borrowings under
line of credit arrangements (231,000,000) (253,300,000) (104,800,000)
Borrowings under senior notes 52,000,000
Principal payments on other long-term
obligations (3,938,325) (15,508,351) (3,324,343)
Proceeds from the issuance of shares 3,221,667 67,108,111 4,399,755
Payment of stock issuance expenses (3,727,470)
Increase in deferred loan and
organization expense (1,527,751) (770,041) (8,222)
Cash distributions to shareholders (23,126,638) (18,251,745) (15,922,353)
------------ ------------ ------------
Net cash provided from financing
activities 10,528,953 36,950,504 1,844,837
------------ ------------ ------------
(Decrease) increase in cash and cash
equivalents (3,960,865) 4,630,446 (299,004)
Cash and cash equivalents at beginning
of year 4,896,314 265,868 564,872
------------ ------------ ------------
Cash and cash equivalents at end of year $ 935,449 $ 4,896,314 $ 265,868
============ ============ ============
See accompanying notes.
-8-
26
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994
1. ACCOUNTING POLICIES AND RELATED MATTERS
Industry
- --------
The Company is predominantly engaged in financing and leasing of health care
and related properties in domestic markets.
Principles of Consolidation
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary (organized in 1993) after the elimination of all
significant intercompany accounts and transactions.
Loans Receivable
- ----------------
Loans receivable consist of construction-period and short-term loans maturing
in two years or less, working capital loans to related parties, and long-term
mortgage loans. Interest income on loans is recognized as earned based upon
the principal amount outstanding. The loans are generally collateralized by a
first or second mortgage on or assignment of partnership interest in the
related facilities, which consist of nursing homes, assisted living facilities,
retirement centers, rehabilitation facilities, behavioral care facilities,
primary care facilities and specialty care hospitals.
Investment in Operating-Lease Properties
- ----------------------------------------
Certain properties owned by the Company are leased under operating leases.
These properties are recorded at the lower of cost or net realizable value.
Depreciation is provided for at rates which are expected to amortize
the cost of the assets over their estimated useful lives using the straight
line method. Operating lease income includes the rent payments and certain
guaranty payments by the lessee, which are generally recognized on a
straight-line basis over the minimum lease period.
Investment in Direct Financing Leases
- -------------------------------------
Certain properties owned by the Company are subject to long-term leases which
are accounted for by the direct financing method. The leases provide for
payment of all taxes, insurance and maintenance by the lessees. The leases are
for a term of 20 years and include an option to purchase the properties
generally after a period of five years. Option prices equal or exceed the
Company's original cost of the property. Income from direct financing leases
is recorded based upon the implicit rate of interest over the lease term. This
income is greater than the amount of cash received during the first six to
seven years of the lease term.
-9-
27
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES AND RELATED MATTERS (CONTINUED)
Allowance for Losses
- --------------------
The allowance for losses is maintained at a level believed adequate to absorb
potential losses in the Company's real estate related investments. The
determination of the allowance is based on a quarterly evaluation of these
earning assets (in the case of direct financing leases, estimated residual
values), including general economic conditions, estimated collectibility of
loan and lease payments, reappraisals (where appropriate), and the
recoverability of the carrying amount of these investments in relationship to
their net realizable value.
Deferred Loan Expenses
- ----------------------
Deferred loan expenses are costs incurred in acquiring financing for
properties. The Company amortizes these costs by the straight line method over
the term of the debt.
Loan and Commitment Fees
- ------------------------
Loan and commitment fees are earned by the Company for its agreement to provide
direct and standby financing to, and credit enhancement for, owners of health
care facilities. The Company amortizes loan and commitment fees over the
period of the commitment and the contractual life of the investment.
Cash and Cash Equivalents
- -------------------------
Cash and cash equivalents consist of all highly liquid investments with an
original maturity of three months or less.
Federal Income Tax
- ------------------
No provision has been made for federal income taxes since the Company has
elected to be treated as a real estate investment trust under the applicable
provisions of the Internal Revenue Code, and the Company believes that it has
met the requirements for qualification as such for each taxable year. See Note
8.
Net Income Per Share
- --------------------
Net income per share has been computed by dividing net income by the weighted
daily average number of shares outstanding.
-10-
28
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. LOANS RECEIVABLE
The following is a summary of loans receivable:
DECEMBER 31
1994 1993
-------------------------
Mortgage loans $208,566,120 $143,338,778
Mortgage loans to related parties 22,215,685 21,808,666
Construction and other short-term loans 17,073,652 12,730,043
Construction loans to related parties 169,787
Working capital loans to related parties 7,068,254 7,234,327
------------ ------------
TOTALS $254,923,711 $185,281,601
============ ============
Loans to related parties included above are at competitive rates but not at
less than the Company's net interest cost on borrowings to support such loans.
The amount of interest earned on loans to related parties amounted to
$3,220,092, $2,869,911, and $2,463,539 for 1994, 1993 and 1992, respectively.
