1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
------------
For the fiscal year ended DECEMBER 31, 1997 Commission File No. 1-8923
HEALTH CARE REIT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1096634
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One SeaGate, Suite 1500, Toledo, Ohio 43604
(Address of principal executive office) (Zip Code)
(419) 247-2800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
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, 1998 was $678,682,000 based on the reported closing
sales price of such shares on the New York Stock Exchange for that date. As of
March 31, 1998, there were 25,367,997 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the annual
shareholders' meeting to be held April 21, 1998, are incorporated by reference
into Part III.
2
FORM 10-K/A
AMENDMENT NO. 1 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 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, 1997.
FRONT COVER AND INSIDE FRONT COVER
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
ITEM 14. EXHIBITS
EXHIBITS
S-K Item 601
No. Document
------------
*23 Consent of Independent Auditors.
*27.1 Financial Data Schedule for the year ended December 31, 1997.
*27.2 Financial Data Schedules that are being restated for the three months ended March
31, 1997, the six months ended June 30, 1997 and the nine months ended September 30,
1997.
*27.3 Financial Data Schedules that are being restated for the three months ended
March 31, 1996, the six months ended June 30, 1996, the nine months ended September
30, 1996 and the year ended December 31, 1996.
*Filed herewith.
3
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, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. Our audits also included the
financial statement schedules listed in the Index at Item 14 (a). These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Health Care REIT,
Inc. at December 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedules, when considered
in relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
ERNST & YOUNG LLP
January 30, 1998
Toledo, Ohio
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HEALTH CARE REIT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
1997 1996
-----------------------------------------
ASSETS (IN THOUSANDS)
Real estate investments:
Real property owned
Land $ 22,445 $ 12,949
Buildings & improvements 239,549 136,256
Construction in progress 47,050 10,900
------------------ -----------------
309,044 160,105
Less accumulated depreciation (11,769) (6,482)
------------------ -----------------
Total real property owned 297,275 153,623
Loans receivable 412,734 358,182
Direct financing leases 7,935 10,876
----------------- -----------------
717,944 522,681
Less allowance for losses (4,387) (9,787)
----------------- -----------------
Net real estate investments 713,557 512,894
Other Assets:
Deferred loan expenses 2,275 1,432
Cash and cash equivalents 1,381 581
Investment securities 9,635 768
Receivables and other assets 7,479 4,156
------------------ -----------------
20,770 6,937
------------------ -----------------
Total assets $ 734,327 $ 519,831
================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Borrowings under line of credit arrangements $ 78,400 $ 92,125
Senior unsecured notes 162,000 82,000
Bonds and mortgages payable 8,670 10,270
Accrued expenses and other liabilities 15,333 9,900
------------------ -----------------
Total liabilities 264,403 194,295
Shareholders' equity:
Preferred Stock, $1.00 par value:
Authorized - 10,000,000 shares
Issued and outstanding - None
Common Stock, $1.00 par value:
Authorized - 40,000,000 shares
Issued and outstanding - 24,341,030
shares in 1997 and 18,320,291
shares in 1996 24,341 18,320
Capital in excess of par value 435,603 298,281
Undistributed net income 8,841 8,167
Unrealized gains on investment
securities available for sale 4,671 768
Unamortized restricted stock (3,532)
------------------ -----------------
Total shareholders' equity 469,924 325,536
------------------ -----------------
Total liabilities and shareholders' equity $ 734,327 $ 519,831
================== =================
See accompanying notes
-18-
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HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------- --------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Interest on loans receivable $ 45,999 $ 36,735 $ 30,837
Prepayment fees 529 3,059 4,082
Direct financing leases:
Lease income 1,238 1,464 1,529
Gain on exercise of options 421
Operating leases:
Rents 22,178 9,848 6,352
Gain on exercise of options 155
Loan and commitment fees 3,036 2,607 1,666
Interest and other income 328 113 130
-------------- --------------- ---------------
73,308 54,402 44,596
Expenses:
Interest expense 15,365 14,635 12,751
Provision for depreciation 5,287 2,427 1,580
General and administrative 4,858 4,448 2,899
