Back to GetFilings.com
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
COMMISSION FILE NUMBER: 1-14151
LTC HEALTHCARE, INC.
(Exact name of Registrant as specified in its charter)
NEVADA 91-1895305
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Esplanade Drive, Suite 1860
Oxnard, California 93030
(Address of principal executive offices)
Registrant's telephone number, including area code: (805) 981-8655
Securities registered pursuant to Section 12(b) of the Act:
Title of Stock Name of each exchange on which registered
-------------- -----------------------------------------
Common stock, $.01 Par Value Pacific Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the Company (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Company was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes 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 10-K or
any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the Company is approximately $4,537,000 as of March 19, 1999.
2,731,432
(Number of shares of common stock outstanding as of March 19, 1999)
Part III is incorporated by reference from the Company's
definitive proxy statement for the Annual Meeting of Stockholders to be held
on May 25, 1999.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
ITEM 1. BUSINESS
GENERAL
LTC Healthcare, Inc. (the "Company"), a Nevada corporation, was incorporated
on March 20, 1998 and began operations on March 25, 1998 to engage in the
following activities: (i) ownership of leveraged properties leased to third
parties; (ii) ownership of secured high yield mortgage loans; (iii) operation
of long-term care facilities; (iv) development of long-term care properties,
and (v) ownership of equity investments in long-term care companies. The
Company was originally a preferred stock subsidiary of LTC Properties, Inc.
("LTC"), a Maryland corporation and real estate investment trust ("REIT"). On
September 30, 1998, concurrently with the conversion of all shares of Company
non-voting common stock held by LTC into voting common stock of the Company,
LTC completed the spin-off of Company common stock through a taxable dividend
to holders of LTC common stock, convertible subordinated debentures and
Series C Preferred Stock (the "Distribution"). Upon completion of the
Distribution, the Company began operating as a separate public company.
The Company was organized to create and realize value by identifying and
making opportunistic real estate and health care investments through the
direct acquisition, development, financing and operation of real properties
and/or participation in these activities through the purchase of debt
instruments or equity interests of entities engaged in the health care or
real estate businesses. The Company will endeavor to provide investors with
return opportunities that are not generally available to publicly traded
REITs due to investment limitations and leverage expectations imposed by the
public markets and Federal income tax laws applicable to REITs. See "Item 2.
- -Properties" for a discussion of the Company's investment in real estate
properties and health care related debt and equity securities as of December
31, 1998.
THE DISTRIBUTION. During the period from March 25, 1998 to
September 30, 1998, LTC acquired 4,002 shares of Company non-voting common
stock for $2,001,000. In addition, LTC contributed equity investments with a
book value of $788,000, 13 real estate properties with a gross book value of
$65,182,000 (net book value of $61,462,000) that were encumbered by
$29,263,000 of mortgage debt on seven of the properties and a minority
interest liability of $3,461,000, and other related assets and liabilities
with a book value of $93,000 to the Company in exchange for an additional
36,000 shares of Company non-voting common stock and borrowings by the
Company under an unsecured line of credit provided by LTC of $21,396,000.
Subsequent to the contribution of the above assets and liabilities by the LTC
to the Company, the Company obtained mortgage financing of $17,400,000 from a
third-party lender on four of the unencumbered properties. The Company
utilized proceeds from the mortgage debt and cash on hand to repay borrowings
of $17,668,000 under the unsecured line of credit provided by LTC.
On September 30, 1998, the 40,002 shares of Company non-voting common stock
held by the LTC were converted into 3,335,882 shares of Company voting common
stock. Concurrently, LTC completed the spin-off of all Company voting common
stock through a taxable dividend distribution to the holders of LTC common
stock, convertible subordinated debentures and Series C Preferred Stock.
INVESTMENT AND OTHER POLICIES
INVESTMENT POLICIES. In addition to the long-term care properties acquired in
the Distribution, the Company intends to invest in a variety of real estate
related assets such as (i) development opportunities that provide substantial
value appreciation rather than immediate cash flow, (ii) properties with
long-term leases enabling the Company to utilize a substantial amount of
leverage, (iii) properties requiring restructuring in order to create
significant value, and (iv) public and private debt and equity securities of
real estate and health care-related entities.
2
DEVELOPMENT. The Company may undertake, directly or through a joint-venture,
development projects that have the potential for substantial gains but which
may take several years to fully develop. In the event that the Company
undertakes a joint-venture development project, the joint-venture developer
will most likely assume the majority of the economic risks associated with
construction, development and the initial stabilization of the properties.
The Company may purchase the developed property and lease it back to the
joint-venture developer or make a loan to the developer with an option to
purchase the property upon completion of the project.
ACQUISITION OF PROPERTIES SUBJECT TO LONG-TERM LEASES. The Company may
acquire real-estate properties in sale/lease-back transactions that can be
highly leveraged with fixed rate debt that amortizes over the term of the
property's tenant lease. The Company's profits can be enhanced when the
property acquired subject to the above investment strategy is encumbered by
fixed rate debt that carries an interest rate below the initial purchase
capitalization rate.
RESTRUCTURING IN ORDER TO CREATE SIGNIFICANT VALUE. The Company may engage in
selective restructuring and development activities such as changing the use
or focus of a property as opportunities arise and when justified by projected
returns. The Company believes that appropriate, well-located properties that
are currently under-performing can be acquired on advantageous terms and
repositioned through selective restructuring and development activities with
the expectation of achieving enhanced returns.
ACQUISITION OF DEBT AND EQUITY SECURITIES OF ENTITIES ENGAGED IN REAL ESTATE
AND HEALTH CARE RELATED ACTIVITIES. The Company may acquire real estate or
health care related equity securities or make loans that constitute, or
invest in real estate or health care related senior, junior or other
subordinated debt securities. Investments in equity securities may include
the purchase of general or limited partnership interests in limited
partnerships or shares in publicly traded or privately held corporations or
interests in other entities engaged in real estate or health care related
activities. Investments in debt securities may include debt that is acquired
at a discount, commercial mortgage-backed securities, secured and unsecured
lines of credit and instruments that are convertible into equity securities.
In some instances, the Company may only acquire a participating interest in a
debt security.
FINANCING POLICIES. The Company intends to finance its investments through
public and private secured and unsecured debt financings, as well as public
and private placements of its equity securities. Equity securities issued may
include both common and preferred classes of common stock. The Company may
incur additional indebtedness when, in the opinion of the directors, it is
advisable. For other short-term purposes, the Company may, from time to time,
negotiate lines of credit, or arrange for other short-term borrowings from
banks or otherwise. The Company may also arrange for long-term borrowings
through public offerings or from institutional investors.
In addition, the Company may incur mortgage indebtedness on real estate which
it has acquired through purchase or otherwise. The Company may also obtain
mortgage financing for unleveraged or underleveraged properties in which it
has invested or may refinance properties acquired on a leveraged basis. There
is no limitation on the number or amount of mortgages that may be placed on
any one property, and the Company has no policy with respect to limitations
on borrowing, whether secured or unsecured.
The Company currently does not intend to qualify as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code"). Consequently, the Company has
the flexibility to respond quickly to opportunities without the structural
limitations inherent in REITs and to operate, when deemed advantageous by
management, on a more highly leveraged basis than most REITs. By not
qualifying as a REIT under the Code (which would require the Company to
distribute each year at least 95% of its net taxable income, excluding
capital gains), the Company has the ability and currently intends to retain
for reinvestment its cash flow generated from operations and to sell
properties without the substantial income tax penalties
3
which may be imposed on REITs in such transactions. In addition, the Company
differs from real estate opportunity funds that are typically structured as
private partnerships. In that regard, the business of the Company is
conducted without the payment of acquisition, disposition or management fees
to general partners which should result in additional cash flow being
available for reinvestment. In addition, unlike investors in opportunity
funds, the Company's stockholders have voting rights and are expected to have
enhanced liquidity through their ability to sell or margin their stock.
However, unlike REITs and opportunity funds, the Company is subject to
corporate level taxation.
RELATIONSHIP WITH LTC PROPERTIES, INC. The Company and LTC entered into an
administrative services agreement containing a number of provisions relating
to employees of LTC and the Company. The administrative services agreement
generally provides that, LTC will provide rental space and management and
administrative services to the Company, including the ability to use the
services of LTC's employees in connection with the Company's business. In
exchange for those services, the Company is required to pay LTC on a monthly
basis 25% of (1) the aggregate amount of all wages, salaries and bonuses paid
during each month to LTC employees and (2) the aggregate amount of rent paid
by LTC for rental of its principal corporate offices during each month. Under
the administrative services agreement, LTC is responsible for continuing to
provide employee benefits (other than those provided separately under the
Healthcare 1998 Equity Participation Plan) to LTC employees. The
administrative services agreement has a term of ten years but may be
terminated either by LTC or the Company at any time upon 30 days' prior
written notice to the other party. In addition, the administrative services
agreement may be terminated upon a change of control of LTC.
Pursuant to an intercompany agreement, the Company has agreed not to engage
in activities or make investments that involve real estate, unless it has
first provided written notice to LTC of the material terms and conditions of
such activities or investments, and LTC has determined not to pursue such
activities or investments either by providing written notice to the Company
rejecting the opportunity within ten days following the date of receipt of
notice of the opportunity or by allowing such ten-day period to lapse.