The following is a summary of mortgage loans at December 31, 1994:
Final Number Principal
Payment of Amount at Carrying
Due Loans Payment Terms Inception Amount
- ------- ------ --------------------------------- ------------- ------------
1995 1 Monthly payment of $22,319,
including interest of 13.18% $ 1,795,000 $ 1,993,868
1996 4 3 monthly payments from $24,160
to $38,958 and 1 quarterly
payment of $6,186, including
interest from 12.93% to 16.97% 9,090,000 8,481,129
1997 4 Monthly payments from $2,201 to
$123,368, including interest
from 11.5% to 13.05% 22,598,977 23,106,927
1998 2 1 monthly payment of $57,091 and
1 quarterly payment of $130,767,
including interest from 11.59% to
12.93% 10,332,150 10,624,132
1999 2 Monthly payments from $15,285 to
$32,988, including interest from
9.42% to 10.65% 6,052,233 6,204,241
2000 1 Quarterly payment of $134,186,
including interest of 11.77% 5,310,000 5,522,400
29
2. LOANS RECEIVABLE (CONTINUED)
Final Number Principal
Payment of Amount at Carrying
Due Loans Payment Terms Inception Amount
- ------- ------ --------------------------------- ------------- ------------
2002 2 Monthly payments from $56,759
to $58,095, including interest
from 12.3% to 12.91% $ 10,937,450 $ 10,937,450
2003 1 Monthly payment of $41,065,
including interest of 10.35% 4,761,192 4,761,192
2004 1 Monthly payment of $24,566,
including interest of 14.82% 1,925,000 1,925,000
2007 12 Monthly payments from $3,297 to
$49,264, including interest from
8.75% to 15.5% 30,918,117 27,687,875
2008 18 Monthly payments from $18,008 to
$266,030, including interest from
9.98% to 13.05% 111,850,000 111,707,035
2014 3 Monthly payments from $29,140 to
$40,105, including interest from
11.08% to 13.18% 10,703,150 10,703,150
2025 1 Monthly payment of $69,889,
including interest at 11.05% 7,127,406 7,127,406
------------ ------------
TOTALS $233,400,675 $230,781,805
============ ============
One loan maturing in 1996 has a prior lien of approximately $1,195,000; and six
loans maturing in 2007 have prior liens aggregating $1,753,000. A significant
portion of monthly mortgage payments increase by 2% per year with the negative
amortization of principal due at maturity. At December 31, 1994, there was one
delinquent mortgage loan of $3,137,000 with $1,231,000 principal past due for
three months or more.
The Company generally requires that the borrower have a substantial initial
investment in the property. No mortgage loan, or multiple loans to a single
borrower, exceeds 8% of total assets.
-11-
30
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENT IN LEASES
The following are the components of investment in direct financing leases:
DECEMBER 31
1994 1993
--------------------------
Total minimum lease payments
receivable--(i) $ 20,543,530 $106,321,047
Estimated unguaranteed residual values
of leased properties 6,063,649 21,118,637
Unearned income (15,179,458) (74,489,496)
------------ ------------
Investment in direct financing leases $ 11,427,721 $ 52,950,188
============ ============
<FN>
(i) The leases contain an option to purchase the leased property. Total
minimum lease payments are computed assuming that the option will not
be exercised.
At December 31, 1994, future minimum lease payments receivable are as follows:
DIRECT FINANCING OPERATING
LEASES LEASES
---------------- -----------
1995 $ 1,716,630 $ 5,950,889
1996 1,653,875 5,672,216
1997 1,665,320 5,626,780
1998 1,697,485 5,831,632
1999 1,729,651 5,721,285
Thereafter 12,080,569 26,195,968
----------- -----------
TOTALS $20,543,530 $54,998,770
=========== ===========
During 1994, the Company restructured two direct financing leases; one into a
$3,324,000 mortgage loan and the other into a $3,582,000 operating lease.
During 1993, the Company restructured a $10,500,000 mortgage loan into an
operating lease. This noncash investing activity is appropriately not
reflected in the accompanying statement of cash flows.
4. ALLOWANCE FOR LOSSES
The following is a summary of the allowance for losses for 1994, 1993 and 1992.
The portion of the allowance relating to loans receivable consists of amounts
for specifically identified loans and an unallocated amount for other potential
losses in the portfolio.
-12-
31
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. ALLOWANCE FOR LOSSES (CONTINUED)
Portion of
Allowance Related to
-----------------------
Other
Loans Real Estate
Receivable Owned Total
---------- ----------- ----------
Balances at January 1, 1992 $3,360,000 $ 940,000 $4,300,000
Provision for losses 640,000 (38,489) 601,511
Charge-offs (901,511) (901,511)
---------- ---------- ----------
Balances at December 31, 1992 4,000,000 -0- 4,000,000
Provision for losses 150,000 150,000
---------- ---------- ----------
Balances at December 31, 1993 4,150,000 -0- 4,150,000
Provision for losses 1,000,000 1,000,000
---------- ---------- ----------
Balances at December 31, 1994 $5,150,000 $ -0- $5,150,000
========== ========== ==========
5. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS
AND RELATED ITEMS
The Company has a credit arrangement with a consortium of ten banks providing
for a revolving line of credit (revolving credit) in the amount of $150,000,000
which expires on March 31, 1997. The agreement specifies that borrowings under
the revolving credit are subject to interest payable in periods no longer than
three months on either the agent bank's base rate of interest or 1 1/2% over
LIBOR interest rate (based at the Company's option). The effective interest
rate at December 31, 1994 was 7.95%. In addition, the Company pays a commitment
fee at an annual rate of 1/2% of the unused line and an annual agent's fee of
$75,000. At December 31, 1994, the revolving line of credit was collateralized
by 27 real estate related investments in health care facilities. Principal is
due upon expiration of the agreement, but the total amount outstanding may not
exceed a specified percentage of the agreed-upon values of the collateral.
The Company has two other lines of credit with two banks for a total of
$18,500,000 which expire at various dates through May 31, 1995. Borrowings
under these lines of credit are subject to interest at each bank's prime rate
of interest (8 1/2% at December 31, 1994) and are due on demand.
