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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20459
 
 
FORM 10-Q
 
(Mark One)
 
x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2002
 
OR
 
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Transition period from                to               
 
Commission file number 1-11314
 
LTC PROPERTIES, INC.
(Exact name of Registrant as specified in its charter)
 
Maryland
(State or other jurisdiction of
incorporation or organization)
  
71-0720518
(I.R.S. Employer
Identification No.)
 
300 Esplanade Drive, Suite 1860, Oxnard, California 93030
(Address of principal executive offices)
 
(805) 981-8655
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether Registrant (1) has filed all reports to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x  No  ¨
 
Shares of Registrant’s common stock, $.01 par value, outstanding at August 9, 2002—18,393,322
 
 

 
LTC PROPERTIES, INC.
 
FORM 10-Q
 
June 30, 2002
 
INDEX
 
         
Page
PART I—Financial Information
     
Item 1.
   
Financial Statements
     
       
3
       
4
       
5
       
6
     
14
Part II—Other Information
     
     
19
     
19
 

2

LTC PROPERTIES, INC.
 
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share amounts)
 
    
June 30, 2002
     
December 31, 2001
  
    
(Unaudited)
         
ASSETS
                  
Real Estate Investments:
                  
Buildings and improvements, net of accumulated depreciation and amortization: 2002—$62,551; 2001—$58,583
   
$
394,327
 
   
$
410,202
 
Land
   
 
27,803
 
   
 
27,339
 
Mortgage loans receivable, net of allowance for doubtful accounts: 2002—$1,280; 2001—$1,250
   
 
84,841
 
   
 
93,611
 
REMIC Certificates
   
 
69,066
 
   
 
73,154
 
    
  
Real estate investments, net
   
 
576,037
 
   
 
604,306
 
Other Assets:
                  
Cash and cash equivalents
   
 
14,701
 
   
 
6,322
 
Debt issue costs, net
   
 
3,043
 
   
 
3,578
 
Interest receivable
   
 
3,645
 
   
 
3,258
 
Prepaid expenses and other assets
   
 
2,908
 
   
 
2,423
 
Notes receivable (includes $3,095 due from CLC Healthcare, Inc. in 2002 and 2001)
   
 
15,108
 
   
 
14,584
 
Marketable debt securities
   
 
8,781
 
   
 
8,755
 
Line of credit due from CLC Healthcare, Inc.
   
 
5,478
 
   
 
5,342
 
    
  
    
 
53,664
 
   
 
44,262
 
    
  
Total Assets
   
$
629,701
 
   
$
648,568
 
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
                  
Convertible subordinated debentures
   
$
—  
 
   
$
2,408
 
Bank borrowings
   
 
96,000
 
   
 
104,000
 
Mortgage loans and notes payable
   
 
146,283
 
   
 
162,232
 
Bonds payable and capital lease obligations
   
 
15,528
 
   
 
15,994
 
Accrued interest
   
 
1,336
 
   
 
1,210
 
Accrued expenses and other liabilities
   
 
6,158
 
   
 
7,138
 
Distributions payable
   
 
981
 
   
 
1,803
 
    
  
Total Liabilities
   
 
266,286
 
   
 
294,785
 
Minority interest
   
 
13,404
 
   
 
13,404
 
Stockholders’ equity:
                  
Preferred stock $0.01 par value: 10,000 shares authorized; shares issued and outstanding: 2002—7,062; 2001—7,062
   
 
165,183
 
   
 
165,183
 
Common stock: $0.01 par value; 40,000 shares authorized; shares issued and outstanding: 2002 —18,393; 2001—18,393
   
 
185
 
   
 
185
 
Capital in excess of par value
   
 
254,976
 
   
 
254,930
 
Cumulative net income
   
 
239,369
 
   
 
218,826
 
Notes receivable from stockholders
   
 
(7,822
)
   
 
(8,042
)
Accumulated comprehensive income
   
 
2,465
 
   
 
2,437
 
Cumulative distributions
   
 
(304,345
)
   
 
(293,140
)
    
  
Total Stockholders’ Equity
   
 
350,011
 
   
 
340,379
 
    
  
Total Liabilities and Stockholders’ Equity
   
$
629,701
 
   
$
648,568
 
    
  
 
See accompanying notes.
 

3

 
LTC PROPERTIES, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
(Unaudited)
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
    
2002
   
2001
     
2002
   
2001
  
Revenues:
                                
Rental income
   
$
10,730
   
$
10,139
 
   
$
21,598
   
$
20,313
 
Interest income from mortgage loans and notes receivable
   
 
2,525
   
 
3,174
 
   
 
5,118
   
 
6,608
 
Interest income from REMIC Certificates
   
 
3,219
   
 
4,010
 
   
 
6,486
   
 
8,036
 
Interest and other income
   
 
766
   
 
758
 
   
 
1,511
   
 
1,402
 
    
  
  
  
Total revenues
   
 
17,240
   
 
18,081
 
   
 
34,713
   
 
36,359
 
    
  
  
  
Expenses:
                                
Interest expense
   
 
5,310
   
 
5,582
 
   
 
10,736
   
 
11,636
 
Depreciation and amortization
   
 
3,671
   
 
3,376
 
   
 
7,384
   
 
7,115
 
Minority interest
   
 
335
   
 
235
 
   
 
656
   
 
470
 
Impairment charge
   
 
4,882
   
 
18,366
 
   
 
4,882
   
 
22,866
 
Operating and other expenses
   
 
1,872
   
 
2,054
 
   
 
3,632
   
 
3,682
 
    
  
  
  
Total expenses
   
 
16,070
   
 
29,613
 
   
 
27,290
   
 
45,769
 
    
  
  
  
Operating income (loss)
   
 
1,170
   
 
(11,532
)
   
 
7,423
   
 
(9,410
)
Gain (loss) on sale of assets, net
   
 
13,192
   
 
(100
)
   
 
13,120
   
 
1,844
 
    
  
  
  
Net income (loss)
   
 
14,362
   
 
(11,632
)
   
 
20,543
   
 
(7,566
)
Less: Preferred dividends
   
 
3,761
   
 
3,771
 
   
 
7,519
   
 
7,543
 
    
  
  
  
Net income (loss) available to common stockholders
   
$
10,601
   
$
(15,403
)
   
$
13,024
   
$
(15,109
)
    
  
  
  
Net Income (Loss) per Common Share:
                                
Basic
   
$
0.58
   
$
(0.61
)
   
$
0.71
   
$
(0.59
)
    
  
  
  
Diluted
   
$
0.55
   
$
(0.61
)
   
$
0.70
   
$
(0.59
)
    
  
  
  
Comprehensive Income (Loss)
                                
Net income (loss) available to common stockholders
   
$
10,601
   
$
(15,403
)
   
$
13,024
   
$
(15,109
)
Unrealized gain (loss) on available-for-sale securities
   
 
—  
   
 
74
 
   
 
28
   
 
(332
)
Reclassification adjustment
   
 
—  
   
 
—  
 
   
 
—  
   
 
366
 
    
  
  
  
Total comprehensive income (loss)
   
$
10,601
   
$
(15,329
)
   
$
13,052
   
$
(15,075
)
    
  
  
  
 
See accompanying notes.