Pursuant to the intercompany agreement, the Company and LTC also agreed to
notify each other of, and make available to each other, investment
opportunities which they develop or of which they become aware but are unable
or unwilling to pursue. The Company also agreed not to prepay or cause to be
prepaid any of its mortgage loans provided by LTC which are securitized in
REMIC transactions. The intercompany agreement has a term of ten years but
shall terminate earlier upon a change of control of LTC.
The Company and LTC have adopted policies and procedures to be followed by
the Board of Directors of each company to limit the involvement of such
officers and directors in conflict situations. Such procedures include
requiring the persons serving as directors of both companies to abstain from
voting as directors with respect to matters that present a significant
conflict of interest between the companies and will require approval of the
disinterested directors of both companies with respect to the intercompany
agreement and the administrative services agreement. Whether or not a
significant conflict of interest situation exists will be determined on a
case-by-case basis depending on such factors as the dollar value of the
matter, the degree of personal interest of any officers or directors in the
matter and the likelihood that resolution of the matter has significant
strategic, operational or financial implications for the business of the
Company and/or LTC. The members of the Board of Directors of each company
that do not have any potentially significant conflict of interest between the
companies will determine whether a matter presents such a significant
conflict.
EMPLOYEES
The Company has no employees. However, pursuant to the administrative
services agreement with LTC, LTC is obligated to provide the Company with the
services of its employees. At December 31, 1998, LTC had 21 employees.
4
GOVERNMENT FINANCING AND REGULATION OF HEALTH CARE
GENERAL. Both the federal and state governments are significant sources of
revenues for the skilled nursing facilities who lease properties from the
Company and used such properties as collateral for those borrowings. In
addition, the skilled nursing facilities and the Company's other tenants who
provide health care related services are often subject to extensive
government regulation.
GOVERNMENT FINANCING. Medicare is a federal program that provides certain
health care benefits to beneficiaries who are 65 years of age or older, are
disabled, or qualify for the End Stage Renal Disease program. Historically,
Medicare covered the reasonable costs of certain post-hospital extended care
services furnished by skilled nursing facilities, including capital-related
costs, subject to limits on routine operating and capital-related costs.
Medicaid is a program of medical assistance, funded jointly by the federal
government and the states for certain needy individuals and their dependents,
and certain other eligible persons. Under Medicaid, the federal government
provides grants to states that have medical assistance programs that are
consistent with federal standards. Medicaid programs or the equivalent are
currently in existence in all of the states in which the Company has nursing
facility investments. While these programs differ in certain respects from
state to state, they are all subject to certain federally imposed
requirements, as a substantial portion of the funds available under these
programs is provided by the federal government. Medicaid programs provide for
payments to participating health care facilities on behalf of the indigent
and certain other eligible persons. California and Texas provide for
reimbursement at flat daily rates, as determined by the responsible state
agency and depending on certain levels of care. In all other states, payments
are based upon specific cost reimbursement formulas established by the
applicable state.
Up until July 1, 1998, Medicare and most state Medicaid programs utilized a
cost-based reimbursement system for skilled nursing facilities which
reimbursed these facilities for the reasonable direct and indirect allowable
costs incurred in providing routine services plus, in certain states, a
return on equity, subject to certain cost ceilings. These costs normally
included allowances for administrative and general costs as well as the costs
of property and equipment (depreciation and interest, fair rental allowance
or rental expense). In certain states, cost-based reimbursement was typically
subject to retrospective adjustment through cost report settlement, and for
certain states, payments made to a facility on an interim basis that were
subsequently determined to be less than or in excess of allowable costs could
be adjusted through future payments to the affected facility and to other
facilities owned by the same owner. State Medicaid reimbursement programs
varied as to the methodology used to determine the level of allowable costs
which were reimbursed to operators.
- PROSPECTIVE PAYMENT SYSTEM
Beginning on July 1, 1998, the congressionally mandated prospective
payment system was implemented for skilled nursing facilities. Under the
prospective payment system, skilled nursing facilities are paid a
case-mix adjusted federal per diem rate for Medicare-covered services
provided by skilled nursing facilities. The per diem rate is calculated
to cover routine service costs, ancillary costs and capital-related
costs. The phased-in implementation of the prospective payment system
for skilled nursing facilities began with the first cost-reporting
period beginning in fiscal years, starting on or after July 1, 1998. The
prospective payment system is expected to be fully implemented over
three such cost-reporting periods. The effect of the implementation of
the prospective payment system on a particular skilled nursing facility
will vary in relation to the amount of revenue derived from Medicare
patients for each skilled nursing facility.
5
Skilled nursing facilities may need to restructure their operations to
accommodate the new Medicare prospective payment system reimbursement.
In part because of the uncertainty as to the effect of the prospective
payment system on skilled nursing facilities, in November 1998, Standard
and Poor's, an international rating agency that provides credit analysis
and information through the rating of financial instruments, placed many
skilled nursing facility companies on a "credit watch" because of the
potential negative impact of the implementation of the prospective
payment system on the financial condition of skilled nursing facilities,
including the ability to make interest and principal payments on
outstanding borrowings. In early March 1999, Standard & Poor's lowered
the ratings of several skilled nursing facility companies, including one
operator that operates skilled nursing facilities in which the Company
invests, because of the impact of the implementation of the prospective
payment system, particularly those companies with substantial debt.
- BALANCED BUDGET ACT OF 1997
The Balanced Budget Act of 1997 signed by President Clinton on August 5,
1997 is expected to produce billions of dollars in savings to the
Federal Government over five years. In addition, the Balanced Budget Act
repealed the Boren Amendment under which states were required to pay
long-term care providers, including skilled nursing facilities, rates
that are "reasonable and adequate to meet the cost which must be
incurred by efficiently and economically operated facilities." As a
result of the repeal of the Boren Amendment, states are now required by
the Balanced Budget Act to:
- use a public process for determining rates,
- publish proposed and final rates, the methodologies underlying
the rates, and justifications for the rates, and
- give methodologies and justifications.
During rate-setting procedures, states are required to take into account
the situation of facilities that serve a disproportionate number of
low-income patients with special needs. The Secretary of the Department
of Health and Human Services is required to study and report to Congress
within four years concerning the effect of state rate-setting
methodologies on the access to and the quality of services provided to
Medicaid beneficiaries. The Balanced Budget Act also provides the
federal government with expanded enforcement powers to combat waste,
fraud and abuse in delivery of health care services. Though applicable
to payments for services furnished on or after October 1, 1997, the new
requirements are not retroactive. Thus, states that have not proposed
changes in their payment methods or standards, or changes in rates for
items and services furnished on or after October 1, 1997, need not
immediately implement a Balanced Budget Act public approval process.
The Balanced Budget Act also created the Medicare+Choice program which
provides a variety of options for individuals entitled to Medicare Part
A and enrolled in Medicare Part B. The options include coordinated care
plans (including provider-sponsored organization plans), private fee for
service plans, and medical savings accounts plans. Medicare+Choice is
effective as of January 1, 1999. It is not possible at this time to
predict with any certainty the effect of Medicare+Choice on the
Company's tenants.
Both the Medicare and Medicaid programs contain specific requirements which
must be adhered to at all times by health care facilities in order to qualify
under the programs. The Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings, interpretations of
policy, intermediary determinations and governmental funding restrictions,
all of which may materially increase or decrease
6
program reimbursement to health care facilities. No assurance can be given as
to whether the future funding of such programs will remain at levels
comparable to the present levels.
ANTI-FRAUD LAWS AND REGULATIONS. There are various federal and state laws
prohibiting fraud by health care providers, including criminal provisions
which prohibit filing false claims or making false statements to receive
payment or certification under Medicare and Medicaid, or failing to refund
overpayments or improper payments. Violation of these federal provisions is a
felony punishable by up to five years imprisonment and/or $25,000 fines.
Civil provisions prohibit the knowing filing of a false claim or the knowing
use of false statements to obtain payment. The penalties for such a violation
are fines of not less than $5,000 nor more than $10,000, plus treble damages,
for each claim filed.
There are also laws which govern referrals and financial relationships. The
federal Anti-Kickback Law prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for, or to
induce, the referral of Medicare and Medicaid patients. A wide array of
relationships and arrangements, including ownership interests in a company by
persons who refer or who are in a position to refer patients, as well as
personal services agreements, have under certain circumstances, been alleged
or been found to violate these provisions. In addition to the Anti-Kickback
Statute, the federal government restricts certain financial relationships
between physicians and other providers of health care services.
State and federal governments are devoting increasing attention and resources
to anti-fraud initiatives against health care providers. The Health Insurance
Portability and Accountability Act of 1996 and the Balanced Budget Act expand
the penalties for health care fraud, including broader provisions for the
exclusion of providers from the Medicare and Medicaid programs. Further,
under Operation Restore Trust, a major anti-fraud demonstration project, the
Office of Inspector General of the U.S. Department of Health and Human
Services, in cooperation with other federal and state agencies, has focused
on the activities of skilled nursing facilities, home health agencies,
hospices and durable medical equipment suppliers in certain states in which
we have properties. Due to the success of Operation Restore Trust, the
project has been expanded to numerous other states and to additional
providers including providers of ancillary nursing home services.
Based upon information periodically received from the Company's operators
over the terms of their respective leases, management believe that the
nursing facilities in which the Company has investments are in substantial
compliance with the various regulatory requirements applicable to them,
although there can be no assurance that the operators are in compliance or
will remain in compliance in the future.