The following information relates to aggregate borrowings under the line of
credit arrangements:
-13-
32
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS
AND RELATED ITEMS (CONTINUED)
YEAR ENDED DECEMBER 31
1994 1993 1992
---------------------------------------
Balance outstanding at December 31 $ 70,900,000 $ 35,000,000 $78,900,000
Maximum amount outstanding at any
month end 70,900,000 107,900,000 78,900,000
Average amount outstanding (total
of daily principal balances
divided by days in year) 51,422,466 76,241,644 59,103,279
Weighted average interest rate
(actual interest expense divided
by average borrowings outstanding) 6.88% 5.01% 5.83%
The Company has two five-year interest rate swap agreements, which expire at
various dates through 1997, aggregating $30,000,000 for the purpose of reducing
the Company's interest rate risk on its borrowings under the revolving credit.
Maximum rates of interest under the swap agreements are 8.77% and 10%. At
December 31, 1994, the Company had elected to borrow $52,000,000 at three to
six-month LIBOR. The Company also has one two-year variable interest rate swap
agreement which expires in May 1995 which effectively converts $40,000,000
of fixed interest rate Senior Notes (see Note 6) to a variable interest rate.
The interest rate cost for the variable interest rate swap at December 31, 1994
is 235 basis points. The differential to be paid or received is accrued as
interest rates change and are recognized as an interest expense. The related
amount payable to or receivable from counter-parties is included in other
liabilities or assets. The fair value of the swap agreements are not
recognized in the financial statements.
The Company may or may not elect to continue to match certain of its borrowings
with interest rate swap agreements. Such decisions are principally based on
the Company's policy to match its variable rate investments with comparable
borrowings, but is also based on the general trend in interest rates at the
applicable dates and the Company's perception of future volatility of interest
rates. At December 31, 1994, the Company is at risk for declining interest
rates because its variable interest rate assets exceeds its variable interest
rate debt.
The Company is exposed to credit loss in the event of nonperformance by the
other parties to the interest rate swap agreements. However, the Company does
not anticipate nonperformance by the counterparties.
Interest paid amounted to $9,256,551, $10,409,852 and $8,099,808 for 1994, 1993
and 1992, respectively, which includes $1,309,368, $2,155,260 and $1,824,131,
respectively, for the net cost of the swaps.
-14-
33
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS
During 1993, the Company issued $52,000,000 of Senior Notes with interest
ranging from 7.16% to 8.24% and maturing in 1998, 2000 and 2003. These notes
are collateralized by 12 real estate related investments in health care
facilities.
The following information relates to other long-term obligations:
DECEMBER 31
1994 1993
-------------------------
Notes payable related to industrial
development bonds, collateralized
by health care facilities--3 in
1994 and 6 in 1993, interest rates
from 10.75% to 15%, maturing at
various dates to 2004 $ 3,620,000 $ 7,300,000
Mortgage loans, collateralized by
health care facilities--2 in 1994
and 1993, interest rates from 8.75%
to 15.5%, maturing at various dates
to 2005 1,752,790 2,011,115
----------- -----------
TOTALS $ 5,372,790 $ 9,311,115
=========== ===========
At December 31, 1994, the annual payments on these long-term obligations for
the succeeding five years are as follows:
Principal Interest Total
----------- ----------- -----------
1995 $ 451,561 $4,599,196 $ 5,050,757
1996 357,969 4,554,129 4,912,098
1997 695,466 4,498,831 5,194,297
1998 23,367,256 3,590,973 26,958,229
1999 242,947 2,709,569 2,952,516
7. STOCK OPTIONS
The Company's 1985 Incentive Stock Option Plan authorized up to 450,000 shares
of Common Stock to be issued at the discretion of the Board of Directors.
The following summarizes the activity in the Plan:
-15-
34
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (CONTINUED)
YEAR ENDED DECEMBER 31
1994 1993
----------------------
Number of shares under option at
beginning of year 152,500 132,673
Options granted 51,000 47,000
Options exercised (20,360) (27,173)
------- -------
Number of shares under option at
end of year 183,140 152,500
======= =======
At end of year:
Shares exercisable 123,166 112,495
======= =======
Shares available to be granted 160,000 61,000
======= =======
At December 31, 1994, the option prices ranged from $11.94 to $23.94 per share.
The option prices were equivalent to the market prices of the shares on the
dates granted. Such options expire ten years after the date granted. Options
exercised during 1994 and 1993 were at prices ranging from $11.94 to $17.69 per
share. During 1994 and 1993, Messrs. Thompson and Wolfe exercised 20,360 and
27,173 shares, respectively, and together have options to purchase 76,140
shares at December 31, 1994.
8. DISTRIBUTIONS
In order to continue to qualify as a real estate investment trust for federal
income tax purposes, 95% of taxable income (not including capital gains) must
be distributed to shareholders. Real estate invest-ment trusts which do not
distribute a certain amount of current year taxable income in the current year
are also subject to a 4% federal excise tax. The Company's excise tax expense
was $575,000 and $132,000 for the years ended December 31, 1994 and 1993,
respectively. Undis-tributed net income for federal income tax purposes
amounted to $18,029,000 at December 31, 1994. The principal reason for the
difference between undistributed net income for federal income tax purposes and
financial statement purposes is the use of the operating method of accounting
for leases for federal income tax purposes. Cash distributions paid to
shareholders, for federal income tax purposes, are as follows:
YEAR ENDED DECEMBER 31
1994 1993 1992
-----------------------
Per Share:
Ordinary income $ .72 $1.49 $1.55
Capital gains 1.29 .44 .30
----- ----- -----
TOTALS $2.01 $1.93 $1.85
===== ===== =====
-16-
35
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
At December 31, 1994, the Company has outstanding commitments to provide
financing for facilities in the approximate amount of $114,972,000. The
Company also has commitments to provide working capital loans to related
parties of approximately $369,000. The Company has granted to a partnership a
credit facility line to finance retirement facilities. The Company's board of
directors retains the right to approve the financing of each facility. At
December 31, 1994, the unused portion is $19,800,000. The above commitments
are generally on similar terms as existing financings of a like nature with
rates of return to the Company based upon current market rates at the time of
the commitment.