Loan expense 720 808 752
Provision for losses 600 600 4,800
Disposition of investment 808
Settlement of management contract 5,793
Management fees 2,386
-------------- --------------- ---------------
26,830 23,726 30,961
-------------- --------------- ---------------
Net income $ 46,478 $ 30,676 $ 13,635
============== =============== ===============
Average number of shares outstanding:
Basic 21,594 14,093 11,710
Diluted 21,929 14,150 11,728
Net income per share:
Basic $ 2.15 $ 2.18 $ 1.16
Diluted 2.12 2.17 1.16
See accompanying notes
-19-
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HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
CAPITAL IN UNAMORTIZED
COMMON EXCESS OF UNDISTRIBUTED UNREALIZED RESTRICTED
STOCK PAR VALUE NET INCOME GAINS STOCK TOTAL
-------------- --------------- ---------------- -------------- --------------- --------------
(In thousands)
Balances at January 1, 1995 $ 11,595 $ 161,087 $ 16,498 $ 189,180
Net income 13,635 13,635
Proceeds from issuance of
shares under the dividend
reinvestment and stock
incentive plans 157 2,947 3,104
Issuance of shares related
to settlement of
management contract 282 4,766 5,048
Unrealized gains on investment
securities available for sale $ 845 845
Cash dividends paid--$2.075
per share (24,215) (24,215)
--------- ---------- ---------- --------- --------- ----------
Balances at December 31, 1995 12,034 168,800 5,918 845 187,597
Net income 30,676 30,676
Proceeds from issuance of
shares under the dividend
reinvestment and stock
incentive plans 176 3,479 3,655
Proceeds from sale of shares,
net of expenses of
$6,433,000 6,110 126,002 132,112
Change in unrealized gains
on investment securities
available for sale (77) (77)
Cash dividends paid --
$2.08 per share (28,427) (28,427)
--------- ---------- ------------ ---------- --------- ----------
Balances at December 31, 1996 18,320 298,281 8,167 768 325,536
Net income 46,478 46,478
Proceeds from issuance of
shares under the dividend
reinvestment and stock
incentive plans 455 10,179 $ (3,789) 6,845
Proceeds from sale of shares,
net of expenses of
$7,477,000 5,566 127,143 132,709
Change in unrealized gains
on investment securities
available for sale 3,903 3,903
Amortization of restricted
stock grants 257 257
Cash dividends paid --
$2.11 per share (45,804) (45,804)
--------- ---------- ------------ --------- --------- ------------
Balances at December 31, 1997 $ 24,341 $ 435,603 $ 8,841 $ 4,671 $ (3,532) $ 469,924
========= ========== ========== ========= ========== =========
See accompanying notes
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HEALTH CARE REIT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1997 1996 1995
------------------ ------------------ -------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 46,478 $ 30,676 $ 13,635
Adjustments to reconcile net income to
net cash provided from operating
activities:
Provision for depreciation 5,361 2,461 1,580
Amortization 980 810 749
Provision for losses 600 600 4,800
Disposition of investment 808
Settlement of management contract 5,002
Loan and commitment fees earned
less than cash received 4,642 1,764 1,467
Direct financing lease income less
than cash received 372 90 181
Rental income in excess of
cash received (1,548) (370)
Interest income (more than) less
than cash received (29) (134) 525
Increase (decrease) in accrued
expenses and other liabilities 790 401 (382)
Increase in receivables and
other assets (1,638) (886) (404)
------------ ----------- -----------
Net cash provided from operating activities 56,008 36,220 27,153
INVESTING ACTIVITIES
Investment in loans receivable (123,376) (168,845) (107,297)
Investment in operating-lease properties (135,835) (66,083) (2,976)
Other investments (4,964)
Principal collected on loans 49,750 60,659 69,697
Proceeds from exercise of purchase options 2,569 9,508
Other (213) (221) (3)
------------ ----------- -----------
Net cash used in investing activities (212,069) (164,982) (40,579)
FINANCING ACTIVITIES
Net (decrease) increase under line of
credit arrangements (13,725) (14,575) 35,800
Borrowings under senior notes 80,000 30,000
Assumption of mortgage loan payable 6,539
Principal payments on other long-term
obligations (1,600) (329) (1,313)
Net proceeds from the issuance of shares 139,554 135,767 3,104
Increase in deferred loan expense (1,564) (492) (25)
Cash distributions to shareholders (45,804) (28,427) (24,215)
------------ ----------- -----------
Net cash provided from financing activities 156,861 128,483 13,351
----------- ---------- ----------
Decrease in cash and cash equivalents 800 (279) (75)
Cash and cash equivalents at beginning of year 581 860 935
----------- ---------- ----------
Cash and cash equivalents at end of year $ 1,381 $ 581 $ 860
=========== ========== ==========
See accompanying notes
-21-
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Health Care REIT, Inc.
