-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AA1F3WQesVoKCOxAQTWYGyRRjJ48SzN3J2IJWvJczfVEDCtXoNkGRzqghnQYzpmQ 61OJGTxDqUABBuxj49rWUw== 0000766704-96-000008.txt : 19960418 0000766704-96-000008.hdr.sgml : 19960418 ACCESSION NUMBER: 0000766704-96-000008 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960417 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTH CARE REIT INC /DE/ CENTRAL INDEX KEY: 0000766704 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 341096634 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: ARS SEC ACT: 1934 Act SEC FILE NUMBER: 001-08923 FILM NUMBER: 96547814 BUSINESS ADDRESS: STREET 1: ONE SEAGATE STE 1950 STREET 2: P O BOX 1475 CITY: TOLEDO STATE: OH ZIP: 43604 BUSINESS PHONE: 4192472800 ARS 1 [COVER] HEALTH CARE REIT, INC. ANNUAL REPORT 1995 [PHOTO depicting the number 25 representing 25 years of business.] [INSIDE COVER - Same photo as cover with this phrase underneath:] Health Care REIT, Inc. has reached a major milestone - our 25th Anniversary, celebrating 98 consecutive dividends. We look forward with enthusiasm and optimism to the next quarter century, making profitable investments for our shareholders. TABLE OF CONTENTS Corporate Profile . . . . . . . . . . . . . . . . . . . . . . . 1 Financial Highlights. . . . . . . . . . . . . . . . . . . . . . 1 Letter to Shareholders. . . . . . . . . . . . . . . . . . . . . 2 Portfolio Review. . . . . . . . . . . . . . . . . . . . . . . . 7 Management's Discussion and Analysis. . . . . . . . . . . . . . 8 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . 12 Consolidated Statements of Income . . . . . . . . . . . . . . . 13 Consolidated Statements of Shareholders' Equity . . . . . . . . 14 Consolidated Statements of Cash Flows . . . . . . . . . . . . . 15 Notes to Consolidated Financial Statements. . . . . . . . . . . 16 Report of Independent Auditors. . . . . . . . . . . . . . . . . 25 Market and Dividend Information . . . . . . . . . . . . . . . . 26 Income Tax Information. . . . . . . . . . . . . . . . . . . . . 26 Board of Directors. . . . . . . . . . . . . . . . . . . . . . . 27 Shareholder Information . . . . . . . . . . . . . . . . . . . . 28 CORPORATE PROFILE Founded in 1970, Health Care REIT, Inc. (the "Company"), a real estate investment trust, invests in health care facilities - primarily nursing homes, assisted living and retirement facilities. The Company also invests in specialty care hospitals and primary care facilities. The Company's investment portfolio is diversified by type of facility, number of facilities, location and state. The Company operates in accordance with federal tax laws and regulations governing real estate investment trusts. By maintaining its REIT status, the Company avoids substantial corporate federal income tax, provided 95% of taxable income (not including capital gains) is distributed as dividends. FINANCIAL HIGHLIGHTS
1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- (In thousands, except per share amounts) Gross Income $ 44,596 $ 42,732 $ 36,018 $ 28,908 $ 29,248 Net Income 13,635 24,953 20,055 16,515 13,126 Loans Receivable 291,999 254,924 185,282 151,414 123,812 Investment in Operating- Lease Properties and Other 58,629 57,232 42,776 10,301 14,800 Investment in Direct Financing Leases 11,246 11,428 52,950 65,411 68,391 Total Assets 358,092 324,102 285,024 226,207 207,204 Borrowings Under Line of Credit Arrangements 106,700 70,900 35,000 78,900 62,200 Senior Notes and Other Long-Term Obligations 56,060 57,373 61,311 24,819 28,144 Shareholders' Equity 187,598 189,180 184,132 118,948 113,956 Cash Distributions to Shareholders 24,215 23,127 18,252 15,922 12,042 Cash Available for Distribution (1) 27,938 31,697 22,780 18,654 14,927 Average Number of Shares Outstanding 11,710 11,519 9,339 8,629 6,828 Per Share: Net Income 1.16 2.17 2.15 1.91 1.92 Distributions 2.075 2.01 1.93 1.85 1.77 (1) Cash Available for Distribution is defined as net cash provided from operating activities, but does not consider the effects of changes in operating assets and liabilities such as other receivables and accrued expenses. The Company uses Cash Available for Distribution in evaluating investments and the Company's operating performance. Cash Available for Distribution does not represent cash generated from operating activities in accordance with generally accepted accounting principles, is not necessarily indicative of cash available to fund cash needs, and should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flow as a measure of liquidity.