The Company has entered into a number of agreements to purchase health care
facilities, or the loans with respect thereto, in the event that the present
owners default upon their obligations. In consideration for these agreements,
the Company generally receives and recognizes fees annually related to these
guarantees. Although the terms of these agreements vary, the purchase prices
are equal to the amount of the outstanding obligations financing the facility.
These agreements expire between the years 1997 and 2005. At December 31, 1994,
obligations under these agreements for which the Company was contingently
liable aggregated approximately $20,175,000, all of which were with related
parties.
The Company believes that it has the ability to obtain funds to meet these
commitments. The Company also believes that such commitments represent no
greater than normal risk.
10. MANAGEMENT AGREEMENT AND CERTAIN TRANSACTIONS WITH RELATED PARTIES
The Company has a management agreement with First Toledo Advisory Company (the
Manager). F. D. Wolfe and B. G. Thompson, two of the Company's nine directors,
are officers and co-owners of the Manager. The Company accrues a fee to the
Manager at a monthly rate of 1/10 of 1% of the Company's net assets, as defined
in the Management Agreement. Further, the Manager is entitled to an annual
incentive fee equal to 10% of the amount by which net profits exceed 10% of the
monthly average net worth of the Company, as defined in the Management
Agreement.
Messrs. Wolfe and Thompson are also related to various entities: a) to which
the Company has made mortgage loans and working capital loans yielding interest
income (see Note 2); b) with which the Company has entered into agreements to
purchase health care facilities, or the loans with respect thereto, upon
default of obligations by their present owners providing fee income of
$338,722, $422,438, and $349,650 for 1994, 1993 and 1992, respectively; and c)
with which the Company has entered into operating lease agreements (see Note
3).
-17-
36
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. MANAGEMENT AGREEMENT AND CERTAIN TRANSACTIONS WITH RELATED PARTIES
(CONTINUED)
The Company recorded income from related parties as follows:
1994 1993 1992
---------- ---------- ----------
Interest income $3,220,092 $2,869,911 $2,463,539
Loan and guaranty fees 377,658 469,362 421,996
Operating lease rents 112,561 272,307 866,960
Gain on exercise of options 100,029 1,030,898
---------- ---------- ----------
TOTALS $3,810,340 $3,611,580 $4,783,393
========== ========== ==========
In accordance with the By-Laws of the Company, such transactions were approved
by a majority of the directors not affiliated with the transactions.
On February 6, 1995, the Company's Board of Directors approved in principle the
acquisition of the Manager. Under the agreement in principle, the Company
would issue 215,154 shares of common stock as consideration for the acquisition
of the Manager, subject to adjustment under certain circumstances. In
connection with the closing of the acquisition, Messrs. Thompson and Wolfe
would enter into five-year service agreements and would each purchase 84,191
shares of common stock at a price of $21.38 per share with funds loaned by the
Company. Under the stock purchase and loan arrangements, 20% of each loan
could be forgiven each year if continued service and stock price performance
tests are met. This agreement is subject to, among other things, shareholder
approval and is anticipated to close in the second quarter of 1995.
11. SHAREHOLDER RIGHTS PLAN
Under the terms of a Shareholder Rights Plan approved by the Board of Directors
in July 1994, a Preferred Share Right (Right) is attached to and automatically
trades with each outstanding share of Health Care REIT, Inc. common stock.
The Rights, which are redeemable, will become exercisable only in the event
that any person or group becomes a holder of 15% or more of the Company's
stock, or commences a tender or exchange offer which, if consummated, would
result in that person or group owning at least 15% of the common stock. Once
the Rights become exercisable, they entitle all other shareholders to purchase
one one-thousandth of a share of a new series of junior participating preferred
stock for an exercise price of $48.00. The Rights will expire on August 5,
2004 unless exchanged earlier or redeemed earlier by the Company for $.01 per
Right at any time before public disclosure that a 15% position has been
acquired.
-18-
37
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practi-cable to estimate
that value.
Mortgage Loans--The fair value of all mortgage loans, except those matched with
debt, is estimated by discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with similar credit ratings
and for the same remaining maturities. Mortgage loans matched with debt are
presumed to be at fair value.
Working Capital and Construction Loans--The carrying amount is a reasonable
estimate of fair value for working capital and construction loans because the
interest earned on these instruments is variable.
Cash and Cash Equivalents--The carrying amount approximates fair value because
of the short maturity of these financial instruments.
Borrowings Under Line of Credit Arrangements and Related Items--The carrying
amount of the line of credit approximates fair value because the borrowings are
interest rate adjustable. The fair value of interest rate swaps is the
estimated amount, taking into account the current interest rate, that the
Company would receive or pay to terminate the swap agreements at the reporting
date.
Senior Notes and Industrial Development Bonds--The fair value of the senior
notes payable and the industrial development bonds was estimated by discounting
the future cash flow using the current borrowing rate available to the Company
for similar debt.
Mortgage Loans Payable--Mortgage loans payable is a reasonable estimate of fair
value because they are matched with loan receivable.