4

 
LTC PROPERTIES, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
    
Six Months Ended June 30,
  
    
2002
     
2001
  
OPERATING ACTIVITIES:
                  
Net income (loss)
   
$
20,543
 
   
$
(7,566
)
Adjustments to reconcile net income to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
7,384
 
   
 
7,115
 
Impairment charge
   
 
4,882
 
   
 
22,866
 
Other non-cash charges
   
 
2,278
 
   
 
2,422
 
Loss on the sale of other assets
   
 
—  
 
   
 
456
 
Gain on sale of real estate investments, net
   
 
(13,120
)
   
 
(2,300
)
Increase in accrued interest
   
 
162
 
   
 
31
 
Net change in other assets and liabilities
   
 
(1,743
)
   
 
(1,898
)
    
  
Net cash provided by operating activities
   
 
20,386
 
   
 
21,126
 
    
  
INVESTING ACTIVITIES:
                  
Investment in real estate properties and capital improvements, net
   
 
(1,091
)
   
 
(1,084
)
Proceeds from sale of real estate investments and other assets, net
   
 
9,520
 
   
 
12,671
 
Principal payments on mortgage loans receivable
   
 
5,356
 
   
 
3,325
 
Advances under line of credit to CLC Healthcare, Inc.
   
 
(792
)
   
 
(1,650
)
Payments on line of credit to CLC Healthcare, Inc.
   
 
656
 
   
 
—  
 
Other
   
 
1,565
 
   
 
2,799
 
    
  
Net cash provided by investing activities
   
 
15,214
 
   
 
16,061
 
    
  
FINANCING ACTIVITIES:
                  
Borrowings under the line of credit
   
 
—  
 
   
 
12,000
 
Repayments of bank borrowings under line of credit
   
 
(8,000
)
   
 
(15,000
)
Principal payments on mortgage loans payable and capital lease obligations
   
 
(5,058
)
   
 
(981
)
Redemption of convertible subordinated debentures
   
 
(2,408
)
   
 
(12,120
)
Repurchase of common stock
   
 
—  
 
   
 
(4,703
)
Distributions paid
   
 
(12,027
)
   
 
(7,544
)
Other
   
 
272
 
   
 
(904
)
    
  
Net cash used in financing activities
   
 
(27,221
)
   
 
(29,252
)
    
  
Increase in cash and cash equivalents
   
 
8,379
 
   
 
7,935
 
Cash and cash equivalents, beginning of period
   
 
6,322
 
   
 
1,870
 
    
  
Cash and cash equivalents, end of period
   
$
14,701
 
   
$
9,805
 
    
  
SUPPLEMENTAL CASH FLOW INFORMATION:
                  
Interest paid
   
$
10,051
 
   
$
11,128
 
Non-cash investing and financing transactions:
                  
Conversion of mortgage loans into owned properties
   
 
2,332
 
   
 
3,502
 
Increase in short term notes receivable related to the disposition of real estate properties
   
 
2,631
 
   
 
5,183
 
Assumption of mortgage loans payable related to acquisitions of real estate properties
   
 
1,357
 
   
 
—  
 
 
See accompanying notes.

5

 
LTC PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.    General
 
LTC Properties, Inc. (the “Company”), a Maryland corporation, is a real estate investment trust (“REIT”) that invests primarily in long term care facilities through mortgage loans, facility lease transactions and other investments.
 
The consolidated financial statements included herein have been prepared by the Company without audit and in the opinion of management include all adjustments necessary for a fair presentation of the results of operations for the three and six months ended June 30, 2002 and 2001 pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and controlled partnerships. All significant intercompany accounts and transactions have been eliminated in consolidation. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations; however, the Company believes that the disclosures in the accompanying financial statements are adequate to make the information presented not misleading. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the results for a full year.
 
No provision has been made for federal or state income taxes. The Company qualifies as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. As such, the Company is not taxed on its income that is distributed to its stockholders.
 
2.    Real Estate Investments
 
Owned Properties.    At June 30, 2002, the Company owned 66 skilled nursing facilities with a total of 8,003 beds, 89 assisted living facilities with 4,222 units and one school located in 24 states. During the six months ended June 30, 2002, the Company sold five skilled nursing facilities in Alabama for approximately $9,824,000 in cash, a 10-year $3,550,000 note with a face rate of 7.0% which the Company discounted to $2,631,000 for an effective rate of 13.0% and a reduction of $10,247,000 in mortgage debt due to a REMIC pool originated by the Company. The Company recognized a gain of approximately $13,192,000. Net proceeds from the sale will be used to meet debt maturities in the third quarter of 2002. Annual rental revenue to the Company from these five properties was approximately $2,100,000 before net interest expense of approximately $800,000. Also during the six months ended June 30, 2002, the Company sold, in one transaction, two skilled nursing facilities in Illinois for approximately $2,100,000 in cash and used the proceeds and available cash to pay off $2,562,000 in mortgage debt due to REMIC pools originated by the Company. The Company recognized a loss of approximately $72,000 from this sale.
 
During the six months ended June 30, 2002, the Company purchased one skilled nursing facility in Grapevine, Texas for a total cost of $1,862,000. The Company paid approximately $505,000 in cash and assumed $1,357,000 in mortgage debt due to a REMIC pool originated by the Company. This facility was leased to CLC Healthcare, Inc.
 
During the six months ended June 30, 2002, one mortgage loan on a skilled nursing facility in Jacksonville, Florida was reclassified to an owned property as a result of a deed-in-lieu of foreclosure transaction. A new operator began operating this facility in May 2002.
 
Subsequent to June 30, 2002, the Company sold (in separate transactions) two closed, previously impaired skilled nursing facilities in Arizona and Texas resulting in net proceeds of approximately $1,899,000 and a

6

LTC PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
combined gain of approximately $368,000. Proceeds from these sales were used to reduce amounts outstanding and $930,000 of the proceeds was used to reduce commitments under the Senior Secured Revolving Line of Credit.
 
Mortgage Loans.    At June 30, 2002 the Company had 40 mortgage loans secured by first mortgages on 37 skilled nursing facilities with a total of 4,185 beds and eight assisted living residences with a total of 369 units located in 20 states. At June 30, 2002, the mortgage loans had interest rates ranging from 9.3% to 13.7% and maturities ranging from 2003 to 2018. In addition, the loans contain certain guarantees, provide for certain facility fees and generally have 25-year amortization schedules. The majority of the mortgage loans provide for annual increases in the interest rate based upon a specified increase of 10 to 25 basis points.
 