Notes to Consolidated Financial Statements
1. ACCOUNTING POLICIES AND RELATED MATTERS
INDUSTRY
The Company is a self-administered real estate investment trust that invests
primarily in long-term care facilities, which include nursing homes, assisted
living facilities, and retirement centers. The Company also invests in specialty
care facilities.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after the elimination of all significant
intercompany accounts and transactions.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
LOANS RECEIVABLE
Loans receivable consist of long-term mortgage loans, construction-period loans
maturing in two years or less, and working capital 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, behavioral care
facilities, and specialty care hospitals.
OPERATING LEASE PROPERTIES
Certain properties owned by the Company are leased under operating leases and
are recorded at cost. Impairment losses are recorded when events or changes in
circumstances indicate the carrying value of an asset is greater than its fair
value. Management assesses the recoverability of the carrying value of its
assets on a property by property basis. 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. The leases provide for payment of
all taxes, insurance and maintenance by the lessees. In general, operating
lease income includes base rent payments plus fixed annual rent increases,
which are recognized on a straight-line basis over the minimum lease period.
This income is greater than the amount of cash received during the first half of
the lease term.
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 generally
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.
CAPITALIZATION OF CONSTRUCTION PERIOD INTEREST
The Company capitalizes interest costs associated with funds used to finance the
construction of facilities. The amount capitalized is based upon the borrowings
outstanding during the construction period using the rate of interest which
approximates the Company's cost of financing.
-22-
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Health Care REIT, Inc.
Notes to Consolidated Financial Statements
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 loans receivable. The determination of the
allowance is based on a quarterly evaluation of these loans, including general
economic conditions and estimated collectibility of loan payments.
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.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of all highly liquid investments with an
original maturity of three months or less.
INVESTMENT SECURITIES
Management determines the appropriate classification of a security at the time
of acquisition and reevaluates such designation as of each balance sheet date.
If there is a readily determinable fair value, available-for-sale equity
securities are stated at fair value, with unrealized gains and losses reported
in a separate component of shareholders' equity. Other equity securities are
stated at historical cost. Debt securities which are classified as held to
maturity are stated at historical cost. Investment securities include the common
stock of two corporations, which were obtained by the Company at no cost, the
fair value of the common stock related to warrants in one corporation in excess
of the exercise price, the preferred stock of two private corporations and
subordinated debt securities in three corporations.
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 initial
fixed term of the lease, the mortgage or the construction period related to such
investments.
FEDERAL INCOME TAX
No provision has been made for federal income taxes since the Company has
elected to be treated as a real estate investment trust under the applicable
provisions of the Internal Revenue Code, and the Company believes that it has
met the requirements for qualification as such for each taxable year. See Note
8.
NET INCOME PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been presented, and
where appropriate, restated to conform to the Statement 128 requirements.
NEW ACCOUNTING STANDARD
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Comprehensive Income, which is effective for periods beginning after December
31, 1997. Statement 130 establishes standards for reporting and display of
comprehensive income and its components. The Company will adopt Statement 130 in
the first quarter of 1998 and the impact will not be significant.
-23-
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Health Care REIT, Inc.
Notes to Consolidated Financial Statements
2. LOANS RECEIVABLE
The following is a summary of loans receivable (in thousands):
December 31
1997 1996
---------------------------------------------
Mortgage loans $ 375,693 $ 290,515
Mortgage loans to related parties 1,945 1,927
Construction loans 27,698 61,013
Working capital 3,551
Working capital loans to related parties 3,847 4,727
------------------ ------------------
TOTALS $ 412,734 $ 358,182
================== ==================
Loans to related parties (various entities whose ownership includes two Company
directors and former officers) included above are at competitive rates and are
equal to or greater than the Company's net interest cost on borrowings to
support such loans. The amount of interest income and loan and commitment fees
from related parties amounted to $980,000, $3,089,000 and $3,378,000 for 1997,
1996 and 1995, respectively.