Commitments to Finance and Guarantees of Obligations--The fair value of the
commitments to finance and guarantees of obligations are based on fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements, and the counterparties' credit standing.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1994 and 1993 are as follows:
-19-
38
HEALTH CARE REIT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------------- --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- ------------
Financial Assets:
Mortgage loans $230,781,805 $225,306,000 $165,147,144 $164,371,000
Working capital and
construction loans 24,141,906 24,141,906 20,134,157 20,134,157
Cash and cash equivalents 935,449 935,449 4,896,314 4,896,314
Financial Liabilities:
Borrowings under line of
credit arrangements 70,900,000 70,900,000 35,000,000 35,000,000
Senior notes payable 52,000,000 46,307,000 52,000,000 51,463,000
Industrial development bonds 3,620,000 4,343,000 7,300,000 9,556,000
Mortgage loans payable 1,752,790 1,752,790 2,011,115 2,011,115
Unrecognized Financial
Instruments:
Interest rate swap agreements 339,000 2,629,000
Commitments to finance 135,141,000 135,141,000 41,902,000 41,902,000
Guarantees of obligations 20,175,000 20,175,000 21,255,000 21,255,000
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations of
the Company for the years ended December 31, 1994 and 1993:
YEAR ENDED DECEMBER 31, 1994
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------------------------------------------------------------------
Gross Income $8,441,239 $12,730,715 $10,518,166 $11,041,911
Net Income 4,984,250 7,799,857 6,326,167 5,842,644
Net Income Per Share .43 .68 .55 .51
YEAR ENDED DECEMBER 31, 1993
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------------------------------------------------------------------
Gross Income $8,602,869 $8,949,136 $9,746,182 $8,720,020
Net Income 5,140,609 4,789,912 5,072,054 5,052,363
Net Income Per Share .59 .54 .57 .45
-20-
39
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The By-Laws provide for nine Directors and divide them into three
classes: Class I, Class II, and Class III. The Directors are elected for a
three-year term or until the election and qualification of their respective
successors.
CLASS I: DIRECTORS (1)
Director Board Committee
Name Age Principal Occupation (2) Since Membership
---- --- ------------------------ ----- ----------
Richard C. Glowacki 62 President of The Danberry 1981 Audit, Executive,
Management Company (real Incentive Stock
estate brokerage and Option, Nominating,
investment activities) Planning and Special
Committees
Bruce G. Thompson 65 Chairman and Chief 1971 Executive, Investment
Executive Officer of the and Planning
Company; 1994-Present Committees
President and Director of
First Toledo Advisory
Company (Manager of the
Company); President and
Director of First Toledo
Corporation (affiliate of
the Company); Director of
WT Management Company
(affiliate of the Company);
Director of Kingston
HealthCare Company,
formerly WTR Corp
(affiliate of the Company);
Director of Society
National Bank, Toledo
(commercial bank); Director
of The Douglas Company
(general contractor); and
Director of Arbor Health
Care Company (developer and
operator of nursing homes;
public company)
Richard A. Unverferth 71 Chairman of Unverferth 1971 Audit, Executive,
Manufacturing Company, Inc. Incentive Stock
(agricultural equipment Option, Investment,
manufacturer); and Chairman Nominating, Planning
of the Board of H.C.F., and Special Committees
Inc. (operator of a nursing
home chain)
CLASS II: DIRECTORS (1)
Director Board Committee
Name Age Principal Occupation (2) Since Membership
---- --- ------------------------ ----- ----------
George Chopivsky, Jr. 48 Chairman of United 1984 Investment, Nominating
Psychiatric Corporation and Planning
(psychiatric hospitals); Committees
and Director of Franklin
National Bank (commercial
bank)
-21-
40
Director Board Committee
Name Age Principal Occupation (2) Since Membership
---- --- ------------------------ ----- ----------
Bruce Douglas 62 Chairman of the Board of 1975 Investment and
The Douglas Company Planning Committees
(general contractor)
Frederic D. Wolfe 65 President of the Company; 1971 Executive, Investment
1994-Present Chairman of and Planning
the Board and Director of Committees
First Toledo Advisory
Company (Manager of the
Company); Chairman of the
Board and Director of First
Toledo Corporation
(affiliate of the Company);
Director of WT Management
Company (affiliate of the
Company); Director of
Kingston HealthCare
Company, formerly WTR Corp
(affiliate of the Company);
and Director of National
City Bank, Northwest
(commercial bank)
CLASS III: DIRECTORS (1)
Director Board Committee
Name Age Principal Occupation (2) Since Membership
---- --- ------------------------ ----- ----------
Pier C. Borra 55 Chairman, President and 1991 Incentive Stock
Chief Executive Officer of Option, Investment,
Arbor Health Care Company Planning and Special
(developer and operator of Committees
nursing homes;
public company)
George L. Chapman 47 Executive Vice President 1994 Planning Committee
and General Counsel of the
Company; 1994-Present
Executive Vice President
and General Counsel of
First Toledo Advisory
Company (Manager of the
Company); Executive Vice
President and General
Counsel of First Toledo
Corporation (affiliate of
the Company); and prior to
January 1992, Attorney-at-
Law, Shumaker, Loop &
Kendrick (law firm)
Sharon M. Oster 46 Professor of Management, 1994 Planning Committee
Yale School of Management,
Yale University and Director
of Aristotic Corporation
(public company)
<FN>
_______________
(1) The terms of Messrs. Glowacki, Thompson and Unverferth expire in 1995.
The terms of Messrs. Chopivsky, Douglas and Wolfe expire in 1996. The
terms of Messrs. Borra and Chapman and Ms. Oster expire in 1997.
-22-
41
(2) Unless otherwise noted, each person has had the same principal
occupation and employment during the last five years.