Subsequent to June 30, 2002 the Company sold, to a private bank, a non-recourse senior participation interest in 22 of the Company’s first mortgages with a total balance outstanding of approximately $58,627,000. The sales agreement provides that the private bank will receive 9.25% per annum interest and all principal payments from these mortgages until the senior participation is retired. There is no specific principal maturity date for the senior participation other than the principal maturity dates of the underlying mortgages. The Company will continue to receive interest from these mortgages above the 9.25% paid to the private bank and will resume collecting principal once the senior participation is repaid in full. The weighted average interest rate of these mortgages is approximately 11.6%. The Company sold the senior participation interest for $30,000,000 and received $29,750,000 in net proceeds, which it used to reduce commitments and amounts outstanding under the Senior Secured Revolving Line of Credit.
 
REMIC Certificates.    As of June 30, 2002 the outstanding certificate principal balance and the weighted average pass-through rate for the senior REMIC Certificates (all held by outside third parties) was $251,562,000 and 7.36%. As of June 30, 2002, the carrying value of the subordinated REMIC Certificates held by the Company was $69,066,000. The effective yield on the subordinated REMIC Certificates held by the Company, based on expected future cash flows discounted to give effect to potential risks associated with prepayments and unanticipated credit losses was 17.55% at June 30, 2002.
 
Interest only certificates and certificates with an investment rating of “BB” or higher are classified as available-for-sale and unrated certificates and certificates with an investment rating of “B” or lower are classified as held-to-maturity. As of June 30, 2002, available-for-sale certificates were recorded at their fair value of approximately $17,559,000. An unrealized holding gain on available-for-sale certificates of $28,000 was included in comprehensive income for the six months ended June 30, 2002. An unrealized holding loss of $332,000 was included in comprehensive loss for the same period in 2001. At June 30, 2002 held-to-maturity certificates had a book value of $51,507,000 and a fair value of $32,907,000. As of June 30, 2002, the effective yield on the available-for-sale certificates and the held-to-maturity certificates, based on expected future cash flows discounted to give effect to potential risks associated with prepayments and unanticipated credit losses was 33.81% and 11.94%, respectively.
 
3.    Impairment Charge
 
The Company periodically performs an evaluation of its real estate investment portfolio. Impairment losses are recorded when events or changes in circumstances indicate the asset is impaired and the estimated undiscounted cash flows to be generated by the asset are less than its carrying amount. Management assesses the impairment of properties individually and impairment losses are calculated as the excess of the carrying amount of the real estate over its fair value less cost to sell as per Financial Accounting Standard No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” In

7

LTC PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
determining fair value, the Company uses current appraisals or other third party opinions of value and other estimates of fair value such as estimated undiscounted future cash flows. During the six months ended June 30, 2002, the Company recorded an impairment charge of $4,882,000. Of this charge, $1,600,000 related to loans on two skilled nursing facilities, $1,000,000 related to a valuation adjustment on one skilled nursing facility and $2,282,000 related to two loans in two separate REMIC pools originated by the Company. Relative to the $2,282,000 charge and as more fully described in Note 2—Summary of Significant Accounting Policies of the Company’s 10-K for the year ending December 31, 2001, to the extent there are defaults or unrecoverable losses on the underlying mortgages resulting in reduced cash flows, the subordinated REMIC Certificates held by the Company would bear the first risk of loss. During management’s periodic evaluation of the realizability of expected future cash flows from the mortgages underlying the Company’s REMIC Certificates, there were indications that a portion of the underlying mortgage collateral would not be realized by the REMIC Trust. Accordingly, the Company recorded a permanent impairment in current period earnings related to the valuation adjustment of the subordinated REMIC Certificates held by the Company.
 
The Company believes it has recorded valuation adjustments on all assets for which there are permanent impairments. However, the long-term care industry has experienced significant adverse changes which have resulted in continued operating losses by certain of the Company’s operators and in some instances the filing by certain operators for bankruptcy protection. Thus, the Company cannot predict what, if any, impairment charge may be needed in the future.
 
During the three and six months ended June 30, 2001 the Company recorded impairment charges of $18,366,000 and $22,866,000, respectively. The impairment charge recorded for the three months ended June 30, 2001 consisted of the following: a $9,537,000 valuation adjustment on 10 skilled nursing facilities and an $8,829,000 valuation adjustment on the Company’s investment in the convertible subordinated debentures of Assisted Living Concepts, Inc. (“ALC”). The impairment charge recorded for the six months ended June 30, 2001 consisted of $11,537,000 in valuation adjustments on 10 skilled nursing facilities, a $1,500,000 write down of a note receivable and a $9,829,000 valuation adjustment on the Company’s investment in ALC convertible subordinated debentures.
 
4.    CLC Healthcare, Inc.
 
As of June 30, 2002, 23 skilled nursing facilities with 2,617 beds and a gross carrying value of $57,823,000 or 10.1% of the Company’s direct real estate investment portfolio were operated by CLC Healthcare, Inc. (“CLC”). These facilities are leased to CLC under individual six-year leases that provided for total rents of $3,000,000; $4,000,000; $4,750,000; $5,350,000; $5,900,000 and $6,500,000 respectively, in years 2002 through 2007. The leases contain two five-year renewal options with increases of 2% annually. These leases have cross default provisions and a provision for acceleration should there be a change of control, as defined in the leases. Additionally, CLC owns and operates two skilled nursing facilities in New Mexico, discussed more fully below, that are financed with mortgage loans payable to a REMIC pool originated by the Company. During the three and six months ended June 30, 2002, the Company was due rental income of approximately $750,000 and $1,275,000, respectively, from CLC as compared to $763,000 and $1,615,000 during the same periods in 2001. For the three and six months ended June 30, 2002, the Company has classified the rents due from CLC as non-accrual rents but has not forgiven any current rents due and at this time has waived default under the leases provisions.
 
During the six months ended June 30, 2002, the Company sold a wholly owned subsidiary, LTC-Fort Tucum, Inc. to CLC for a $500,000 note bearing no interest for one year and thereafter interest at 8% annually for two years. CLC has certain rights to extend the note at its maturity. The $500,000 note is a full recourse obligation of LTC-Fort Tucum, Inc. and is secured by all the assets owned now or in the

8

LTC PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
future by LTC-Fort Tucum, Inc. and contains a provision for acceleration should there be a change of control of LTC-Fort Tucum, Inc. LTC-Fort Tucum, now owned by CLC, has acquired two skilled nursing facilities in New Mexico, previously financed with debt from a REMIC pool originated by the Company. CLC began operating the two facilities during the second quarter of 2002.
 