The following is a summary of mortgage loans at December 31, 1997 (in
thousands):
Final Number Principal
Payment of Amount at Carrying
Due Loans Payment Terms Inception Amount
------- ------ --------------------------------------- ---------- --------
1999 2 Monthly payments from $15,734 to $ 6,350 $ 5,037
$28,101, including interest from 10.64%
to 10.91%
2001 3 Monthly payments from $17,602 11,227 10,853
to $72,731, including interest from
10.50% to 12.0%
2002 2 Monthly payments from $24,663 to 8,455 8,321
$60,481, including interest from 10.71%
to 12.0%
2006 1 Monthly payment of $54,456, 5,537 5,484
including interest of 11.05%
2007 3 Monthly payments from $27,611 to 17,198 13,063
$73,483, including interest from
10.66% to 12.50%
2008 6 Monthly payments from $18,399 to 25,950 25,308
$82,769, including interest from
10.88% to 12.31%
2009 5 Monthly payments from $27,285 to 24,646 24,502
$68,341, including interest from
10.75% to 11.47%
2010 6 Monthly payments from $39,849 to 52,835 52,269
$140,857, including interest from
10.32% to 10.94%
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Health Care REIT, Inc.
Notes to Consolidated Financial Statements
2. LOANS RECEIVABLE (CONTINUED)
Final Number Principal
Payment of Amount at Carrying
Due Loans Payment Terms Inception Amount
------- ------ --------------------------------------- ---------- --------
2011 11 Monthly payments from $24,370 to $ 47,163 $ 47,163
$86,557, including interest from
9.98% to 11.50%
2012 2 Monthly payments from $41,000 to 32,843 32,810
$278,883, including interest from
11.54% to 12.19%
2014 1 Monthly payment of $44,679, 3,970 3,940
including interest of 13.24%
2015 5 Monthly payments from $23,653 to 36,260 35,827
$116,680, including interest from
10.29% to 12.58%
2016 12 Monthly payments from $13,002 to 87,856 87,339
$222,956, including interest from
10.11% to 11.78%
2017 4 Monthly payments from $24,614 to 25,722 25,722
$107,900 including interest from
9.96% to 10.66%
----------------- -----------------
TOTALS $ 386,012 $ 377,638
================= =================
3. INVESTMENT IN LEASES
The following are the components of investments in direct financing leases (in
thousands):
December 31
1997 1996
----------------------------------------
Total minimum lease payments receivable $ 13,602 $ 17,291
Estimated unguaranteed residual values of
leased properties 3,437 5,779
Unearned income (9,104) (12,194)
---------------- ----------------
Investment in direct financing leases $ 7,935 $ 10,876
================ ================
The leases contain an option to purchase the leased property. Total minimum
lease payments are computed assuming that the purchase options are not
exercised.
-25-
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Health Care REIT, Inc.
Notes to Consolidated Financial Statements
3. INVESTMENT IN LEASES (CONTINUED)
At December 31, 1997, future minimum lease payments receivable (assuming that
purchase options are not exercised) are as follows (in thousands):
Direct Financing Operating
Leases Leases
---------------- --------------
1998 $ 1,199 $ 27,225
1999 1,219 40,156
2000 1,240 41,131
2001 1,260 42,093
2002 988 43,052
Thereafter 7,696 283,762
------------ -------------
TOTALS $ 13,602 $ 477,419
============ =============
During 1997 the Company converted three mortgage loans totaling $13,103,000 into
operating leases. During 1996 the Company converted nineteen mortgage loans
totaling $40,567,000 into operating leases. This noncash activity is
appropriately not reflected in the accompanying statements of cash flows.
4. CONCENTRATION OF RISK
As of December 31, 1997, long-term care facilities comprised 86% of the
Company's real estate investments and were located in 29 states. Investments in
assisted living facilities comprised 48% of the Company's real estate
investments. The Company's investments with the three largest operators totaled
approximately 27%. No single operator has a real estate investment balance which
exceeds 10% of total real estate investments, including credit enhancements.