EXECUTIVE OFFICERS OF THE COMPANY
The following information is furnished as to the Executive Officers of
the Company, each of whom has a term of office of one year or until their
successors are chosen and qualified or until their earlier resignation or
removal:
Year Appointed
Name Age Office and Business Experience Executive Officer
---- --- ------------------------------ -----------------
Bruce G. Thompson 65 Chairman and Chief Executive Officer of the 1971
Company; JUNE 1994-PRESENT President and
Director of First Toledo Advisory Company
(Manager of the Company); President and
Director of First Toledo Corporation
(affiliate of the Company); Director of WT
Management Company (affiliate of the
Company); Director of Kingston HealthCare
Company, formerly WTR Corp (affiliate of the
Company); Director of Society National Bank,
Toledo (commercial bank); Director of The
Douglas Company (general contractor); and
Director of Arbor Health Care Company
(developer and operator of nursing homes)
Frederic D. Wolfe 65 President of the Company; JUNE 1994-PRESENT 1971
Chairman of the Board and Director of First
Toledo Advisory Company (Manager of the
Company); Chairman of the Board and Director
of First Toledo Corporation (affiliate of the
Company; Director of WT Management Company
(affiliate of the Company); Director of
Kingston HealthCare Company, formerly WTR
Corp (affiliate of the Company); and Director
of National City Bank, Northwest (commercial
bank)
George L. Chapman 47 JANUARY 1992-PRESENT Executive Vice President 1992
and General Counsel of the Company; Executive
Vice President and General Counsel of First
Toledo Corporation (affiliate of the
Company); JUNE 1994-PRESENT Executive Vice
President and General Counsel of First Toledo
Advisory Company (Manager of the Company);
and 1979-1991 Attorney-at-Law, Shumaker, Loop
& Kendrick (law firm)
Erin C. Ibele 33 JANUARY 1993-PRESENT Vice President and 1987
Corporate Secretary of the Company; 1987-
JANUARY 1993 Corporate Secretary of the
Company; and Vice President, Corporate
Secretary and Director of First Toledo
Corporation (affiliate of the Company); and
JUNE 1994-PRESENT Vice President, Corporate
Secretary and Director of First Toledo
Advisory Company (Manager of the Company)
Robert J. Pruger 46 Chief Financial Officer and Treasurer of the 1986
Company; 1986-JANUARY 1993 Controller of the
Company; Treasurer and Director of First
Toledo Corporation (affiliate of the
Company); JUNE 1994-PRESENT Treasurer and
Director of First Toledo Advisory Company
(Manager of the Company)
ITEM 11. EXECUTIVE COMPENSATION
Each Executive Officer of the Company is employed and compensated by
the Management Company. See "Certain Relationships and Related Transactions --
The Manager." No officer of the Company was paid cash compensation by the
Company in excess of $100,000 in 1994. Cash compensation paid to all Executive
Officers of the Company as a group during the year ended December 31, 1994 five
persons equalled $16,500. The information set forth below regarding Mr.
Thompson must be disclosed because Mr. Thompson is the Chief Executive Officer
of the Company, even though his annual salary and bonus did not exceed
$100,000.
SUMMARY COMPENSATION TABLE
Long-Term
Name and Annual Compensation Compensation
--------------------- ------------
Principal Position Year Salary($) Bonus($) Options
---------------------- ---- --------- -------- -------
Bruce G. Thompson, 1994 $4,000 -0- 12,000
Chairman and 1993 4,000 -0- 10,000
Chief Executive Officer 1992 4,000 -0- 10,000
OPTION GRANTS IN LAST FISCAL YEAR
Number of % of Total
Shares Options Potential Realizable
Underlying Granted to Value at Assumed Annual
Options Employees Exercise Rate of Stock Price
Granted (#) in Fiscal price Expiration Appreciation for Option
Name (1), (2) Year ($/SH) Date Term(3)
---- ----------- --------- ------ ---------- ----------------------
5%($) 10%($)
----- ------
Bruce G. Thompson 12,000 23.53% $23.9375 1-16-2004 $150,543 $381,492
<FN>
(1) Of the options granted, no shares are currently exercisable and
options for 3,060 shares, 4,177 shares, 4,177 shares and 586 shares
vest in 1997, 1998, 1999 and 2000, respectively.
-23-
42
(2) The terms of the options granted permit cashless exercises and payment
of the option exercise price by delivery of previously owned shares.
(3) Gains are reported net of the exercise price, but before taxes
associated with the exercise. These amounts represent certain assumed
rates of appreciation only. Actual gains, if any, on stock option
exercises are dependent on the future performance of the shares, as
well as the optionee's continued employment through the vesting
period. The amount reflected in this Table may not necessarily be
achieved.
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR
END OPTION VALUES
Shares
Acquired Value Number of Shares Underlying Value of Unexercised In-
On Realized Unexercised Options The-Money Options at
Name Exercise ($) at Fiscal Year End Fiscal Year End ($)
---- -------- --- ------------------ -------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Bruce G. Thompson 14,500 $137,094 19,469 22,531 $63,750 $0
COMPENSATION OF DIRECTORS
In 1994, each Director received a fee of $10,000 for his service as
such, which fee was increased to $12,000 effective January 1, 1995. In
addition, each Director received a fee of $1,200 for each Board meeting
attended. The schedule set forth below indicates the fees paid to each
Director for each committee meeting attended in 1994 and fees to be paid
effective January 1, 1995:
COMMITTEE FEES
--------- ----
1994 1995
------ ------
Audit $ 750 $1,000
Executive -0- -0-
Incentive Stock Option 400 400
Investment, no quarterly board meetings 1,000 1,200
Investment, quarterly board meetings 500 600
Nominating -0- -0-
Planning 1,200 1,500
Special 1,000 1,000
Messrs. Chapman, Thompson and Wolfe are not paid fees for Board or
committee meetings. The fees paid to the other Directors totalled $133,947 in
1994.