During the six months ended June 30, 2001, the Company sold all 180,000 shares of CLC common stock it owned at December 31, 2000. The shares were sold to CLC for $225,000, not including selling commissions, which was the fair market value as of the date of sale. The Company recognized a loss of $386,000 on the sale of these shares. The Company sold these shares because the Tax Relief Extension Act of 1999 (“Act”) provides that, subject to certain exceptions for taxable years commencing after December 31, 2000, a REIT may not own more than 10% of the total value of the securities of any corporation. Without qualifying as safe harbor debt, securities under the Act include the line of credit provided by the Company to CLC. In order to qualify as safe harbor debt and retain its REIT status, the Company was required to hold only such debt or the shares.
 
The Company has provided CLC with a $20,000,000 secured line of credit that bears interest at 10% and matures on April 1, 2008. This agreement contains a provision for acceleration should there be a change of control of CLC. As of June 30, 2002 and December 31, 2001, $5,478,000 and $5,342,000, respectively, were outstanding under the line of credit. During the six months ended June 30, 2002, the Company advanced CLC $792,000 under the line of credit and CLC repaid $656,000 on the line of credit. Under the terms of the Senior Secured Revolving Credit, the Company is permitted to loan CLC up to $25,000,000. The Company and CLC have not increased the $20,000,000 secured line of credit between the companies. Should any such amendment be proposed, it would need approval of the independent Board members of each company’s board. The Company reserved for, but has not forgiven, interest due from CLC under the line of credit during the first half of 2002. During the three and six months ended June 30, 2002 the Company recorded interest income of $0 on the average outstanding principal balance under the line of credit as compared to $0 and $437,000, during the same periods in 2001. The Company has granted a waiver through July 31, 2002 for unpaid interest of $269,000 for January through June 2002.
 
CLC has advised the Company that it no longer has general and professional liability insurance in Texas and Florida. CLC no longer operates in Florida; however, it has claims arising from operations prior to their exit from the Florida market. CLC does provide for a reserve for potential insurance losses based on an estimate of incurred but not reported losses; however, should CLC incur a significant uninsured loss, it may seek to draw to draw against its line of credit with the Company to pay the loss. At this time, CLC has stated that given the current litigation environment and unpredictability of jury trials, the existing claims could develop in a way which may present a material adverse affect on CLC’s financial position, results of operations or liquidity.
 
CLC further stated its insurance for those claims for which insurance exists and CLC’s allowance for general and professional liability risk in an amount determined for reported claims and the incurred but not reported claims, CLC’s management believes, at this time, that the existing claims do not present a material adverse affect on CLC’s financial position or results of operations, however, such claims could have a material adverse effect on liquidity.
 
Additionally, the Company holds a Promissory Note (“Note”) issued by Healthcare Holdings, Inc. (“Holdings”), a wholly owned subsidiary of CLC, in the face amount of $7,000,000. The Note was received in December 2001 in exchange for the Company’s right to receive 1,238,076 shares of Assisted Living Concepts, Inc. (“ALC”) common stock distributed concurrently with ALC’s emergence from bankruptcy on December 31, 2001. The Note is for a term of five years and bears interest at 5.0%

9

LTC PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
compounded annually and accruing to the principal balance plus interest at 2.0% on the original principal of $7,000,000 payable in cash annually. The Company did not accrue any interest income on the Note during the first six months of 2002. The Note is a full recourse obligation of Holdings and is secured by all the assets owned now or in the future by Holdings and contains a provision for acceleration should there be a change of control of Holdings or CLC. At June 30, 2002 Holdings owned 1,452,794 shares of ALC common stock with a fair market value based on the closing price of the stock on June 30, 2002 of $4,649,000 and $1,382,000 face value of ALC Senior Subordinated Debentures and $544,000 face value of Junior Subordinated Debentures. At June 30, 2002, the book value of the note was $3,095,000 which represented the fair market value of the 1,238,076 shares acquired by Holdings on December 31, 2001.
 
In February 2002, the independent members of CLC’s Board of Directors approved, in principle, an Administrative Services Agreement between CLC and the Company. This agreement would terminate on June 30, 2007 and provides that during its term, the Company will provide office space and certain management and administrative services to CLC for a fee of approximately $1,000,000 per year beginning as of July 1, 2002. As of August 13, 2002 this agreement had not been signed by CLC or the Company. Additionally, the Company has an indemnification agreement covering four of the Company’s officers who also serve as officers of CLC and one current CLC outside director.
 
5.    Debt Obligations
 
At June 30, 2002, $96,000,000 was outstanding under the Company’s Senior Secured Revolving Line of Credit (the “Secured Revolving Credit”). During the three and six months ended June 30, 2002, pricing under the Secured Revolving Credit ranged between LIBOR plus 2.25% and LIBOR plus 3.00%. At June 30, 2002, the Company’s weighted average interest rate was 4.48%.
 
Subsequent to June 30, 2002, the Company sold, to a private bank, a non-recourse senior participation interest in 22 of the Company’s first mortgages with a total balance outstanding of approximately $58,627,000. The sales agreement provides that the private bank will receive 9.25% per annum interest and all principal payments from these mortgages until the senior participation is retired. There is no specific principal maturity date for the senior participation other than the principal maturity dates of the underlying mortgages. The Company will continue to receive interest from these mortgages above the 9.25% paid to the private bank and will resume collecting principal once the senior participation is repaid in full. The weighted average interest rate of these mortgages is approximately 11.6%. The Company sold the senior participation interest for $30,000,000 and received $29,750,000 in net proceeds, which it used to reduce commitments and amounts outstanding under the Secured Revolving Credit.
 
During the six months ended June 30, 2002, the Company received three mortgage loan repayments totaling approximately $4,282,000. Provisions of the credit facility required the Company to apply 50% of the Net Cash Proceeds, as defined in the credit facility, to reduce outstanding commitments, and therefore, commitments were reduced to $117,300,000. Subsequent to June 30, 2002, the Company borrowed $10,000,000 under the Secured Revolving Credit for general corporate purposes.
 
During the six months ended June 30, 2002 the Company paid off $16,193,000 in mortgage notes payable to REMIC pools originated by the Company. Approximately $12,809,000 of the pay-offs related to property sales as discussed in Note 2—Real Estate Investments and $3,384,000 related to two loans that were repaid prior to maturity.
 
At maturity, January 2, 2002, the Company redeemed $2,408,000 of convertible subordinated debentures.

10

LTC PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
6.    Stockholders’ Equity
 
During the six months ended June 30, 2002, the Company declared and paid cash dividends on its Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock totaling $3,653,000, $2,247,000 and $2,454,000 ($818,000 of which was accrued at December 31, 2001), respectively. During the first and second quarters of 2002 the Company declared and paid cash dividends of $0.10 per share on its common stock totaling $3,686,000.
 
Subsequent to June 30, 2002 the Company declared a cash dividend of $0.10 per share on its common stock payable September 30, 2002 to stockholders of record on September 23, 2002.
 