OTHER REGULATORY AND LICENSING REQUIREMENTS. In addition to the requirements
to be met by skilled nursing facilities for participation in the Medicare and
Medicaid programs, skilled nursing facilities are subject to regulatory and
licensing requirements of federal, state and local authorities. The operator
of each skilled nursing facility is licensed annually by the board of health
or other applicable agency in each state. In granting and renewing licenses,
regulatory agencies consider, among other things, the physical buildings and
equipment, the qualifications of the administrative personnel and nursing
staff, the quality of care and continuing compliance with the laws and
regulations relating to the operation of the facilities. State licensing of
facilities is a prerequisite to certification under the Medicare and Medicaid
programs. In the ordinary course of business, the operators receive notices
of deficiencies for failure to comply with various regulatory requirements
and take appropriate corrective and preventive actions. The Company believes
that the nursing facilities in which it has investments are in compliance
with the applicable licensing or other regulation although there can be no
assurance that the operators are or will be in compliance at any time.
Assisted living facilities are subject to certain state regulations and
licensing requirements. To qualify as a state licensed facility, assisted
living facilities must comply with regulations which address, among other
7
things, staffing, physical design, required services and resident
characteristics. Assisted living facilities are also subject to various local
building codes and other ordinances, including fire safety codes. These
requirements vary from state to state and are monitored to varying degrees by
state agencies.
Currently, assisted living facilities are not regulated as such by the
federal government. State standards required for assisted living facility
providers are less stringent than those required of other licensed health
care operators. There can be no assurance that federal regulations governing
the operation of assisted living facilities will not be implemented in the
future or that existing state regulations will not be expanded. In addition,
only certain states have adopted laws or regulations permitting individuals
with higher acuity levels to remain in assisted living communities who may
otherwise qualify for placement in a nursing facility. While only certain
states presently provide for any Medicaid reimbursement for assisted living
residences, several states are currently reviewing their policies and
reimbursement programs to provide funding for assisted living residences.
There can be no assurance that such states will adopt the Medicaid waiver
program.
UNCERTAINTY OF HEALTH CARE REFORM
The health care industry is facing various challenges, including increased
government and private payor pressure on health care providers to control
costs. The pressure to control health care costs intensified during 1994 and
1995 as a result of the national health care reform debate and continues into
1999 as Congress attempted to slow the rate of growth of federal health care
expenditures as part of its effort to balance the federal budget.
The Balanced Budget Act enacted significant changes to the Medicare and
Medicaid programs designed to "modernize" payment and health care delivery
systems while achieving substantial budgetary savings. In seeking to limit
Medicare reimbursement for long term care services, Congress established the
prospective payment system for skilled nursing facility services to replace
the cost-based reimbursement system. In addition, there are numerous
initiatives at the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. Congress
and state legislatures can be expected to continue to review and assess
alternative health care delivery systems and payment methodologies. Changes
in the law, new interpretations of existing laws, or changes in payment
methodology may have a dramatic effect on the definition of permissible or
impermissible activities, the relative costs associated with doing business
and the amount of reimbursement by the government and other third party
payors.
In light of forthcoming regulations and continuing state Medicaid program
reform, no assurance can be given that the implementation of such regulations
and reform will not have a material adverse effect on the Company's financial
condition or results of operations.
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 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.
8
ITEM 2. PROPERTIES
REAL ESTATE INVESTMENTS
As of December 31, 1998, the Company's real estate investment portfolio
contained 13 properties consisting of seven skilled nursing facilities
("SNFs") with a total of 914 beds, five assisted living residences ("ALFs")
with a total of 293 units and one Alzheimer facility with 26 units,
representing a net investment of $65,182,000 (before accumulated depreciation
of $4,306,000). All of the above real estate properties were contributed to
the Company by LTC in connection with the Distribution.
Skilled nursing facilities provide restorative, rehabilitative and nursing
care for people not requiring the more extensive and sophisticated treatment
available at acute care hospitals. Many skilled nursing facilities provide
ancillary services that include occupational, speech, physical, respiratory
and IV therapies, as well as provide sub-acute care services. Such services
are paid either by the patient or the patient's family, or through the
federal Medicare or state Medicaid programs. Assisted living facilities serve
elderly persons who require assistance with activities of daily living, but
do not require the constant supervision skilled nursing facilities provide.
Services are generally available 24-hours a day and include personal
supervision and assistance with eating, bathing, grooming and administering
medication. The facilities provide a combination of housing, supportive
services, personalized assistance and health care designed to respond to
individual needs.
The following table sets forth certain information regarding the Company's
owned properties as of December 31, 1998:
No. of Avg. Remaining
No. of No. of Beds Lease Term Carrying Current Annual
Location SNFs ALFs /Units Encumbrances (in Months) Value Rent Payments
- ----------------- -------- ------- ---------- -------------- -------------- ------------------- ---------------
Arizona 2 393 $ 14,040,000 49 $ 11,273,000 $ 1,550,000
New Mexico 4 399 13,405,000 40 11,633,000 1,389,000
Ohio 5 250 17,341,000 232 30,973,000 2,807,000
Pennsylvania 1 69 232 8,327,000 770,000
Texas 1 122 1,741,000 57 2,976,000 354,000
- ----------------- -------- ------- ---------- -------------- -------------- ------------------- ---------------
TOTAL 7 6 1,233 $ 46,527,000(1) 65,182,000(2) $ 6,870,000
- ----------------- -------- ------- ---------- -------------- -------------- ------------------- ---------------
- ----------------- -------- ------- ---------- -------------- -------------- ------------------- ---------------
(1) Encumbrances consist of non-recourse mortgages payable by the Company
secured by first mortgages on the facilities.
(2) Consists of: SNFs-$25,882,000; ALFs-$36,010,000; and Alzheimer
facility-$3,290,000.
The leases generally have an initial term of ten to twelve years and provide
for a fixed minimum base rent during the initial and renewal periods. Most of
the leases provide for annual fixed rent increases or increases based on
increases in consumer price indices over the term of the lease. In addition,
certain of the Company's leases provide for additional rent through revenue
participation (as defined in the lease agreement) in incremental revenues
generated by the facilities, over a defined base period, effective at various
times during the term of the lease. Each lease is a triple net lease which
requires the lessee to pay additional charges including all taxes, insurance,
assessments, maintenance and repair (capital and non-capital expenditures),
and other costs necessary in the operation of the facility.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
At December 31, 1998 the Company owned the following debt and equity
securities:
- - $8,500,000 principal amount of Regent Assisted Living, Inc. 7.5%
convertible subordinated debentures due 2008 (fair value approximates
face value);
9
- - $3,000,000 principal amount (amortized cost of $2,191,000) of Assisted
Living Concepts, Inc. 5.625% convertible subordinated debentures due
2003 (fair value of $2,386,000);
- - 30,847 shares of Assisted Living Concepts, Inc. common stock contributed
by LTC in connection with its distribution of its investment in the
Company with a fair value of approximately $405,000 (net of the fair
market adjustment of approximately $81,000); and
- - 194,100 shares of LTC common stock acquired for an aggregate purchase
price of $3,308,000 (fair value of $3,227,000).
MAJOR OPERATORS
As of December 31, 1998, Integrated Health Services, Inc. ("IHS"), Sun
Healthcare Group, Inc., through a wholly owned subsidiary, ("Sun") and
Karrington Health, Inc. ("Karrington") were the Company's largest operators.
As of December 31, 1998, approximately 11%, 25% and 60% of the Company's
gross real estate investments were leased to IHS, Sun and Karrington,
respectively. In addition, the Company's investment of $8,500,000 in Regent
Assisted Living, Inc. ("Regent") convertible debentures represented
approximately 11% of the Company's total assets as of December 31, 1998. IHS,
Sun, Karrington and Regent are publicly traded companies, and as such are
subject to the filing requirements of the Securities and Exchange Commission.
See "Item 8. -Financial Statements -Note 2. Summary of Significant Accounting
Policies -CONCENTRATION OF CREDIT RISKS." for summary information for IHS,
Sun, Karrington and Regent that was extracted from public reports on file
with the Securities and Exchange Commission.
10
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal proceeding which, in the opinion of
management, would be material to its' results of operations or financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4A. EXECUTIVE OFFICERS
NAME AGE POSITION
- ------------------------------- --- ------------------------------------------------------
Andre C. Dimitriadis 58 Chairman, Chief Executive Officer and Director
James J. Pieczynski 36 President, Chief Financial Officer, and Director
Christopher T. Ishikawa 35 Senior Vice President and Chief Investment Officer
Raad K. Shawaf 33 Senior Vice President and General Counsel
Mr. Dimitriadis has served as Chairman and CEO of the Company since its
inception. He founded LTC in 1992 and was employed by Beverly Enterprises,
Inc., an owner/operator of long-term care facilities, retirement living
facilities and pharmacies, from October 1989 to May 1992, where he served as
Executive Vice President and Chief Financial Officer. Prior to that, he was
employed by American Medical International, Inc., an owner/operator of
hospitals, from 1985 to 1989, where he served as Executive Vice President -
Finance, Chief Financial Officer and Director. Mr. Dimitriadis is a member of
the board of Magellan Health Services.