-24-
43
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ending December 31, 1994, the Incentive Stock
Option Committee of the Board consisted of Pier C. Borra, Richard C. Glowacki
and Gregory G. Alexander until his retirement as a director of the Company in
May 1994. On February 6, 1995, Mr. Unverferth was appointed to the Incentive
Stock Option Committee. The Incentive Stock Option Committee of the Board has
the authority to determine which officers and key employees of the Company will
receive option awards under the Company's 1985 Incentive Stock Option Plan (the
"1985 Plan") and the terms of any options granted under the Plan.
Mr. Alexander is a partner in the law firm of Shumaker, Loop &
Kendrick, which the Company has retained with respect to various legal matters.
Mr. Borra is the Chairman, President and Chief Executive Officer of Arbor
Health Care Company ("Arbor"). During the fiscal year ending December 31,
1994, Bruce G. Thompson, the Chairman and Chief Executive Officer of the
Company and a participant in the Plan, served as a member of the Board of
Directors of Arbor.
REPORT OF THE INCENTIVE STOCK OPTION COMMITTEE
With the exception of incentive stock options awarded under the
Company's Plan, the officers of the Company receive only nominal compensation
from the Company. The aggregate amount of salary payments made by the Company
to officers in 1994 was limited to $16,500. Although the officers of the
Company are principally employed and compensated by the Management Company, the
Board and the stockholders of the Company adopted the 1985 Plan in order to
reward individual performance and to provide long-term incentives. Under the
terms of the 1985 Plan, the ISO Committee has authority to approve stock option
awards to officers of the Company and to determine the terms and conditions of
such awards. The ISO Committee meets in January or February of each year.
The ISO Committee met on January 17, 1994 and granted officers of the
Company options to purchase an aggregate of 51,000 shares, including options
granted to Mr. Bruce Thompson, the Chief Executive Officer of the Company, to
acquire 12,000 shares. In deciding to grant these stock options, the ISO
Committeee considered several different criteria, including the Company's
financial performance during the prior year, the contributions individual
officers had made to the Company's success during that period, and the need to
provide greater equity-based incentives to retain and adequately motivate
members of the management team. The Committeee reviewed indicators of the
Company's financial performance such as the steady growth in the Company's cash
flow from operating activities available for distribution during the year, and
the increase in the Company' portfolio of properties. The awards, however were
not specifically based upon financial performance. Instead, the ISO Committee's
decisions were based in large part on senior management's success in achieving
several major non-quantitative strategic goals. These goals included the
successful completion of an equity offering, senior management's continued
progress in developing and strengthening the Company's marketing team and
strategies, and the Company's continued success in locating and completing
transactions with high-quality health care facility operators.
The ISO Committee considered Mr. Thompson's leadership crucial to the
Company's achievement of these goals, and therefore decided he should receive
an option award that was a significant indicator of his value to the Company.
In determining that 12,000 shares was the appropriate amount, the ISO Committee
considered the size of the option grants awarded to Mr. Thompson in prior
years, and the extent of his total holdings of shares of the Company stock
(including previously granted but unexercised options to acquire additional
shares). The ISO Committeee determined that an option for 12,000 shares would
be sufficiently large to provide Mr. Thompson with additional motivation to
continue his efforts.
The ISO Committee believes that stock options provide a desirable set
of incentives to retain and encourage future efforts by the Company's officers.
Since the options are granted at prevailing market value, the options will only
have value if the stock price increases.
-25-
44
Although the Company does not anticipate that the $1,000,000
compensation limit on federal tax deductions for executive compensation added
to the Code by the 1993 tax legislation will apply to Mr. Thompson or other
executive officers at this time, the Company is studying the issue and whether
any changes to the Company's compensation policies will be necessary or
desirable as a result.
The foregoing report was prepared by Messrs. Borra, Glowacki and
Unverferth, the members of the ISO Committee.
STOCKHOLDER RETURN PERFORMANCE PRESENTATION
Set forth below is a table comparing the yearly percentage change and
the cumulative total stockholder return on the Company's shares against the
cumulative total return of the S & P Composite-500 Stock Index and the NAREIT
Hybrid Index prepared by NAREIT. Twenty-two companies comprise the NAREIT
Hybrid Index. The Index consists of REITs identified by NAREIT as hybrid (those
REITs which have both mortgage and equity investments). Upon written request
the Company shall provide stockholders with the names of the component issuers.
The data are based on the last closing prices as of December 31 for each of the
five years. 1989 equals $100 and dividends are assumed to be reinvested.
12/31/89 12/31/90 12/31/91 12/31/92 12/31/93 12/31/94
-------- -------- -------- -------- -------- --------
S & P 500 100.00 96.83 126.41 136.10 149.70 151.66
Company 100.00 104.18 181.22 203.04 235.51 224.41
Hybrid 100.00 71.79 99.90 116.47 141.14 146.79
Except to the extent the Company specifically incorporates this
information by reference, the foregoing Report of the ISO Committee and Stock
Price Performance Table shall not be deemed incorporated by reference by any
general statement incorporating by reference the Company's Report on Form 10-K
into any filing under the Securities Act of 1933 or under the Securities
Exchange Act of 1934. This information shall not otherwise be deemed filed
under such Acts.
Section 16(A) Compliance
- ------------------------
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own beneficially
more than ten percent (10%) of the Common Stock of the Company, to file reports
of ownership and changes of ownership with the Securities and Exchange
Commission and the New York Stock Exchange. Copies of all filed reports are
required to be furnished to the Company pursuant to Section 16(a). Based
solely on the reports received by the Company and on written representations
from reporting persons, the Company believes that the directors and executive
officers complied with all applicable filing requirements during the fiscal
year ended December 31, 1994, except for Frederic D. Wolfe, the President and a
director of the Company, who filed late Form 4's for the months of November
1993 and June 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
-26-
45
The following table sets forth as of January 31, 1995, unless
otherwise specified, certain information with respect to the beneficial
ownership of the Company's shares by each person who is a Director of the
Company and by the Directors and officers of the Company as a group. The
Company's Management is not aware of any person who, as of December 31, 1994,
was the beneficial owner of more than 5% of the outstanding shares of the
Company.