During the six months ended June 30, 2002, the Company granted 30,000 stock options at an exercise price of $7.63. The options vest over five years and expire the earlier of seven years from the date of vesting and ten years from the date of grant.
 
7.    Major Operators
 
At June 30, 2002, Sun Healthcare Group, Inc. (“Sun”) operated 14 facilities (13 leases and one loan to a party who in turn leased the facility to Sun) with 1,714 beds/units representing approximately 11.6%, or $65,969,000, of the Company’s “direct real estate investment portfolio” (properties that the Company owns or on which the Company holds promissory notes, secured by first mortgages). Additionally, at June 30, 2002 Sun operated 10 skilled nursing facilities securing eight mortgage loans payable to REMIC pools originated by the Company. During 1999, Sun filed for reorganization under Chapter 11 of the Bankruptcy Code and operated its business as a debtor-in-possession subject to the jurisdiction of the Bankruptcy Court until it emerged from bankruptcy in February 2002. Concurrently, 13 leases the Company had directly with Sun were affirmed; additionally the lease related to the loan was affirmed.
 
At June 30, 2002, ALC operated 37 assisted living facilities with 1,434 units representing approximately 15.4%, or $88,105,000, of the Company’s direct real estate investment portfolio. ALC filed for reorganization under Chapter 11 of the Bankruptcy Code in October 2001 and emerged from bankruptcy on December 31, 2001. The Company also has an investment in ALC’s senior and junior subordinated debentures with a net book value of $8,755,000 at June 30, 2002. Additionally, as more fully described in Note 4—CLC Healthcare, Inc., the Company has a $7,000,000 note from CLC that is secured by 1,452,794 shares of ALC common stock and $1,926,000 face value ALC senior and junior debentures.
 
At June 30, 2002, Alterra Healthcare Corporation (“Alterra”) operated 35 assisted living facilities with 1,416 units representing 14.8%, or $84,194,000 of the Company’s direct real estate investment portfolio. Alterra has announced that it has engaged financial advisors to assist Alterra in a restructuring of its debt and equity. The Company cannot, at this time predict or quantify what, if any, impact any ultimate restructuring could have on the Company. As of August 2002, Alterra was current on all rent due the Company.
 
At June 30, 2002, Sunwest Management, Inc. (“Sunwest”) operated 7 assisted living facilities with 693 units representing 10.9%, or $62,294,000, of the Company’s direct real estate investment portfolio.
 
CLC Healthcare, Inc. (See Note 4—CLC Healthcare, Inc.)
 
All of these companies, except Sunwest, are publicly traded companies, and as such are subject to the filing requirements of the Securities and Exchange Commission. The Company’s financial position and its ability to make distributions may be adversely affected by further financial difficulties experienced by

11

LTC PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
ALC, Alterra, CLC and Sun, or financial difficulties experienced by Sunwest, or any of the Company’s other major operators, including additional bankruptcies, inability to emerge from bankruptcy, insolvency or general downturn in business of any such operator, or in the event any such operator does not renew and/or extend its relationship with the Company or the Company’s borrowers when it expires.
 
8.    Contingencies
 
It is the Company’s policy to require, all borrowers of funds from the Company and lessees of any of the Company’s properties to secure comprehensive property and general and professional liability insurance that covers the Company, as well as the borrower and/or lessee. Even though that is the policy of the Company, certain borrowers and lessees have been unable to obtain general and professional liability insurance because the cost of such insurance has increased substantially and some insurers have stopped offering such insurance for long term care facilities. Additionally, insurance companies have filed for bankruptcy protection leaving certain of the Company’s borrowers and/or lessees without coverage for periods that were believed to be covered prior to such bankruptcies. The unavailability and associated exposure as well as increased cost of such insurance could have a material adverse effect on the lessees and operators, including their ability to make lease or mortgage payments. Although the Company contends that as a non-possessory landlord it is not generally responsible for what takes place on real estate it does not possess, claims including general and professional liability claims, may still be asserted against it which may result in costs and exposure for which insurance is not available. Certain risks may be uninsurable, not economically insurable or insurance may not be available and there can be no assurance that the Company, a borrower or lessee will have adequate funds to cover all contingencies. If an uninsured loss or a loss in excess of insured limits occurs with respect to one or more of the Company’s properties, the Company could be subject to an adverse claim including claims for general or professional liability; could lose the capital that it has invested in the properties, as well as the anticipated future revenue for the properties and, in the case of debt which is with recourse to the Company, the Company would remain obligated for any mortgage debt or other financial obligations related to the properties. Certain losses such as losses due to floods or seismic activity if insurance is available may be insured subject to certain limitations including large deductibles or co-payments and policy limits.
 
The Company and one of its subsidiaries are parties to an action which attempts to present a legal basis to hold the Company and its subsidiaries responsible for an incident occurring in February 2001 in connection with resident care at a facility where the subsidiary was the non-possessory landlord and had a long term lease to a third party operator. While the operator of this facility is the only entity licensed to provide care, the litigants have included the Company as a defendant. The operator’s insurance company has filed for bankruptcy. The Company has tendered this matter to its insurer for general and professional liability. At renewal in August of 2001, the insurer elected to not renew this policy. The Company has been unable to replace coverage for this type of contingent liability insurance. The Company is and intends to continue to vigorously defend itself against the claims that a non-possessory landlord has liability for the actions of the operators in this action and other similar asserted claims.
 
In accordance with Statement of Financial Accounting Standards No. 5, “Accounting for Contingencies”, an accrual for a loss contingency “shall be accrued by a charge to income if both of the following conditions are met: a) Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. It is implicit in this condition that it must be probable that one or more future events will occur confirming the fact of the loss, and b) The amount of the loss can be reasonably estimated.”

12

LTC PROPERTIES, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)

 
At this time the Company, in reliance on the law and discussions with its outside counsel, does not believe that this type of case has merit and will continue to vigorously defend this and any other such action, nor does the Company believe that a measurable loss is probable or estimatable at this time.
 