Mr. Pieczynski has served as President and Director of the Company since its
inception. He has also served as President and Director of LTC since
September 8, 1997 and Chief Financial Officer of LTC since May 1994. From May
1994 to September 1997, he also served as Senior Vice President of LTC. He
joined LTC in December 1993 as Vice President and Treasurer. Prior to that,
he was employed by American Medical International, Inc., an owner/operator of
hospitals, from May 1990 to December 1993, where he served as Assistant
Controller and Director of Development.
Mr. Ishikawa has served as Senior Vice President and Chief Investment Officer
of the Company since its inception. He has also served as Senior Vice
President and Chief Investment Officer of LTC since September 8, 1997. Prior
to that, he served as the Vice President and Treasurer of LTC since April
1995. Prior to joining LTC, he was employed by MetroBank from December 1991
to March 1995, where he served as First Vice President and Controller. From
December 1989 to November 1991, he was employed by Mercantile National Bank
where he served as Assistant Treasurer.
Mr. Shawaf has served as Senior Vice President and General Counsel of the
Company and LTC since March 1, 1999. From September 1997 to March 1999, he
served as Vice President and Assistant General Counsel of LTC. Prior to
joining LTC, he was employed by Pamela J. Privett, A Professional Law
Corporation, which served outside General Counsel to LTC from June 1997 to
September 1997. From November 1996 to June 1997, he was the sole owner of
Raad K. Shawaf , Attorney At Law, a real estate law practice. From June 1993
to June 1996, he was an associate attorney at Stern, Neubauer, Greenwald &
Pauly.
11
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) The Company's common stock is listed on the Pacific Exchange and began
active trading on October 1, 1998. Set forth below are the high and low
reported sale prices for the Company's common stock as reported on the
Pacific Exchange.
PRICE PER SHARE
HIGH LOW
---- ---
1998
----
Fourth Quarter $4.38 $2.00
(b) As of December 31, 1998, there were approximately 802 stockholders of
record of the Company's common stock.
(c) The Company has never paid cash dividends on its common stock. The
Company currently anticipates that it will retain all available funds
for use in the operation and expansion of its business and does not
anticipate paying any cash dividends in the foreseeable future.
12
ITEM 6. SELECTED FINANCIAL INFORMATION
The Company was not formed until March 25, 1998 therefore, comparative
results with 1997 are not provided. The following table summarizes the
Company's results of operations for the period from inception (March 25,
1998) through December 31, 1998 and balance sheet information as of December
31, 1998 and should be read in conjunction with the Company's financial
statements and related notes thereto included elsewhere in this Annual Report
on Form 10-K (Dollars in thousands except share amounts).
OPERATING INFORMATION:
Revenues:
Rental income $ 2,172
Interest and other income 692
---------
Total revenues 2,864
Expenses:
Mortgage interest 1,133
Interest on line of credit from LTC Properties, Inc. 711
Depreciation 586
Minority interest 86
Operating and other expenses 467
---------
Total expenses 2,983
---------
Operating Loss (119)
Provision for income taxes -
---------
Net Loss $ (119)
---------
---------
Weighted Average Shares Outstanding 3,184,832
---------
---------
PER SHARE INFORMATION:
Basic net (loss) $ (0.04)
---------
---------
Diluted net (loss) $ (0.04)
---------
---------
BALANCE SHEET INFORMATION:
Real estate investments, net $ 60,876
Total assets 77,244
Total debt 63,055
Total liabilities 63,996
Minority interest 3,461
Total stockholders' equity 9,787
OTHER INFORMATION:
Cash flows from operating activities $ 556
Cash flows (used in) investing activities (13,580)
Cash flows provided by financing activities 14,036
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OPERATING RESULTS FOR THE PERIOD FROM INCEPTION (MARCH 25, 1998) THROUGH
DECEMBER 31, 1998
On August 18, 1998, LTC transferred six properties operated by Karrington to
the Company. Rental income from August 18, 1998 to December 31, 1998 on the
Karrington properties was $1,317,000. On September 30, 1998, LTC transferred
the remaining seven real estate properties contributed to the Company in
connection with the Distribution. Rental income on these seven properties was
$855,000 for the period from October 1, 1998 to December 31, 1998. Interest
income on the Company's investment in Regent Assisted Living, Inc. and
Assisted Living Concepts, Inc. convertible subordinated debentures was
$475,000. Interest and other income consisted of $133,000 in dividends on LTC
common stock and a gain on the sale of Regent common stock of $86,000.
Mortgage interest expense includes $467,000 on a 7.27% mortgage loan of
$17,400,000 obtained by the Company in August 1998 and interest of $666,000
on mortgage debt with a weighted average rate of 9.1% assumed in connection
with the Distribution. Interest expense of $711,000 on the unsecured line of
credit from LTC represents interest at 10% on the average borrowings under
the unsecured credit line provided by LTC.
Depreciation expense of $586,000 consists of depreciation from August 18,
1998 to December 31, 1998 on the Karrington properties of $359,000 and
depreciation of $227,000 from October 1, 1998 to December 31, 1998 on the
remaining seven properties transferred to the Company in the Distribution.
General and administrative expenses were $467,000, the majority of which
relates to a fee of $350,000 for services provided by LTC under the
administrative services agreement.
No benefit for income taxes was recorded since the Company believes that it
is more likely than not that future taxable income will not be sufficient to
realize tax benefits associated with net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the formation and capitalization of the Company, LTC
provided the Company with a $20.0 million unsecured line of credit.
Borrowings outstanding under the unsecured line of credit bear interest at
10% and mature in 2008. (See "Item 8. Financial Statements -Note. 3
Distribution of LTC's Investment in the Company for a more complete
discussion of the formation and capitalization of the Company".) As of
December 31, 1998, the Company had borrowings outstanding under the unsecured
line of credit of $16,528,000. In addition to amounts available under the
unsecured line of credit, as of December 31, 1998, the Company owns
unencumbered assets consisting of approximately $16,050,000 in real estate,
$10,886,000 in convertible subordinated debentures and $3,632,000 in
marketable equity securities.
During 1998, the Company utilized working capital and borrowings under the
line of credit to:
- - repurchase 138,600 shares of its common stock for an aggregate purchase
price of $384,000;
- - purchase $8,500,000 principal amount of Regent Assisted Living, Inc.
7.5% convertible subordinated debentures due 2008 (fair value
approximates face value);
14
- - purchase $3,000,000 principal amount of Assisted Living Concepts, Inc.
5.625% convertible subordinated debentures due 2003 for approximately
$2,160,000 (fair value of $2,386,000; amortized cost $2,191,000);
- - purchase 194,100 shares of LTC common stock for an aggregate purchase
price of $3,308,000 (fair value of $3,227,000).
In August 1998, the Company obtained mortgage financing of $17,400,000 from a
third-party lender on four of the unencumbered properties transferred from
LTC in the Distribution. The mortgage loan bears interest at 7.27% and
matures in August 2008. Proceeds were used to repay borrowings under the line
of credit.
Subsequent to December 31, 1998, the Company utilized borrowings under the
line of credit to purchase an additional 40,058 shares of LTC common stock
for approximately $585,000 and an additional 453,400 shares of its own common
stock for approximately $1,240,000.
The Company anticipates that cash flow from operations will be adequate to
meet its short-term liquidity requirements. The Company expects to meet its
long term liquidity requirements such as property acquisitions and
development, the granting of high yield loans, the purchase of equity
investments and mortgage debt maturities through the most advantageous
sources of capital available to the Company at that time. This may include,
but not be limited to, the sale of common stock, preferred stock or debt
securities through public offerings or private placements, the incurrence of
indebtedness through secured or unsecured borrowings and the reinvestment of
proceeds from the disposition of assets. Currently the Company has no
external source of financing and the Company has not received any commitment
with respect to any funds needed in the future. The Company expects to be
able to access capital markets or to seek other financing, but there can be
no assurance that it will be able to do so at all or in amounts or on terms
acceptable to the Company.
As of December 31, 1998, the Company had no commitments to purchase any
additional assets. The Company intends to operate its business as described
herein, and may purchase additional assets from time to time in the future.
The purchase of additional assets will be contingent upon securing adequate
funding on terms acceptable to the Company. The Company is not aware of any
material unfavorable trends in either capital resources or the outlook for
long-term cash generation; nor, does it expect any material changes in the
availability and relative cost of such capital resources.
YEAR 2000
Currently many computer programs assume the first two digits of a year are
"19" and simply identify a year by the last two digits. It is widely
anticipated that, beginning in the year 2000 when the first two digits of a
year are "20" rather than "19", these computer programs will incorrectly
identify the year (i.e. the year 2000 will be incorrectly identified as
1900). Such miscalculations could result in the disruption of operations that
are reliant on these computer programs. Computer programs that identify a
year by four digits are deemed to be year 2000 compliant. The statements in
this section include year 2000 readiness disclosure within the meaning of the
Year 2000 Information and Readiness Disclosure Act of 1998.
STATUS OF THE COMPANY'S INFORMATION TECHNOLOGY SYSTEMS AND NON-INFORMATION
TECHNOLOGY SYSTEMS. The Company's primary use of information technology
systems is its internal accounting and information management software
(collectively the "Systems"). The Company has evaluated the Systems to assess
whether they will function properly with respect to dates in the year 2000
and beyond. Systems that were determined to be non-compliant with the year
2000 and beyond will be upgraded or replaced.