SECURITY OWNERSHIP OF DIRECTORS AND MANAGEMENT
Amount and Nature of Beneficial
Ownership of Common Stock Percent
Name of Beneficial Owner as of January 31, 1995 of Class
------------------------ ---------------------- --------
Pier C. Borra Sole voting power 0 N/A
Shared voting power 0 N/A
Sole investment power 0 N/A
Shared investment power 5,140 .04
------- -------
Total 5,140 .04
George L. Chapman Sole voting power 22,423(1) .19
Shared voting power 0 N/A
Sole investment power 22,423(1) .19
Shared investment power 0 N/A
------- -------
Total 22,423 .19
George Chopivsky, Jr. Sole voting power 3,076 .03
Shared voting power 0 N/A
Sole investment power 3,076 .03
Shared investment power 0 N/A
------- -------
Total 3,076 .03
Bruce Douglas Sole voting power 36,976 .32
Shared voting power 0 N/A
Sole investment power 36,976 .32
Shared investment power 0 N/A
------- -------
Total 36,976 .32
Richard C. Glowacki Sole voting power 16,202 .14
Shared voting power 0 N/A
Sole investment power 16,202 .14
Shared investment power 0 N/A
------- -------
Total 16,202 .14
Sharon M. Oster Sole voting power 100 .00
Shared voting power 0 N/A
Sole investment power 100 .00
Shared investment power 0 N/A
------- -------
Total 100 .00
Bruce G. Thompson Sole voting power 61,809(1) .53
Shared voting power 0 N/A
Sole investment power 61,809(1) .53
Shared investment power 606 .01
------- -------
Total 62,415 .54
Richard A. Unverferth Sole voting power 0 N/A
Shared voting power 0 N/A
Sole investment power 0 N/A
Shared investment power 3,816 .03
------- -------
Total 3,816 .03
Frederic D. Wolfe Sole voting power 111,623(1) .95
Shared voting power 35,075 .30
Sole investment power 111,623(1) .95
Shared investment power 35,075 .30
------- -------
Total 146,698 1.25
All Directors and Officers Sole voting power 308,341(2) 2.63
as a group (11 persons) Shared voting power 35,075 .30
Sole investment power 308,341(2) 2.63
Shared investment power 44,637 .38
------- -------
Total 696,394 5.94
<FN>
___________________
(1) Includes shares not actually owned by such individuals as of January
31, 1995, but of which beneficial ownership could be acquired
currently by such individuals upon the exercise of outstanding
options.
(2) Includes an aggregate of 116,534 shares not actually owned by such
Directors and officers as of January 31, 1995, but of which beneficial
ownership could be acquired currently by such Directors and officers
upon the exercise of outstanding options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Partnership Financings
- ----------------------
The Company has provided direct loans and credit enhancements to five
partnerships in connection with four assisted living and retirement facilities
and two nursing homes. First Toledo Corporation, which is wholly owned by
Messrs. Thompson and Wolfe, serves as a general partner in each partnership in
order to monitor and manage the affairs of the partnerships and the development
and operations of the projects. The partnership structures facilitated
industrial development bond financing in four of the projects and credit
enhancements were provided in the form of the Company's agreement to purchase
the facilities or the bonds in the event of default by the partnerships. As of
December 31, 1994, the Company had $5,418,000 outstanding in loans to three of
these partnerships and was obligated to make additional loans aggregating
$369,000. The Company has contingent obligations under the agreements to
purchase which currently total $20,175,000. For the years ended 1994, 1993 and
1992, the Company received $339,000, $422,000 and $350,000, respectively in
connection with its contingent obligations in the agreements to purchase.
Messrs. Thompson and Wolfe are limited partners in three of the partnerships,
an affiliate of Mr. Douglas, a director of the Company, serves as a general
partner of one of the partnerships, and an affiliate of Messrs. Thompson and
Wolfe, Kingston HealthCare Company, manages four of the facilities.
The Manager
- -----------
Messrs. Thompson and Wolfe, Chairman, Chief Executive Officer and
Director and President and Director of the Company, respectively each own 50%
of First Toledo Advisory Company, the Manager of the Company. In 1994, 1993
and 1992, the Manager was paid $3,087,000, $2,427,000 and $1,969,000,
respectively in management fees by the Company.
Other Relationships
- -------------------
George Chopivsky, Jr., a Director of the Company, and his affiliates
have interests in two behavioral care facilities for which the Company is
providing financing in the total amount of $12,641,000.
-27-
46
Bruce G. Thompson, Chairman, Chief Executive Officer and Director of
the Company, is a Director of Society National Bank, Toledo, which is a
participant in the Company's revolving line of credit.
Frederic D. Wolfe, President and a Director of the Company, is a
Director of National City Bank, Northwest (NCB), which is a participant in the
Company's revolving line of credit. NCB is an affiliate of National City Bank
of Cleveland, which is agent for, and a participant in, the Company's revolving
line of credit.
For the years ended 1994, 1993 and 1992, the Company recorded lease
income from Kingston in the amounts of $113,000, $272,000 and $439,000,
respectively.
General
- -------
All of the related party matters were approved by a majority of
Directors unaffiliated with the transactions. For the years ended December 31,
1994, 1993 and 1992, gross income from related parties totalled $3,810,000
$3,612,000, and $4,783,000 or 8.92%, 10.03% and 16.55%, respectively, of the
gross income of the Company.
-28-