9.    Earnings per Share
 
The following table sets forth the computation of basic and diluted net income per share (unaudited, in thousands, except per share amounts):
 
    
Three Months Ended June 30,
     
Six Months Ended June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Net income (loss)
   
$
14,362
 
   
$
(11,632
)
   
$
20,543
 
   
$
(7,566
)
Preferred dividends
   
 
(3,761
)
   
 
(3,771
)
   
 
(7,519
)
   
 
(7,543
)
    
  
  
  
Net income (loss) for basic net income per share
   
 
10,601
 
   
 
(15,403
)
   
 
13,024
 
   
 
(15,109
)
Effect of dilutive securities:
                                    
8.25% convertible debentures due 2001
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
8.50% convertible debentures due 2001
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
7.75% convertible debentures due 2002
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Other dilutive securities
   
 
1,154
 
   
 
—  
 
   
 
127
 
   
 
—  
 
    
  
  
  
Net income (loss) for diluted net income per share
   
$
11,755
 
   
$
(15,403
)
   
$
13,151
 
   
$
(15,109
)
    
  
  
  
Shares for basic net income per share
   
 
18,393
 
   
 
25,340
 
   
 
18,393
 
   
 
25,688
 
Effect of dilutive securities:
                                    
Stock options
   
 
180
 
   
 
—  
 
   
 
153
 
   
 
—  
 
8.25% convertible debentures due 2001
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
8.50% convertible debentures due 2001
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
7.75% convertible debentures due 2002
   
 
—  
 
   
 
—  
 
   
 
—  
 
   
 
—  
 
Other dilutive securities
   
 
2,873
 
   
 
—  
 
   
 
195
 
   
 
—  
 
    
  
  
  
Shares for diluted net income per share
   
 
21,446
 
   
 
25,340
 
   
 
18,741
 
   
 
25,688
 
    
  
  
  
Basic net income (loss) per share
   
$
0.58
 
   
$
(0.61
)
   
$
0.71
 
   
$
(0.59
)
    
  
  
  
Diluted net income (loss) per share
   
$
0.55
 
   
$
(0.61
)
   
$
0.70
 
   
$
(0.59
)
    
  
  
  
 

13

 
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Operating Results
 
Three months ended June 30, 2002 compared to three months ended June 30, 2001
 
Revenues for the three months ended June 30, 2002 decreased to $17.2 million from $18.1 million for the same period in 2001. Rental income for the three months ended June 30, 2002 increased $0.6 million compared to the same period of 2001 primarily as a result of the acquisition of properties in December 2001, new leases and rental increases provided for in existing lease agreements, partially offset by the elimination of rents from sold properties and closed facilities. Same store rental income, properties owned for the three months ended June 30, 2002 and the three months ended June 30, 2001, decreased $0.1 million primarily due to the reduction of rents due from Assisted Living Concepts, Inc. Interest income from mortgage loans and notes receivable decreased $0.6 million primarily as a result of the early payoff of five mortgage loans (three in 2002 and two in the second half of 2001), the conversion of one mortgage loan to an owned property, a receipt of delinquent interest related to a bankruptcy order in the prior year and the effect of not accruing interest on one mortgage loan. Interest income from REMIC Certificates for the three months ended June 30, 2002 decreased $0.8 million compared to the same period of 2001 due to the amortization of the related asset, the early payoff of certain mortgage loans underlying the Company’s REMIC Certificates and the sale of REMIC Certificates in the third quarter of 2001. Interest and other income for the three months ended June 30, 2002 was comparable to the same period in 2001.
 
Interest expense decreased by $0.3 million to $5.3 million for the three months ended June 30, 2002 from $5.6 million during the same period in 2001, due to lower debt outstanding along with a decrease in interest rates. Depreciation and amortization expense for the second quarter of 2002 increased $0.3 million from the second quarter of 2001 due to the conversion of mortgage loans into owned properties and the acquisition of properties in December 2001 partially offset by properties sold and a lower basis of certain assets due to impairment charges taken in 2001. The Company recorded a $4.9 million impairment charge during the second quarter of 2002 (as discussed in Note 3.—Impairment Charge) compared to an $18.4 million impairment charge taken in the same quarter of the prior year. Operating and other expenses for the three months ending June 30, 2002 were comparable to the same period in 2001.
 
During the three months ended June 30, 2002, the Company sold five skilled nursing facilities in Alabama for $24.0 million resulting in a net gain of approximately $13.2 million. The Company received approximately $9.8 million in cash, a $3.6 million note at 7.0% interest which the Company recorded at $2.6 million to allow for a 13.0% discount, and a reduction of $10.2 million in mortgage debt due to a REMIC pool originated by the Company. During the same period in 2001, the Company recorded a net loss of $0.1 million related the sale of one office building and closing costs related to the sale of three schools in the first quarter of 2001.
 
Net income available to common stockholders increased to $10.6 million for the three months ended June 30, 2002 from a net loss to common stockholders of $15.4 million for the same period in 2001, due largely to the impairment in 2001 and the gain on sale of assets in 2002 as discussed above.
 
Six months ended June 30, 2002 compared to six months ended June 30, 2001
 
Revenues for the six months ended June 30, 2002 decreased to $34.7 million from $36.4 million for the same period in 2001. Rental income for the six months ended June 30, 2002 increased $1.3 million compared to the same period of 2001 primarily as a result of the acquisition of properties in December 2001, new leases and rental increases provided for in existing lease agreements, partially offset by the elimination of rents from sold properties and closed facilities. Same store rental income, properties owned for the six months ended June 30, 2002 and the six months ended June 30, 2001, decreased $0.4 million primarily due to the reduction of rents due from Assisted Living Concepts, Inc. Interest income from mortgage loans and notes receivable decreased $1.5 million primarily as a result of the early payoff of five mortgage loans (three in 2002 and two in the second half of 2001), the

14

 
conversion of one mortgage loan to an owned property, a receipt of delinquent interest related to a bankruptcy order in the prior year and the effect of not accruing interest on one mortgage loan and the line of credit with CLC as discussed in Note 4—CLC Healthcare, Inc. Interest income from REMIC Certificates for the six months ended June 30, 2002 decreased $1.6 million compared to the same period of 2001 due to the amortization of the related asset, the early payoff of certain mortgage loans underlying the Company’s REMIC Certificates and the sale of REMIC Certificates in the third quarter of 2001. Interest and other income increased $0.1 million for the six months ended June 30, 2002 which was comparable to the same period in 2001.
 
Interest expense decreased by $0.9 million to $10.7 million for the six months ended June 30, 2002 from $11.6 million during the same period in 2001, due to lower debt outstanding along with a decrease in interest rates. Depreciation and amortization expense increased $0.3 million due to the conversion of mortgage loans into owned properties and the acquisition of properties in December 2001 partially offset by properties sold and a lower basis of certain assets due to impairment charges taken in 2001. The Company recorded a $4.9 million impairment charge during the six months ended June 30, 2002 (as discussed in Note 3.—Impairment Charge) compared to a $22.9 million impairment charge taken in the six months ended June 30, 2001. Operating and other expenses for the six months ending June 30, 2002 were comparable to the same period in 2001.
 
During the six months ended June 30, 2002, the Company sold two skilled nursing facilities in Illinois and five skilled nursing facilities in Alabama resulting in a net gain of approximately $13.1 million. During the same period in 2001, the Company recorded a net gain of $1.8 million related the sale of three schools, one skilled nursing facility and an office building.
 
Net income available to common stockholders increased to $13.0 million for the six months ended June 30, 2002 from a net loss to common stockholders of $15.1 million for the same period in 2001, due largely to the impairment in 2001 and the gain on sale of assets in 2002 as discussed above.
 