15
Implementation of year 2000 compliant Systems and upgrades to existing
Systems are expected to be completed by mid-1999. The total cost associated
with modifications required to become year 2000 compliant will not be
material to the Company's financial position, results of operations or
liquidity. Due to the Company's limited reliance on complex Systems, the
Company believes the year 2000 issue, as it relates to its internal Systems,
will not have a material adverse effect upon the Company's financial
position, results of operations or liquidity.
The Company will also have year 2000 exposure in non-information technology
areas as it relates to owned properties and its leased corporate offices.
There is a risk that embedded chips in elevators, security systems,
electrical systems and similar technology-driven devices may stop functioning
on January 1, 2000. All of the Company's owned properties are leased under
triple-net leases and as such, the cost to repair any of these items will be
paid by the lessee. While any disruption in services at our corporate offices
due to failure of non-information technology systems may be inconvenient and
disruptive to day-to-day activities, it is not expected to have a material
adverse effect on our financial position, results of operations or liquidity.
EXPOSURE TO THIRD PARTY YEAR 2000 ISSUES. The Company depends upon the
following third parties:
- - its tenants and other third parties in which it has made investments
in their debt and equity securities for rents and cash flows;
- - its financial institutions for availability of working capital; and
- - its transfer agent to maintain and track investor information.
If our primary tenants or other third parties in which we have made
investments are not year 2000 compliant, or if they face disruptions in their
cash flows due to year 2000 issues, we could face significant temporary
disruptions in our cash flows after that date. These disruptions could be
compounded if the commercial banks that process our cash receipts and
disbursements are not year 2000 compliant.
Neither we nor our lessees can be assured that the federal and state
governments, upon which our lessees rely for Medicare and Medicaid revenue,
will be in compliance in a timely manner. The General Accounting Office has
reported that the Health Care Financing Administration, which runs Medicare,
is behind schedule in taking steps to deal with the year 2000 issue and that
it is highly unlikely that all of the Medicare systems will be compliant in
time to ensure the delivery of uninterrupted benefits and services into the
year 2000. The General Accounting Office has also reported that, based upon
its survey of the states, the District of Columbia and three territories,
less than 16% of the automated systems used by state and local government to
administer Medicaid are reported to be year 2000 compliant. Due to the
general uncertainty surrounding the readiness of third-party tenants and
other third-parties, including the federal and state governments, with which
the Company and its lessees does business, the Company is unable at this time
to determine whether non-compliance with the year 2000 issue by third-parties
will have a material impact on the Company's financial position, results of
operations or liquidity.
CONTINGENCY PLAN. In the event we experience a significant disruption in cash
receipts due to the a delay in Medicare or Medicaid receipts by our tenants
or due to other year 2000 non-compliance issues, we would seek additional
liquidity from our lenders and slow our investment activity.
Readers are cautioned that forward-looking statements contained in the above
discussion regarding year 2000 compliance should be read in conjunction with
the disclosure under the heading -Statement Regarding Forward Looking
Disclosure.
16
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 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.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Readers are cautioned that statements contained in this section are
"Quantitative and Qualitative Disclosures About Market Risk" are forward
looking and should be read in conjunction with the disclosure under the
heading "-Statement Regarding Forward Looking Disclosure" set forth above.
The Company is exposed to market risks associated with fluctuations in
interest rates on its debt and investments in debt securities and
fluctuations in equity prices on its investment in equity and convertible
debt securities. These market risks are sensitive to many factors, including
governmental monetary and tax policies, domestic and international economic
and political considerations and other factors that are beyond our control.
The Company does not use interest rate contracts or other types of derivative
financial instruments.
All of the Company's investments in debt securities and secured mortgage
loans payable at December 31, 1998 have fixed interest rates. Changes in
interest rates generally impact the fair value, but not future earnings or
cash flows of investments in debt and equity securities and fixed rate debt.
At December 31, 1998, based on prevailing interest rates for comparable loans
and estimates made by management, the fair value of our mortgage loans
payable was approximately $39,285,000. The carrying value and weighted
average interest rate for mortgage loans payable was $46,527,000 and 8.4%,
respectively at December 31, 1998. At December 31, 1998, based on quoted
market values, interest rates for comparable securities and estimates made by
management, the fair value of the Company's investment in debt and equity
securities was $14,518,000. The Company does not believe that the future
market rate risks associated with its investments in debt and equity
securities and debt will have a material impact on the Company or its future
operations.
17
ITEM 8. FINANCIAL STATEMENTS
Page
----
Report of Independent Auditors ........................................................................ 19
Consolidated Balance Sheet as of December 31, 1998 .....................................................20
Consolidated Statement of Income for the period from
inception (March 25, 1998) to December 31, 1998.........................................................21
Consolidated Statement of Stockholders' Equity for the period from
inception (March 25, 1998) to December 31, 1998.........................................................22
Consolidated Statement of Cash Flows for the period from
inception (March 25, 1998) to December 31, 1998.........................................................23
Notes to Consolidated Financial Statements .............................................................24
18
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
LTC Healthcare, Inc.
We have audited the accompanying consolidated balance sheet of LTC
Healthcare, Inc. as of December 31, 1998 and the related consolidated
statement of income, stockholders' equity, and cash flows for the period from
inception (March 25, 1998) to December 31, 1998. Our audit also included the
financial statement schedule listed at Item 14(d). These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of LTC Healthcare,
Inc. at December 31, 1998, and the consolidated results of its operations and
its cash flows for the period from inception (March 25, 1998) to December 31,
1998, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, present fairly
in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
January 19, 1999, except Note 13, as to
which the date is March 19, 1999
19
LTC HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
DECEMBER 31, 1998
-----------------
ASSETS
Real Estate Investments:
Buildings and improvements $ 61,376
Land 3,806
Accumulated depreciation (4,306)
-----------------
Real estate investments, net 60,876
Equity Investments 3,632
Investment in Convertible Subordinated Debentures 10,886
Other Assets:
Cash and cash equivalents 1,012
Debt issue costs, net 104
Interest receivable 187
Prepaid expenses and other assets 547
-----------------
1,850
-----------------
Total assets $ 77,244
-----------------
-----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgage loans payable $ 46,527
Line of credit from LTC Properties, Inc. 16,528
Accrued interest 308
Accrued expenses and other liabilities 633
-----------------
Total liabilities 63,996
Minority Interest 3,461
Commitments and Contingencies
Stockholders' Equity:
Preferred stock $0.01 par value; 10,000,000 shares
authorized; No shares issued and outstanding -
Common stock $0.01 par value; 40,000,000 shares authorized;
3,335,882 shares issued 33
Capital in excess of par value 10,224
Treasury stock, 151,050 shares (384)
Retained earnings (loss) (119)
Accumulated comprehensive income 33
-----------------
Total stockholders' equity 9,787
-----------------
Total liabilities and stockholders' equity $ 77,244
-----------------
-----------------
See accompanying notes
20
LTC HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
PERIOD FROM INCEPTION
(MARCH 25, 1998) TO
DECEMBER 31, 1998
---------------------
Revenues:
Rental income $ 2,172
Interest and other income 692
---------------------
Total revenues 2,864
---------------------
Expenses:
Interest on mortgages payable 1,133
Interest expense on line of credit from LTC Properties, Inc. 711
Depreciation 586
Minority interest 86
General and administrative 467
---------------------
Total expenses 2,983
---------------------
Operating loss (119)
Provision for income taxes -
---------------------
Net loss $ (119)
---------------------
---------------------
Net (loss) Per Common Share:
Basic net (loss) per share $ (0.04)
---------------------
---------------------
Diluted net (loss) per share $ (0.04)
---------------------
---------------------
See accompanying notes
21
LTC HEALTHCARE, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
CAPITAL IN RETAINED ACCUMULATED
COMMON EXCESS OF TREASURY EARNINGS COMPREHENSIVE COMPREHENSIVE
STOCK PAR STOCK (LOSS) INCOME INCOME (LOSS)
------ ---------- -------- -------- ------------- -------------
Issuance of 3,335,882 shares $ 33 $ 10,224 $ - $ - $ - $ -
Repurchase of (138,600) shares - - (384) - - -
Contribution of Net Assets from
LTC Properties, Inc. (12,450) shares - - - - - -
Unrealized gains on
available-for-sale securities - - - - 33 33
Net loss - - - (119) - (119)
------ ---------- -------- -------- ------------- -------------
Comprehensive loss $ (86)
-------------
-------------
Balance - December 31, 1998 $ 33 $ 10,224 $ (384) $ (119) $ 33
------ ---------- -------- -------- -------------
------ ---------- -------- -------- -------------
See accompanying notes
22
LTC HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
PERIOD FROM INCEPTION
(MARCH 25, 1998) TO
DECEMBER 31, 1998
---------------------
OPERATING ACTIVITIES:
Net loss $ (119)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 586
Gain on sale of investments (86)
Other non-cash items (31)
Increase in other assets (473)
Increase in accrued interest 108
Increase in accrued expenses and other liabilities 571
---------------------
Net cash provided by operating activities 556
INVESTING ACTIVITIES:
Investment in equity securities (3,308)
Investment in convertible subordinated debentures (10,660)
Proceeds from sale of investments, net 388
---------------------
Net cash used in investing activities (13,580)
FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 2,001
Advance on line of credit from LTC Properties, Inc. 12,800
Payments on line of credit from LTC Properties, Inc. (17,668)
Mortgage loan borrowings 17,400
Debt issue costs (143)
Principal payments on mortgage loans payable (136)
Repurchase of common stock (384)
Other 166
---------------------
Net cash provided by financing activities 14,036
---------------------
Increase (decrease) in cash and cash equivalents 1,012
Cash and cash equivalents, beginning of year -
---------------------
Cash and cash equivalents, end of year $ 1,012
---------------------
---------------------
Supplemental disclosure of cash flow information:
Interest paid $ 880
Non-cash distribution of net assets from LTC Properties Inc. $ 10,224
See accompanying notes
23
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
LTC Healthcare, Inc. (the "Company"), a Nevada corporation, was incorporated
on March 20, 1998 and began operations on March 25, 1998 to engage in the
following activities: (i) ownership of leveraged properties leased to third
parties; (ii) ownership of secured high yield mortgage loans; (iii) operation
of long-term care facilities; (iv) development of long-term care properties,
and (v) ownership of equity investments in long-term care companies.