5. ALLOWANCE FOR LOSSES
The following is a summary of the allowance for losses (in thousands):
1997 1996 1995
------------ ------------- ------------
Balance at beginning of year $ 9,787 $ 9,950 $ 5,150
Provision for losses 600 600 4,800
Disposition of investment 808
Charge-offs (6,000) (1,571)
------------ ------------- ------------
Balance at end of year $ 4,387 $ 9,787 $ 9,950
============ ============= ============
During 1997, two loans with an aggregate balance of $12,073,000 and a
specifically identified allowance of $6,000,000 were extinguished. The Company
recognized payments of $6,073,000 and recorded a charge of $6,000,000 against
the allowance for losses.
Interest income on impaired loans is recognized as payments are received. The
Company recognized $323,000 of interest income on impaired loans in 1995.
-26-
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Health Care REIT, Inc.
Notes to Consolidated Financial Statements
6. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS
AND RELATED ITEMS
The Company has an unsecured credit arrangement with a consortium of twelve
banks providing for a revolving line of credit (revolving credit) in the amount
of $175,000,000 which expires on March 31, 2000. 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
1.125% over LIBOR interest rate (based at the Company's option). The effective
interest rate at December 31, 1997 was 7.08%. In addition, the Company pays a
commitment fee ranging from an annual rate of 0.20% to 0.375% and an annual
agent's fee of $50,000. Principal is due upon expiration of the agreement. The
Company has another line of credit with a bank for a total of $10,000,000 which
expires January 31, 1999. Borrowings under this line of credit are subject to
interest at the bank's prime rate of interest (8.5% at December 31, 1997) and
are due on demand.
The following information relates to aggregate borrowings under the line of
credit arrangements (in thousands except percentages):
Year Ended December 31
1997 1996 1995
---------------------------------------------------------------
Balance outstanding at December 31 $ 78,400 $ 92,125 $ 106,700
Maximum amount outstanding at any
month end 158,950 142,600 119,100
Average amount outstanding (total
of daily principal balances
divided by days in year) 78,826 110,667 88,851
Weighted average interest rate
(actual interest expense divided
by average borrowings outstanding) 7.63% 7.72% 8.41%
At December 31, 1997, the Company's variable interest rate debt exceeded its
variable interest rate assets, presenting an exposure to rising interest rates.
The Company may or may not elect to use financial derivative instruments to
hedge variable interest rate exposure. Such decisions are principally based on
the Company's policy to match its variable rate investments with comparable
borrowings, but is also based on the general trend in interest rates at the
applicable dates and the Company's perception of future volatility of interest
rates.
Interest paid amounted to $16,444,000, $14,211,000 and $13,084,000 for 1997,
1996 and 1995, respectively. The Company capitalized interest costs of
$2,306,000 and $287,000 during 1997 and 1996, respectively, related to
construction of real property owned by the Company.
7. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS
The Company has $162,000,000 of unsecured Senior Notes with interest ranging
from 7.06% to 8.34% and maturing at various dates to 2003.
The following information relates to other long-term obligations (in thousands):
December 31
1997 1996
--------------------------------
Notes payable related to industrial development
bonds, collateralized by one health care facility in 1997
and two health care facilities in 1996; interest rates at
11.25% for 1997 and from 11.25% to 15%
in 1996 maturing in 2002 $ 1,160 $ 2,320
Mortgage notes payable, collateralized by two
health care facilities, interest rates from 7.625%
to 12%, maturing at various dates to 2034 7,510 7,950
---------------- ----------------
TOTALS $ 8,670 $ 10,270
================ ================
-27-
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Health Care REIT, Inc.
Notes to Consolidated Financial Statements
7. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS (CONTINUED)
At December 31, 1997, the annual principal payments on these long-term
obligations for the succeeding five years are 1998 - $23,242,000; 1999 -
$90,000; 2000 - $35,099,000; 2001 - $10,109,000; and 2002 - $20,121,000; 2003
and beyond - $82,009,000.
8. STOCK INCENTIVE PLANS AND RETIREMENT ARRANGEMENTS
The Company's 1995 Stock Incentive Plan authorized up to 2,200,000 shares of
Common Stock to be issued at the discretion of the Board of Directors. The 1995
Plan replaced the 1985 Incentive Stock Option Plan. The options granted under
the 1985 Plan continue to vest through 2005 and expire ten years from the date
of grant. Officers and key salaried employees of the Company are eligible to
participate in the 1995 Plan. The 1995 Plan allows for the issuance of stock
options, restricted stock grants and DERs. In addition, during 1997 the Company
adopted a Stock Incentive Plan for Non-Employee Directors which authorizes up to
142,000 shares to be issued.