Liquidity and Capital Resources
 
At June 30, 2002 the Company’s real estate investment portfolio (before accumulated depreciation and amortization) consisted of $484.7 million invested primarily in owned long-term care facilities, mortgage loans of approximately $84.8 million (net of a $1.3 million reserve) and subordinated REMIC Certificates of approximately $69.1 million with a weighted average effective yield of 17.55%. At June 30, 2002 the outstanding certificate principal balance and the weighted average pass-through rate for the senior REMIC Certificates (all held by outside third parties) was $251.6 million and 7.36%. The Company’s portfolio consists of direct investments (properties that the Company either owns or on which the Company holds promissory notes secured by first mortgages) in 103 skilled nursing facilities, 97 assisted living facilities and one school in 30 states.
 
For the six months ended June 30, 2002, the Company had net cash provided by operating activities of $20.4 million. The Company acquired one skilled nursing facility in Texas for $0.5 million cash and the assumption of $1.4 million in mortgage debt payable to a REMIC pool originated by the Company. Additionally, the Company invested $0.6 million for renovation of owned properties. The Company sold seven skilled nursing facilities resulting in a net gain of $13.1 million. The sales resulted in net cash proceeds of $9.5 million, a ten-year $3.6 million note with a face rate of 7.0% which the Company discounted to $2.6 million for an effective rate of 13.0% and the pay off of $12.8 million of mortgage debt payable to REMIC pools originated by the Company. The Company received $5.4 million in principal payments on mortgage loans receivable including $4.3 million in prepayments of three loans on skilled nursing facilities. The Company also received $1.6 million in repayments of two notes receivable related to properties sold in 2001. The Company provided CLC with an additional $0.1 million in borrowings, net of payments, under the $20.0 million secured line of credit that bears interest at 10% and matures in April 1, 2008. In addition, one mortgage loan on a skilled nursing facility in Florida with a principal balance of $2.3 million was reclassified to an owned property as a result of a deed-in-lieu of foreclosure transaction.

15

 
During the six months ended June 30, 2002, the Company repaid $8.0 million of bank borrowings and redeemed $2.4 million of convertible subordinated debentures at maturity. Subsequent to June 30, 2002 the Company borrowed an additional $10.0 million on the Senior Secured Revolving Line of Credit for general corporate purposes. In addition to the $12.8 million reduction in mortgage debt related to asset sales, the Company also repaid, at maturity, two loans payable to REMIC pools originated by the Company totaling $3.4 million. During the six months ended June 30, 2002, the Company paid cash dividends on its Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock totaling $3.7 million, $2.2 million, and $2.4 million ($0.8 million of which was accrued at December 31, 2001), respectively. Additionally, the Company paid a cash dividend on its common stock totaling $3.7 million. The Company has declared a $0.10 dividend per share on its common stock payable on September 30, 2002; however, the Company is giving no assurances that this amount or any amount will be a continuing common dividend in the near future.
 
Subsequent to June 30, 2002 the Company sold a non-recourse senior participation interest in 22 of the Company’s first mortgages with a total balance outstanding of approximately $58.6 million to a private bank. The sales agreement provides that the private bank will receive 9.25% per annum interest and all principal payments from these mortgages until the senior participation is retired. There is no specific principal maturity date for the senior participation other than the principal maturity dates of the underlying mortgages. The Company will continue to receive interest from these mortgages above the 9.25% paid to the private bank and will resume collecting principal once the senior participation is repaid in full. The weighted average interest rate of these mortgages is approximately 11.6%. The Company sold the senior participation interest for $30.0 million and received $29.8 million in net proceeds, which it used to reduce commitments and amounts outstanding under the Senior Secured Revolving Line of Credit.
 
Also subsequent to June 30, 2002, the Company sold (in separate transactions) two closed, previously impaired skilled nursing facilities in Arizona and Texas resulting in net proceeds of approximately $1.9 million and a combined gain of $0.4 million. Proceeds from these sales were used to reduce amounts outstanding and $0.9 million of the proceeds were used to reduce commitments under the Senior Secured Revolving Line of Credit.
 
The Company will continue to pursue sales of assets and alternative financings in 2002 in order to comply with the credit facility’s commitment reductions and mortgage loan maturities. In the aggregate, the Company is required to make payments in 2002 of at least $25.4 million to reduce various obligations. As of August 13, 2002, the Company had made approximately $16.6 million of these payments.
 
Should an insufficient amount be raised to meet the Company’s debt obligations through asset sales or financings, the Company would need to again suspend paying a common dividend and perhaps some of the preferred dividends in order to apply funds from operations to debt reductions.
 
Alterra Healthcare Corporation (“Alterra”) operates 35 assisted living facilities with a total of 1,416 units owned by the Company representing approximately 14.8%, or $84.2 million, of the Company’s “direct real estate investment portfolio” (properties that the Company owns or on which the Company holds promissory notes secured by first mortgages). Alterra has announced that it has engaged financial advisors to assist Alterra in a restructuring of its debt and equity. The Company cannot, at this time, predict or quantify what, if any, impact any ultimate restructuring could have on the Company. As of August 2002, Alterra was current on all rent due the Company.
 
The Company expects its future income and ability to make distributions from cash flows from operations to depend on the collectibility of its mortgage loans receivable, REMIC Certificates and rents. The collection of these loans, certificates and rents will be dependent, in large part, upon the successful operation by the operators of the skilled nursing facilities and assisted living facilities owned by or pledged to the Company and the school owned by the Company. The operating results of the facilities will be impacted by various factors over which the operators/owners may have no control. Those factors include, without limitation, the status of the economy, changes in supply of or demand for competing long-term care facilities, ability to control rising operating costs, and the potential for significant reforms in the long-term care industry. In addition, the Company’s future growth in net income and cash flow may be adversely impacted by various proposals for changes in the governmental

16

 
regulations and financing of the long-term care industry. The Company cannot presently predict what impact these proposals may have, if any. The Company believes that an adequate provision has been made for the possibility of loans proving uncollectible but will continually evaluate the status of the operations of the skilled nursing facilities, assisted living facilities and the school. In addition, the Company will monitor its borrowers and the underlying collateral for mortgage loans and will make future revisions to the provision, if considered necessary.
 
The Company’s investments, principally its investments in mortgage loans, REMIC Certificates, and owned properties, are subject to the possibility of loss of their carrying values as a result of changes in market prices, interest rates and inflationary expectations. The effects on interest rates may affect the Company’s costs of financing its operations and the fair market value of its financial assets. The Company generally made loans that have predetermined increases in interest rates and leases that have agreed upon annual increases. Inasmuch as the Company initially funded its investments with its Senior Secured Revolving Line of Credit, the Company is at risk of net interest margin deterioration if medium and long-term rates were to increase.
 