The Company was originally a preferred stock subsidiary of LTC Properties,
Inc. ("LTC"), a Maryland corporation and real estate investment trust. On
September 30, 1998, concurrently with the conversion of all shares of Company
non-voting common stock held by LTC into voting common stock of the Company,
LTC completed the spin-off of Company common stock through a taxable dividend
to holders of LTC common stock, convertible subordinated debentures and
Series C Preferred Stock (the "Distribution"). Upon completion of the
Distribution, the Company began operating as a separate public company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying consolidated financial statements
include the accounts of the Company, its wholly-owned subsidiaries and
controlled partnerships. All intercompany accounts and transactions have been
eliminated in consolidation.
USE OF ESTIMATES. The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
CASH EQUIVALENTS. Cash equivalents consist of highly liquid investments with
a maturity of three months or less and are stated at cost which approximates
market.
REAL ESTATE. Real estate assets transferred to the Company from LTC are
recorded at LTC's historical cost. See Note 3. -Distribution of LTC's
Investment in the Company. Land and buildings and improvements acquired by
the Company are recorded at the Company's cost. Impairment losses are
recorded when events or changes in circumstances indicate the asset is
impaired and the undiscounted cash flows estimated to be generated by the
asset are less than the carrying amount. Impairment losses are measured as
the amount by which the carrying amount of the real estate exceeds the fair
value. Management assesses the recoverability of the carrying value of its
assets on a property by property basis. Depreciation is provided on a
straight-line basis over the estimated useful lives of 7 years for equipment
and 35 years for buildings.
INVESTMENTS IN DEBT AND EQUITY SECURITIES. Investments in debt and equity
securities are accounted for at fair value as available-for-sale securities.
Unrealized holding gains and losses resulting from changes in the fair value
are reported as a separate component of stockholders' equity and
comprehensive income.
REVENUE RECOGNITION. Base rental revenue is recognized using the
straight-line method by averaging annual minimum rents over the terms of the
leases. Contingent rental income, which is generated by a
24
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
percentage of increased revenue over a specified base period revenue of the
long-term care facilities, is recognized as earned.
GENERAL AND ADMINISTRATIVE EXPENSES. The Company has entered into an
agreement with LTC whereby LTC will provide space and management and
administrative services to the Company, including the ability to use the
services of LTC's employees in connection with the Company's business (the
"Administrative Services Agreement"). In exchange for these services, the
Company will pay a monthly fee equal to 25% of the aggregate amount of all
wages, salaries and bonuses paid to LTC employees and the aggregate amount of
rent paid by LTC for rental of its principal corporate offices. See Note 3.
- -Distribution of LTC's Investment in the Company.
INCOME TAXES. Deferred income taxes are recognized for the tax consequences
in future years of differences between the tax bases and book bases of assets
and liabilities at each year end based on enacted laws and statutory tax
rates applicable to the years in which the differences are expected to effect
taxable income.
STOCK-BASED COMPENSATION. The Company has adopted the disclosure
requirements of SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" but
accounts for stock-based compensation using the intrinsic value method
prescribed by APB Opinion No. 25.
INDUSTRY SEGMENTS. Management allocates resources and assesses performance on
an individual property or investment basis. The Company has aggregated its
investments into a single operating segment since they consist primarily of
long-term care real estate properties and long-term care debt and equity
securities.
CONCENTRATION OF CREDIT RISKS. As of December 31, 1998, Integrated Health
Services, Inc. ("IHS"), Sun Healthcare Group, Inc., through a wholly-owned
subsidiary, ("Sun") and Karrington Health, Inc., ("Karrington") were the
Company's largest operators leasing approximately 11%, 25% and 60% of the
Company's gross real estate investments, respectively. In addition, as of
December 31, 1998, the Company's investment of $8,500,000 in Regent Assisted
Living, Inc. ("Regent") convertible subordinated debentures represented 11%
of the Company's total assets. See Note 5. - Convertible Subordinated
Debentures. The Company's financial position, results of operations and
liquidity could be adversely affected by financial difficulties experienced
by IHS, Sun, Karrington or Regent, including bankruptcy, insolvency or
general downturn in business, or in the event IHS, Sun, or Karrington does
not renew and/or extend its leases with the Company as they expire. IHS, Sun,
Karrington and Regent are publicly traded companies, and as such are subject
to the filing requirements of the Securities and Exchange Commission
On October 18, 1998, Sunrise Assisted Living, Inc. ("Sunrise") and Karrington
announced a definitive agreement of merger whereby Sunrise would acquire
Karrington. The acquisition is expected to close during the second quarter of
1999.
25
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table, which is not covered by the Report of Independent
Auditors on page 19, contains summary information (in thousands) for IHS,
Sun, Karrington and Regent that was extracted from public reports on file
with the Securities and Exchange Commission.
Nine Months Ended September 30,
September 30, December 31, -------------------------------
1998 1997 1998 1997
------------- ------------ ---------- ----------
IHS
Total assets $5,257,785 $5,063,144 N/A N/A
Total debt 3,288,530 3,238,233 N/A N/A
Total stockholders' equity 1,306,891 1,088,161 N/A N/A
Total revenues N/A N/A $2,249,793 $1,009,139
Income before taxes, discontinued operations
and extraordinary items N/A N/A 213,741 81,433
Net income (loss) N/A N/A (78,763) 28,407
SUN
Total assets 3,098,516 $2,832,611 N/A N/A
Total debt 1,682,575 1,799,019 N/A N/A
Total stockholders' equity 612,429 615,197 N/A N/A
Total revenues N/A N/A 2,463,667 $1,536,886
Income (loss) before taxes and extraordinary items N/A N/A (1,319) 63,402
Net income (loss) N/A N/A (44,156) 31,716
KARRINGTON
Total assets $139,126 $141,316 N/A N/A
Total debt 98,396 104,066 N/A N/A
Total stockholders' equity 16,690 26,507 N/A N/A
Total revenues N/A N/A $24,040 $13,231
Loss before taxes N/A N/A (9,834) (3,916)
Net loss N/A N/A (9,834) (3,726)
REGENT
Total assets $70,405 $75,704 N/A N/A
Total debt 53,021 56,169 N/A N/A
Total stockholders' equity 6,851 15,917 N/A N/A
Total revenues N/A N/A $19,868 $10,224
Loss before taxes N/A N/A (8,617) (1,446)
Net loss N/A N/A (8,617) (1,422)
3. DISTRIBUTION OF LTC'S INVESTMENT IN THE COMPANY
During the period from inception (March 25, 1998) to September 30, 1998, LTC
acquired 4,002 shares of the Company's non-voting common stock for $2,001,000
and contributed equity investments with a book value of $788,000, 13 real
estate properties with a gross book value of $65,182,000 (net book value of
$61,462,000) that were encumbered by $29,263,000 of mortgage debt on seven of
the properties and a minority interest liability of $3,461,000, and other
related assets and liabilities with a book value of $93,000 to the Company in
exchange for an additional 36,000 shares of Company non-voting common stock
and borrowings by the Company under the unsecured line of credit provided by
LTC of $21,396,000. During 1998, the Company borrowed an additional
$12,800,000 under the unsecured line of credit. Subsequent to the
contribution of the above assets and liabilities by LTC to the Company, the
Company obtained mortgage financing of $17,400,000 from a third-party lender
on four of the unencumbered properties. The Company
26
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
utilized proceeds from the mortgage debt and cash on hand to repay borrowings
of $17,668,000 under the unsecured line of credit provided by LTC.
On September 30, 1998, the 40,002 shares of Company non-voting common stock
held by LTC were converted into 3,335,882 shares of Company voting common
stock. Concurrently, LTC completed the spin-off of all Company voting common
stock through a taxable dividend distribution to the holders of LTC common
stock, Cumulative Convertible Series C Preferred Stock ("Series C Preferred
Stock") and Convertible Subordinated Debentures (the "Debentures"). One share
of Company common stock was distributed to each holder of LTC common stock,
Series C Preferred Stock and Debentures for each ten shares of LTC common
stock owned and for each ten shares of LTC common stock that would have been
issued upon conversion of the Debentures and Series C Preferred Stock. Upon
completion of the Distribution, the Company began operating as a separate
public company.
For book purposes, the net assets and liabilities transferred to the Company
by LTC were transferred at LTC's book value of approximately $10,224,000. The
Distribution was a taxable dividend distribution by LTC and accordingly, for
tax purposes, the net assets and liabilities were transferred at their net
fair market value of approximately $15,650,000 ($4.69 per share of Company
common stock)(unauditied).