The following summarizes the activity in the Plans for the years ended December
31 (shares in thousands):
1997 1996 1995
---- ---- ----
Average Average Average
Shares Exerise Price Shares Exercise Price Shares Exercise Price
------ ------------- ------ -------------- ------ --------------
Stock Options
- -------------
Options at beginning of year 749 $19.51 485 $19.95 183 $20.71
Options granted 475 24.44 425 19.14 316 19.28
Options exercised (84) 19.16 (44) 17.66 (14) 14.81
Options terminated (14) 23.61 (117) 20.67
-------- ----------- -------- ----------- -------- -----------
1,126 $21.56 749 $19.51 485 $19.95
======== =========== ======== =========== ======== ===========
At end of year:
Shares exercisable 406 $20.79 226 $21.45 243 20.10
Weighted average fair value
of options granted during the
year $ 1.97 $ 1.78 $ 1.54
The stock options generally vest over a five year period and expire ten years
from the date of grant.
The Company issued 157,000 restricted shares during 1997, including 2,000 shares
for directors. Vesting periods range from six months for directors to periods of
five to ten years for officers. Expense, which is recognized as the shares vest
based on the market value at the date of the award, totalled $257,000 in 1997.
The Company has elected to follow APB Opinion No. 25, Accounting for Stock
Issued to Employees in accounting for its employee stock options as permitted
under FASB statement No. 123 ("FASB 123"), Accounting for Stock-Based
Compensation, and, accordingly, recognizes no compensation expense for the stock
option grants when the market price on the underlying stock on the date of grant
equals the exercise price of the Company's employee stock option.
Pro forma information has been determined as if the Company had accounted for
its employee stock options and restricted shares under the fair value method.
The pro forma disclosures are not likely to be representative of the effects on
reported net income for future years because they do not take into consideration
stock based incentives granted prior to 1995. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following range of assumptions: risk-free interest rates from
5.10% to 7.60%, dividend yields of 8%, expected lives of seven years, and
expected volatility of .18% to .21%. Had compensation cost for the stock based
compensation plans been determined in accordance with FASB 123, net income would
have been reduced by $212,000, $105,000, and $32,000 in 1997, 1996 and 1995,
respectively.
The Company has a 401-(k) Profit Sharing Plan covering all eligible employees.
Under the Plan, eligible employees may make contributions, and the Company may
make a profit sharing contribution. Company contributions to this Plan totaled
$110,000, $90,000, and $6,000 in 1997, 1996, and 1995, respectively.
-28-
15
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
9. DISTRIBUTIONS
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 investment 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 $360,000, $317,000
and $326,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Undistributed net income for federal income tax purposes amounted to $15,926,000
at December 31, 1997. The principal reasons for the difference between
undistributed net income for federal income tax purposes and financial statement
purposes are the use of the operating method of accounting for leases for
federal income tax purposes and the provision for losses for reporting purposes
versus bad debt expense for tax purposes.
Cash distributions paid to shareholders, for federal income tax purposes, are as
follows:
Year Ended December 31
1997 1996 1995
---------------------------------------
Per Share:
Ordinary income $ 2.085 $ 2.030 $ 2.075
Capital gains .025 .050
------- -------- -------
TOTALS $ 2.110 $ 2.080 $ 2.075
======= ======== =======
10. COMMITMENTS AND CONTINGENCIES
At December 31, 1997, the Company had outstanding commitments to provide
financing for facilities in the approximate amount of $275,017,000. 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 several 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 receives and recognizes fees annually related to these agreements.
Although the terms of these agreements vary, the purchase prices are equal to
the amount of the outstanding obligations financing the facility. These
agreements expire through the year 2005. At December 31, 1997, obligations under
these agreements for which the Company was contingently liable aggregated
approximately $15,565,000, all of which were with related parties.