The REMIC Certificates retained by the Company are subordinate in rank and right of payment to the certificates sold to third-party investors and as such would, in most cases, bear the first risk of loss in the event of impairment to any of the underlying mortgages. The returns on the Company’s investment in REMIC Certificates are subject to certain uncertainties and contingencies including, without limitation, the level of prepayments, estimated future credit losses, prevailing interest rates, and the timing and magnitude of credit losses on the underlying mortgages collateralizing the securities that are a result of the general condition of the real estate market or long-term care industry. As these uncertainties and contingencies are difficult to predict and are subject to future events that may alter management’s estimations and assumptions, no assurance can be given that current yields will not vary significantly in future periods. To minimize the impact of prepayments, the mortgage loans underlying the REMIC Certificates generally prohibit prepayment unless the property is sold to an unaffiliated third party (with respect to the borrower).
 
The Company believes that its current cash flow from operations available for distribution or reinvestment and its current borrowing capacity are sufficient to provide for payment of its operating costs, meet debt obligations and provide funds for distribution to the holders of the Company’s preferred stock. As a result of the Company’s current inability to refinance its Senior Secured Revolving Line of Credit, the Company has continued to limit its investment activity in 2002. If prevailing interest rates or other factors at the time of refinancing, if any, (such as the reluctance of lenders to make commercial real estate loans) result in higher rates upon refinancing the interest expense relating to the refinanced indebtedness would increase and therefore adversely affect the Company’s financial condition and results of operations.
 
Critical Accounting Policies
 
In October 2001, the Financial Accounting Standards Board issued Statement No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets”, which is required to be adopted in fiscal years beginning after December 15, 2001. Statement No. 144 on asset impairment supercedes Statement No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and provides a single accounting model for long-lived assets to disposed of. The Company adopted Statement No. 144 on January 1, 2002 and its adoption did not have a significant impact on the consolidated results of operations or financial position.
 
For further discussion of the Company’s critical accounting policies, see the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2001.
 
Funds From Operations
 
Industry analysts generally consider funds from operations (“FFO”) to be an alternative measure of performance of a REIT. The National Association of Real Estate Investment Trusts (“NAREIT”) has defined FFO as net income applicable to common stockholders (computed in accordance with GAAP) excluding gain (or losses) from debt restructuring, sales of property and impairment charges, plus depreciation of real property and after adjustments for unconsolidated entities in which a REIT holds an interest.

17

 
The Company believes that FFO is an important supplemental measure of operating performance. FFO should not be considered as a alternative to net income or any other GAAP measurement of performance as an indicator of operating performance or as an alternative to cash flows from operations, investing or financing activities as a measure of liquidity. The Company believes that FFO is helpful in evaluating a REIT portfolio’s overall performance considering the fact that historical cost accounting implicitly assumes that the value of real estate assets diminishes predictably over time. FFO provides an alternative measurement criteria, exclusive of certain non-cash charges included in GAAP income, by which to evaluate the performance of such investments. FFO, as used by the Company may not be comparable to similarly entitled items reported by other REITs.
 
The following table reconciles net income available to common stockholders to FFO available to common stockholders (unaudited, in thousands, except per share amounts):
 
    
Three Months Ended
June 30,
     
Six Months Ended
June 30,
  
    
2002
     
2001
     
2002
     
2001
  
Net income (loss) available to common stockholders
   
$
10,601
 
   
$
(15,403
)
   
$
13,024
 
   
$
(15,109
)
(Gain) loss on sale of assets, net
   
 
(13,192
)
   
 
100
 
   
 
(13,120
)
   
 
(1,844
)
Impairment charge
   
 
4,882
 
   
 
18,366
 
   
 
4,882
 
   
 
22,866
 
Real estate depreciation
   
 
3,671
 
   
 
3,376
 
   
 
7,384
 
   
 
7,115
 
    
  
  
  
FFO available to common stockholders
   
$
5,962
 
   
$
6,439
 
   
$
12,170
 
   
$
13,028
 
    
  
  
  
Basic FFO per share
   
$
0.32
 
   
$
0.25
 
   
$
0.66
 
   
$
0.51
 
    
  
  
  
Diluted FFO per share
   
$
0.32
 
   
$
0.25
 
   
$
0.66
 
   
$
0.51
 
    
  
  
  
 
Statement Regarding Forward Looking Disclosure
 
Certain information contained in this report includes forward looking statements, which can be identified by the use of forward looking terminology such as “may”, “will”, “expect”, “should” or comparable terms or negatives thereof. These statements involve risks and uncertainties that could cause actual results to differ materially from those described in the statements. These risks and uncertainties include (without limitation) the following: the effect of economic and market conditions and changes in interest rates, government policy changes relating to the health care industry including changes in reimbursement levels under the Medicare and Medicaid programs, changes in reimbursement by other third party payors, the financial strength of the operators of the Company’s facilities as it affects the continuing ability of such operators to meet their obligations to the Company under the terms of the Company’s agreements with its borrowers and operators, the amount and the timing of additional investments, access to capital markets and changes in tax laws and regulations.

18

PART II
 
LTC PROPERTIES, INC.
 
OTHER INFORMATION
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
The Annual Meeting of Stockholders was held on April 26, 2002 (Annual Meeting). At the Annual Meeting Andre C. Dimitriadis, Edmund C. King, Wendy L. Simpson, Timothy J. Triche, M.D. and Sam Yellen were re-elected as directors to serve for a one-year term until the 2003 Annual Meeting of Stockholders.
 
Voting at the Annual Meeting was as follows:
 
Matter
     
Votes Cast For
     
Votes Against
     
Abstentions
Election of Andre C. Dimitriadis
     
16,421,334
            
543,665
Election of Edmund C. King
     
16,814,573
            
150,425
Election of Wendy L. Simpson
     
16,438,513
            
526,485
Election of Timothy J. Triche, M.D.
     
16,811,064
            
153,935
Election of Sam Yellen
     
16,805,540
            
159,458
 
Item 6.    Exhibits and Reports on Form 8-K
 
(a)     Exhibits
 
In accordance with Item 601(b)(4)(iii) of Regulation S-K, certain instruments pertaining to Registrant’s long-term debt have not been filed; copies thereof will be furnished to the Securities and Exchange Commission upon request.
 
10.1
   
Promissory Note between LTC Properties, Inc. and LTC-Fort Tucum, Inc. dated January 30, 2002.
10.2
   
Security Agreement between LTC Properties, Inc. and LTC-Fort Tucum, Inc. dated January 30, 2002.
10.3
   
Stock Purchase Agreement between LTC Properties, Inc. and LTC-Fort Tucum, Inc. dated January 30, 2002.
 
(b)    Reports on Form 8-K
 
No reports on Form 8-K were filed by the Company during the three months ended June 30, 2002.

19

 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
LTC PROPERTIES, INC.
Registrant
By:
  
/s/    WENDY L. SIMPSON                  
   
Wendy L. Simpson
Vice Chairman and Chief Financial Officer
 
Dated: August 13, 2002

20