The Company and LTC have entered into various agreements which, among other
things, provide for a sharing of corporate overhead under an administrative
services agreement. During the period ended December 31, 1998, LTC charged
the Company an administrative services fee of approximately $350,000.
4. REAL ESTATE INVESTMENTS
As of December 31, 1998, the Company had investments in 13 properties located
in five states. The properties include seven skilled nursing facilities with
a total of 914 beds, five assisted living residences with a total of 293
units and one Alzheimer facility with 26 units all of which were contributed
to the Company by LTC in connection with the Distribution.
Owned long-term facilities are leased under operating leases generally with
an initial term of ten to twelve years. Many of the leases contain renewal
options and some contain options that permit the operators to purchase the
facilities. The leases provide for a fixed minimum base rent during the
initial and renewal periods. Most of the leases provide for annual fixed rent
increases or increases based on increases in consumer price indices over the
term of the lease. In addition, certain of the Company's leases provide for
additional rent through revenue participation (as defined on the lease
agreement) in incremental revenues generated by the facilities, over a
defined base period, effective at various times during the term of the lease.
Each lease is a triple net lease that requires the lessee to provide for the
payment of all taxes, insurance, maintenance and repair (capital and
non-capital expenditures),and other costs necessary in the operation of the
facility.
Depreciation expense on buildings and improvements was $586,000 for the year
ended December 31, 1998.
27
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum base rents receivable under the remaining non-cancelable terms
of operating leases are: $6,906,000, $6,957,000, $6,758,000, $6,401,000,
$4,191,000 and $51,272,000 for the years ending December 31, 1999, 2000,
2001, 2002 and 2003 and thereafter.
5. CONVERTIBLE SUBORDINATED DEBENTURES
During 1998, the Company purchased $8,500,000 principal amount of convertible
subordinated debentures from Regent (the "Regent Debentures"). The Regent
Debentures mature on March 31, 2008, bear interest at 7.5% and are
convertible into Regent common stock at $7.50 per share. Regent can require
conversion of the Regent Debentures at such time as the Regent common stock
trades at $12.00 per share or more for 30 consecutive days. As of December
31, 1998, the purchase price approximated the fair value of the Regent
Debentures.
During October 1998, the Company purchased $3,000,000 principal amount of
Assisted Living Concepts, Inc. ("ALC") 5.625% convertible subordinated
debentures due 2003 for approximately $2,160,000. As of December 31, 1998,
the fair value of the ALC convertible debentures, based on quoted market
prices, was approximately $2,386,000.
6. EQUITY INVESTMENTS
During 1998, the Company purchased for investment purposes, 194,100 shares of
LTC common stock for an aggregate cost of approximately $3,308,000. As of
December 31, 1998, the fair value of the Company's investment in LTC stock,
based on quoted market prices, was $3,227,000.
LTC transferred equity investments consisting of 69,000 shares of Regent
common stock and 30,847 shares of ALC common stock to the Company. Subsequent
to the transfer by LTC, the Company sold its investment in Regent common
stock for total proceeds of approximately $388,000 and recognized a gain of
approximately $86,000. As of December 31, 1998 the ALC common stock was
recorded at its fair value of $405,000 (net of an $81,000 unrealized loss).
7. LINE OF CREDIT FROM LTC
On March 30, 1998, the Company obtained an $8,000,000 unsecured line of
credit from LTC. On May 19, 1998, the amount available under the unsecured
line of credit was increased to $20,000,000. The line of credit bears
interest at 10% and matures in March 2008. As of December 31, 1998,
borrowings of $16,528,000 were outstanding under the line of credit. During
1998, the Company recorded interest expense under the unsecured line of
credit of $711,000.
8. MORTGAGES PAYABLE
In connection with the transfer of seven real estate properties from LTC to
the Company, the Company assumed non-recourse mortgage loans totaling
$29,263,000 that bear interest at a weighted average rate of 9.1%. See Note
3.-Distribution of LTC's Investment in the Company.
28
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In August 1998, the Company obtained mortgage financing of $17,400,000 from a
third-party lender on four of the unencumbered properties transferred from
LTC. The mortgage loan bears interest at 7.27% and matures in August 2008.
At December 31, 1998, based on prevailing interest rates for comparable loans
and estimates made by management, the fair value of our mortgage loans
payable was approximately $39,285,000. Aggregate scheduled principal payments
for the mortgage loans payable as of December 31, 1998 were $571,000,
$617,000, $674,000, $3,988,000, $754,000, and $39,923,000 in 1999, 2000,
2001, 2002, 2003 and thereafter.
9. STOCKHOLDERS' EQUITY
INITIAL CAPITALIZATION. On March 25, 1998, LTC acquired 2 shares of
non-voting common stock for $1,000 and Christopher T. Ishikawa, Senior Vice
President and Chief Investment Officer of LTC, acquired 2 shares of voting
common stock in exchange for a $1,000 promissory note. LTC acquired an
additional 4,000 shares of non-voting common stock for $2,000,000 and 36,000
shares of non-voting common stock in exchange for the contribution of certain
assets and liabilities. On September 30, 1998, the 2 shares of voting common
stock acquired by Mr. Ishikawa were retired in return for the cancellation of
the $1,000 promissory note.
On September 30, 1998, the 40,002 shares of Company non-voting common stock
held by the LTC were converted into 3,335,882 shares of Company voting common
stock. On September 30, 1998, the date of the Distribution, the Company owned
124,500 shares of LTC common stock and as a result of the Distribution,
received 12,450 shares of treasury stock. See Note 3.-Distribution of LTC's
Investment in the Company.
REPURCHASE OF COMMON STOCK. During 1998, the Company's Board of Directors
approved the repurchase of up to 300,000 shares of its common stock with such
purchases to be made in the open market, or in negotiated transactions, at
such times and at such prices as management may decide. As of December 31,
1998, the Company repurchased a total of 138,600 shares of its common stock
in the open market at an aggregate cost of $384,000.
STOCK BASED COMPENSATION PLAN. During 1998, the Company adopted the 1998
Equity Participation Plan (the "1998 Plan") under which 500,000 shares of
common stock have been reserved for stock based compensation awards. The 1998
Plan provides for the issuance of incentive and nonqualified stock options,
restricted stock and other stock based awards to officers, employees,
non-employee directors and consultants. The terms of awards granted under the
1998 Plan are set by the Company's compensation committee at its discretion,
however, in the case of incentive stock options, the term may not exceed ten
years from the date of grant.
29
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarized nonqualified stock option activity for the
period from inception (March 25, 1998) to December 31, 1998:
Weighted
Shares Average Price
-------- -------------
Outstanding, March 25, 1998 - $ -
Granted 296,000 2.50
--------
--------
Outstanding, December 31, 1998 296,000 $ 2.50
--------
--------
Available for Grant, December 31, 1998 204,000
--------
--------
All options outstanding as of December 31, 1998 have a ten year life and vest
equally over three years from the original date of grant based on continued
employment as of each respective vesting date. Unexercised options expire
seven years after the date of vesting.
The fair value of options granted during 1998 was estimated using the
Black-Scholes valuation model and assumptions as of the grant date. In
determining the estimated fair value of options granted, the Company assumed
a life expectancy of five years from the options grant date, volatility
factor of the expected market price of the Company's common stock of 1.559,
and a risk free interest rate of 4.70%. Based on the above assumptions, the
estimated fair value of options granted was $2.32 per share. As of December
31, 1998 the average remaining contractual life of the outstanding options
was 9.8 years. Had compensation cost been recorded under the provisions of
SFAS No. 123, pro forma net loss would have been $157,000 and pro forma basic
and diluted loss per share would have been $0.05 per share.
10. INCOME TAXES
For federal and state income tax purposes, the Company recorded the assets
and liabilities transferred from LTC at the net fair market value which was
approximately $5,426,000 higher than their net book value at the date of
transfer (unaudited). The excess of fair market value over book value was
recorded as a deferred tax asset. Sufficient taxable income must be generated
in future years to realize the tax benefit associated with the net deferred
tax asset. The Company believes that sufficient doubt exists as to whether it
is more likely than not that future taxable income will be sufficient to
realize such tax benefits and, accordingly, a valuation allowance was
established against the deferred tax asset resulting from the transfer of
assets and liabilities from LTC and net operating loss carryforwards. See
Note 3.-Distribution of LTC's Investment in the Company.
At December 31, 1998, the Company had, for federal and California tax
purposes, net operating loss carryforwards totaling $379,000 and $49,000
respectively (expiring in 2018 for federal and 2003 for California).
SFAS No. 109 requires the reduction of the deferred tax assets by a valuation
allowance if, based on the weight of available evidence, it is more likely
than not that a portion or all of the deferred tax asset will not be
realized. For the year ended December 31, 1998, the Company has established a
$41,000 valuation allowance for net operating loss carryforward which
currently is not expected to be utilized.