11. MANAGEMENT AGREEMENT
Through November 30, 1995, the Company had a management agreement with First
Toledo Advisory Company (the Manager). Two of the Company's directors were
officers and co-owners of the Manager. The Company accrued a fee to the Manager
as defined in the Management Agreement. On November 30, 1995, the Manager merged
with and into the Company pursuant to a Revised Merger Agreement (the "Merger").
Consideration for this transaction totaled approximately $5,048,000 which was
solely comprised of 282,407 shares of the Company's common stock. In addition,
the Company acquired approximately $46,000 in net assets and incurred
approximately $792,000 of related transaction expenses. The Merger was a
tax-free reorganization. The consideration, plus related transaction expenses,
were accounted for as a settlement of a management contract.
-29-
16
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
12. 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 Common Stock.
The Rights, which are redeemable, will become exercisable only in the event that
any person or group becomes a holder of 15% or more of the Common Stock, or
commences a tender or exchange offer which, if consummated, would result in that
person or group owning at least 15% of the Common Stock. Once the Rights become
exercisable, they entitle all other 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.
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share (in thousands, except per share data):
1997 1996 1995
---------- --------- ------
Numerator for basic and diluted earnings
per share - income available to common
shareholders $ 46,478 $ 30,676 $ 13,635
========= ========= =========
Denominator for basic earnings per
share - weighted average shares 21,594 14,093 11,710
Effect of dilutive securities:
Employee stock options 182 57 18
Nonvested restricted shares 153
--------- -------- --------
Dilutive potential common shares 335 57 18
--------- -------- --------
Denominator for diluted earnings per
share - adjusted weighted average shares 21,929 14,150 11,728
========= ========= ========
Basic earnings per share $2.15 $2.18 $1.16
========= ========= ========
Diluted earnings per share $2.12 $2.17 $1.16
========= ======== ========
14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.
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.
Investment Securities --The assets are recorded at their fair market value.
-30-
17
14. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Health Care REIT, Inc.
Notes to Consolidated Financial Statements
Borrowings Under Line of Credit Arrangements--The carrying amount of the line of
credit approximates fair value because the borrowings are interest rate
adjustable.
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 Notes Payable--Mortgage notes payable is a reasonable estimate of fair
value because they are matched with loans receivable.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1997 and 1996 are as follows (in thousands):
December 31, 1997 December 31, 1996
-------------------------------------- ----------------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial Assets:
Mortgage loans $377,638 $402,348 $ 292,442 $ 300,136
Working capital and
construction loans 35,096 35,096 65,740 65,740
Cash and cash equivalents 1,381 1,381 581 581
Investment securities 9,635 9,635 768 768
Financial Liabilities:
Borrowings under line of
credit arrangements 78,400 78,400 92,125 92,125
Senior notes 162,000 167,113 82,000 82,301
Industrial development bonds 1,160 1,225 2,320 2,650
Mortgage loans payable 7,510 7,445 7,950 7,950
15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations of
the Company for the years ended December 31, 1997 and 1996 (in thousands except
per share data):
Year Ended December 31, 1997
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------------
Revenues $ 16,569 $ 18,448 $ 18,559 $ 19,448
Net Income 9,826 11,928 11,773 12,667
Net Income Per Share
Basic .51 .55 .54 .55
Diluted .51 .54 .53 .54
Year Ended December 31, 1996
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---------------------------------------------------------------------------------
Revenues $ 10,890 $ 14,626 $ 14,068 $ 14,818
Net Income 5,677 8,569 7,383 9,047
Net Income Per Share
Basic .47 .66 .50 .55
Diluted .47 .65 .50 .55
The 1996 and first three quarters of 1997 earnings per share amounts have been
restated to comply with Statement 128.
-31-
18
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned thereunto duly authorized.
HEALTH CARE REIT, INC.
(Registrant)
By: GEORGE L. CHAPMAN
-------------------------
19
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
23 Consent of Independent Auditors.
27.1 Financial Data Schedule for the year ended December 31, 1997.
27.2 Financial Data Schedules that are being restated for the three
months ended March 31, 1997, the six months ended June 30, 1997
and the nine months ended September 30, 1997.
27.3 Financial Data Schedules that are being restated for the three
months ended March 31, 1996, the six months ended June 30, 1996,
the nine months ended September 30, 1996 and the year ended
December 31, 1996.
4