30
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The reconciliation between the statutory provision for income taxes and the
actual provision for income taxes is shown as follows:
1998
----------
Income tax at federal statutory rate $ (41,000)
State income taxes, net of federal benefit (5,000)
Reduction in valuation allowance 41,000
Other 5,000
----------
Provision for income taxes $ -
----------
----------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
The components of the Company's deferred tax assets and liabilities are as
follows:
1998
----------
Deferred tax assets:
Partnership and other income $ 47,000
Federal benefit of state deferred tax 7,000
NOL carryforward 144,000
----------
Total deferred tax assets 198,000
Deferred tax liabilities:
Depreciation (96,000)
Accrued Expenses (52,000)
Other (9,000)
----------
Total deferred tax liabilities (157,000)
----------
Net deferred tax assets before valuation allowance 41,000
Valuation allowance (41,000)
----------
Net deferred tax asset $ -
----------
----------
11. NET LOSS PER SHARE
The Company had no dilutive securities for the period ended December 31,
1998. Weighted average shares outstanding for the period ended December 31,
1998 were calculated assuming the conversion of 40,002 shares of non-voting
common stock held by LTC into 3,335,882 shares of voting common stock and the
151,050 shares of treasury stock obtained by the Company occurred at the
beginning of the period. See Note 9.--Stockholders' Equity.
31
LTC HEALTHCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
QUARTER ENDED
-------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------
Net income (loss) available to
Common stockholders $ 4 $ (37) $ (86)
Basic net income (loss) per share 0.00 (0.01) (0.03)
Diluted net income (loss) per share 0.00 (0.01) (0.03)
13. SUBSEQUENT EVENTS
During 1998, the Company's board of directors authorized the repurchase of
300,000 shares of the Company's common stock. As of December 31, 1998 the
Company had repurchased 138,600 shares of its' common stock for approximately
$384,000. As of January 13, 1999, the Company had repurchased an additional
161,400 shares for approximately $444,000 and had repurchased all the shares
authorized under the 1998 stock repurchase plan. On January 14, 1999 the
Company's board of directors authorized the repurchase of 300,000 additional
shares of the Company's common stock. As of March 19, 1999, the Company had
repurchased 292,000 shares of its common stock under the 1999 stock
repurchase plan, for approximately $796,000. In addition, the Company
purchased 40,058 shares of LTC common stock for approximately $585,000.
During 1999, the Company entered into a transaction with National Healthcare
Investors, Inc. ("NHI"), whereby LTC purchased a note receivable of
$13,691,000 from an NHI subsidiary (the "NHI Note"). The NHI Note is a
non-recourse note secured by four skilled nursing facilities that bears
interest at an annual rate of 11% (calculated using the 365/360 day
methodology resulting in an effective interest rate of approximately 11.2%),
and is fully amortizing with a final maturity of January 1, 2009. The Company
financed the acquisition of the NHI Note with a non-recourse note payable to
NHI for $13,691,000 that bears interest at 10.75% (effective rate of 10.9%)
and matures on January 1, 2009 concurrently with the NHI Note.
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 25, 1999, to
be filed pursuant to Regulation 14A.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 25, 1999, to
be filed pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 25, 1999, to
be filed pursuant to Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive proxy
statement for the Annual Meeting of Stockholders to be held May 25, 1999, to
be filed pursuant to Regulation 14A.
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K.
(a) Financial Statements
The financial statements are filed as Item 8. Financial
Statements and Supplementary Data of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits in the accompanying index to exhibits are filed
as part of this Annual Report on Form 10-K.
(d) Financial Statement Schedules
Schedule XI. Real Estate and Accumulated Depreciation is filed
as part of this Annual Report on Form 10-K. All other
schedules have been omitted since the required information is
not present or not present in amounts sufficient to require
submission of the schedules.
33
ITEM 14 (c). INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- -------------------------------------------------------------------
3.1 Form of Amended and Restated Articles of Incorporation of LTC
Healthcare, Inc. (incorporated by reference to Exhibit 3.1 to
Amendment No. 4 to LTC Healthcare, Inc.'s Information
Statement on Form 10 as filed on September 9, 1998).
3.2 Form of Amended and Restated Bylaws of LTC Healthcare, Inc. (incorporated
by reference to Exhibit 3.2 to Amendment No. 4 to LTC Healthcare,
Inc.'s Information Statement on Form 10 as filed on September 9, 1998).
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to Amendment No. 2 to LTC Healthcare, Inc.'s Information
Statement on Form 10 as filed on August 21, 1998).
10.1 Distribution Agreement, dated as of September 30, 1998, by and
between LTC Properties, Inc. and LTC Healthcare, Inc.
(incorporated by reference to Exhibit 10.1 to LTC Healthcare,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.2 Administrative Services Agreement, dated as of September 30,
1998, by and between LTC Properties, Inc. and LTC Healthcare,
Inc. (incorporated by reference to Exhibit 10.2 to LTC
Healthcare, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998).
10.3 Intercompany Agreement, dated as of September 30, 1998, by and
between LTC Properties, Inc. and LTC Healthcare, Inc.
(incorporated by reference to Exhibit 10.3 to LTC Healthcare,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.4 Tax Sharing Agreement, dated as of September 30, 1998, by and
between LTC Properties, Inc. and LTC Healthcare, Inc.
(incorporated by reference to Exhibit 10.4 to LTC Healthcare,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.5 Amended and Restated Promissory Note, dated as of May 19,
1998, between LTC Properties, Inc. and LTC Healthcare, Inc.
(incorporated by reference to Exhibit 10.5 to LTC Healthcare,
Inc.'s Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998).
10.6 LTC Healthcare, Inc. Equity Participation Plan.
21.1 List of Subsidiaries
27 Financial Data Schedule
99 Risk Factors
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.
34
LTC HEALTHCARE, INC.
SCHEDULE XI
REAL ESTATE AND ACCUMULATED DEPRECIATION
(in thousands)
Initial Gross Amount at which Carried
Cost to Company Costs at December 31, 1998
------------------ Capitalized ----------------------------- Construction/
Building and Subsequent Building and Accum Renovation Acquisition
Encumbrances Land Improvements to Acquisition Land Improvements Total (1) Deprec.(2) Date Date
------------ ------ ------------ -------------- ------ ------------ --------- ---------- ------------- -----------
Skilled Nursing Facilities:
Alamagordo, NM 4,811 314 3,567 28 314 3,595 3,909 739 1985 Mar-93
Roswell, NM 4,066 85 2,932 25 85 2,957 3,042 759 1979 Nov-92
Tucson, AZ 6,432 145 3,932 - 145 3,932 4,077 773 1985 Mar-93
Phoenix, AZ 7,608 432 6,764 - 432 6,764 7,196 1,150 1985/1992 May-94
Clovis, NM 1,644 100 2,519 32 100 2,551 2,651 91 1968 Feb-98
Clovis, NM 2,884 100 1,899 32 100 1,931 2,031 62 1969/1995 Feb-98
Richland Hills, TX 1,741 100 2,844 32 100 2,876 2,976 75 1967 Feb-98
------- ------ ------- ---- ------ ------- ------- ------
SNFs 29,186 1,276 24,457 149 1,276 24,606 25,882 3,649
------- ------ ------- ---- ------ ------- ------- ------
Assisted Living Facilities:
Arlington, OH 17,341(3) 510 6,115 - 510 6,115 6,625 110 1993 Apr-98
Bexley, OH (3) 410 6,215 - 410 6,215 6,625 112 1992 Apr-98
Worthington, OH (3) - 6,710 - - 6,710 6,710 116 1993 Apr-98
Worthington, OH (3) - 3,290 - - 3,290 3,290 63 1996 Apr-98
Rocky River, OH - 760 6,693 - 760 6,693 7,723 130 1998 May-98
Erie, PA - 850 7,477 - 850 7,477 8,327 126 1998 Jun-98
------- ------ ------- ---- ------ ------- ------- ------
ALFs 17,341 2,530 36,770 - 2,530 36,770 39,300 657
------- ------ ------- ---- ------ ------- ------- ------
Total $46,527 $3,806 $61,227 $149 $3,806 $61,376 $65,182 $4,306
------- ------ ------- ---- ------ ------- ------- ------
------- ------ ------- ---- ------ ------- ------- ------
(1) The aggregate cost for federal income tax purposes is approximately
$67,000,000.
(2) Depreciation for building is calculated rising a 35 year life for
skilled nursing facilities and a 40 year life for assisted living
residences and additions to facilities. Depreciation for furniture and
fixtures is calculated based on a 7 year life for all facilities.
(3) Single note backed by four facilities in Ohio.
Activity for the year ended December 31, 1998 is as follows:
Real Estate Accumulated
& Equipment Depreciation
----------- ------------
Balance at Inception (March 25, 1998) $ - $ -
Additions - 586
Contribution of assets by LTC 65,182 3,720
----------- ------------
Balance at December 31, 1998 $ 65,182 $ 4,306
----------- ------------
----------- ------------
35
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 Healthcare, Inc.
Registrant
Dated: March 31, 1999 By: /s/ JAMES J. PIECZYNSKI
-----------------------
JAMES J. PIECZYNSKI
President, Chief Financial Officer
and Director
/s/ ANDRE C. DIMITRIADIS
- ------------------------------
ANDRE C. DIMITRIADIS Chairman of the Board, Chief March 31, 1999
Executive Officer and Director
/s/ JAMES J. PIECZYNSKI
- ------------------------------
JAMES J. PIECZYNSKI President, Chief Financial March 31, 1999
Officer and Director
/s/ STEVEN STUART
- ------------------------------
STEVEN STUART Director March 31, 1999
/s/ BARY G. BAILEY
- ------------------------------
BARY G. BAILEY Director March 31, 1999
36