LETTER TO SHAREHOLDERS The year 1995 was a significant transitional period for the Company. In the face of many challenges, substantial progress was made in repositioning and reengineering the Company for the future. Appropriately, these changes have been impelled by the dynamism of the health care industry and the capital markets. Our success in developing relationships with new customers and designing products that fit their needs continued in 1995. However, during the previous four years, the extended period of low interest rates caused a large "run-off" of direct financing leases and loans. Such transactions produced large gains - $9.4 million of option exercise gains and $6.9 million in loan prepayment fees. While these gains reflect a successful underwriting process, it is also clear that the capital markets are rewarding consistent, rather than episodic, earnings and cash flow. Despite more than $200 million of investments running off our books in the last four years, over $400 million of new investments were recorded during the same period, with longer terms and "lock-out" periods designed to produce predictable earnings and cash flow in the future. The key to the Company's marketing success is our ability to differentiate the Company in terms of service, quality and innovation. We work to understand the marketplace and customer needs as they change from time to time. Our strength is in establishing relationships with emerging health care companies who appreciate our willingness to provide one-stop financing and the "added value" of advice and counsel. In becoming the "provider of growth capital to emerging chains" we have changed the composition of our customer base from smaller operators with limited capital to more sophisticated owner/operators with extensive operating experience and significant capital backing. This change does not indicate dissatisfaction with our historical niche; rather it reflects the consolidation of the health care delivery system. Today, more than 50% of our portfolio is comprised of substantial companies, of which approximately one-half are public companies. [PHOTO depicting professional persons standing on different levels of peaks with the following statement in the upper left-hand corner:] Health Care REIT, with a diversified, growing portfolio of health care facilities, is becoming one of the nation's premier health care REITs, providing growth capital to emerging chains. A good part of the Company's success comes from identifying opportunities early. We were the first health care REIT to identify assisted living as an integral part of any delivery system. We continuously explore other cost effective, quality investment opportunities across the continuum of care, as distinctions among types of health care facilities blur in today's dynamic health care industry. While our focus remains on long-term care investments, an important part of our management responsibility is to focus on tomorrow's opportunities and choose new investments wisely. As the health care REIT industry has evolved, competition from other financing sources has dramatically increased. Access to reasonably priced capital is becoming the factor that separates the successful from the unsuccessful REITs and other financiers. In this selection process clear capital market expectations relating to performance and policies have developed. Size, self- administration, appropriate leverage, investment grade status, and effective shareholder communication directly influence a REIT's cost of capital. The following accomplishments during the last several years reflect management's understanding of the importance of access to the capital markets and the need to communicate effectively: - - The Company became a listed New York Stock Exchange company in late 1992 to enhance its visibility in the capital markets. - - The Company received an investment grade rating for its $52 million private note transaction in 1993 that was raised in 1994 and reaffirmed in 1995. The reaffirmation also applies to a new note issue of $30 million that is scheduled to close in the near future at an attractive weighted average interest rate of 7.18%. - - Sophisticated information systems have been developed, including a database system that permits us to more effectively present the Company's portfolio performance to the marketplace. - - The Company has attained self-administered status, put senior management succession in motion, and developed a compensation system that closely aligns the interests of new management and shareholders. [PHOTO depicting a building with its structure being changed, added on to, and extending higher, with the following statement:] Repositioned and reengineered for the future, the attainment of self-administered status and commitment to senior management succession in 1995 builds a sound foundation for growth. - - A new Chief Financial Officer with substantial financial, health care and capital markets experience has been hired, completing the new management team. - - Since December 31, 1990, the Company's leverage has been reduced from levels as high as 1.43 to 1 to levels approximating .9 to 1 at the end of 1995. We will continue to present the Company to the capital markets seeking broader support and lower capital costs. Our understanding of the health care industry, relationships with excellent operators and innovative financing programs will carry the day. Our vision is to enter the ranks of the premier health care REITs as the "provider of growth capital to emerging chains." This goal can be attained only through the continuous development of the best trained, attentive management group in the industry attuned to the ever-changing health care and capital markets. \S\: BRUCE G. THOMPSON \S\: GEORGE L. CHAPMAN - ----------------------- ----------------------- Bruce G. Thompson George L. Chapman Chairman and Chief Executive Officer President [PHOTO BELOW NAME] [PHOTO BELOW NAME] 1995 PORTFOLIO REVIEW [PHOTO here depicting a map of the U.S. Each facility is marked on the map and represented by a symbol according to type of facility.] ALABAMA NEW JERSEY Assisted Living Facilities Nursing Homes Hoover* Clark* ARIZONA NEW MEXICO Nursing Homes Assisted Living Facilities Camp Verde Hobbs* Payson* Roswell* Assisted Living Facilities Retirement Centers Scottsdale* Santa Fe* Retirement Centers Chandler* NEW YORK Nursing Homes ARKANSAS Plattsburgh* Specialty Care Assisted Living Facilities Little Rock* Chestnut Ridge* CALIFORNIA NORTH CAROLINA Nursing Homes Assisted Living Facilities Santa Rosa* Newton Retirement Centers Statesville Placentia* Yadkinville Specialty Care Brea* OHIO Nursing Homes COLORADO Ashland* Nursing Homes Bellevue* Pueblo* Calcutta* Canal Winchester CONNECTICUT Grand Rapids* Nursing Homes Kent Farmington* Stow Guilford* Tallmadge* Manchester (3)* Vermilion* New Haven* Retirement Centers Southington Toledo* Waterbury* Behavioral Care St. Clairsville* FLORIDA Primary Care Nursing Homes Huber Heights Citrus County* Centerville Daytona Beach* Venice* OKLAHOMA Assisted Living Facilities Assisted Living Facilities Margate* Bartlesville* Tampa Chickasha* Behavioral Care Duncan* Clearwater* Edmond* Miami* Enid* Lawton* GEORGIA Midwest City* Nursing Homes Norman* Snellville* Oklahoma City* Ponca City IDAHO Shawnee* Nursing Homes Stillwater* Boise* Coeur D'Alene* PENNSYLVANIA Nursing Homes ILLINOIS Easton Retirement Centers Philadelphia* Naperville* Assisted Living Facilities Rockford* Baldwin Twp.* Primary Care Primary Care Bloomingdale Philadelphia (2)* INDIANA TEXAS Nursing Homes Nursing Homes Knox Conroe* Retirement Centers Fredericksburg* Ft. Wayne* Jasper* Behavioral Care San Antonio (2)* Bloomington* San Antonio Woodville* KENTUCKY Assisted Living Facilities Nursing Homes Houston* Owensboro Wharton* Retirement Centers LOUISIANA Harlingen* Behavioral Care Specialty Care Alexandria* McAllen* MARYLAND VIRGINIA Assisted Living Facilities Assisted Living Facilities Towson* Chesapeake Poquoson MASSACHUSETTS Williamsburg Nursing Homes Manassas* Braintree* South Boston* WASHINGTON D.C. Webster* Specialty Care Weymouth* Washington, D.C.* MICHIGAN WEST VIRGINIA Nursing Homes Nursing Homes Detroit* Glenville Westland* MISSOURI Nursing Homes Hannibal* St. Joseph St. Louis* Retirement Centers Kansas City* Behavioral Care * loan site and/or Springfield* credit enhancement MANAGEMENT'S DISCUSSION AND ANALYSIS Liquidity and Capital Resources - ------------------------------- Loan interest payments, lease payments and loan and commitment fees are the Company's primary sources of cash from operating activities. Net cash provided from operating activities in each of the three most recent years totalled $27,153,000 in 1995; $31,977,000 in 1994; and $23,180,000 in 1993. The decrease in 1995 versus 1994 was primarily due to a $2,900,000 net reduction in gain on exercise of options and prepayment fees in addition to the loss of interest income during 1995 on three non-performing loans. Interest income on these three loans totalled $2,155,000 in 1994. The 1994 versus 1993 increase arose primarily from an increase in the Company's net income. However, there are differences between the recognition of income for financial reporting purposes and cash receipts for both leases and mortgage loans which cause period-to-period changes in net cash provided from operating activities. The level of the Company's investing activities varies over time due to a number of factors, including economic conditions in the health care financing market, the availability of capital resources, and the timing of principal payments. Investing activities in loans receivable and leases, net of principal collected on loans, were $40,576,000, $84,797,000 and $67,720,000 for the years 1995, 1994 and 1993, respectively. The net increase in investments in 1995 was unfavorably affected by higher loan repayments of almost $21,000,000. Additionally, certain 1995 anticipated investments were delayed or, in the case of construction loans, funded more slowly than expected. The net increase in investments in 1994 versus 1993 was due to significantly increased marketing activity. The Company's investing activities are financed principally by borrowings, proceeds from the exercise of lease purchase options, loan repayments, and equity issuances, including issuances pursuant to the Company's dividend reinvestment plan and the Company's employee incentive stock option plans. On April 8, 1993, the Company issued $52,000,000 of Senior Notes (the "Senior Notes") to a group of institutional investors, the Company's first such debt offering. These Senior Notes were issued in three tranches with an initial effective interest rate of 7.63% and an average maturity of approximately seven years. The Company has a credit agreement for $150,000,000 with ten banks which matures March 31, 1997. The agreement specifies that borrowings under the revolving credit are subject to interest rates, at the Company's option, based on either the agent bank's prime rate of interest or 1.5% over LIBOR interest rate. The Company is primarily utilizing the LIBOR pricing option with a weighted average LIBOR interest rate of 7.32% at December 31, 1995. In addition, the Company pays a commitment fee at an annual rate of .5% of the unused line and an annual agent's fee of $75,000. At December 31, 1995, the Company had $90,000,000 outstanding under the revolving credit agreement. The revolving credit agreement limited the amount of borrowings available to 75% of the Company's borrowing base. The Company's borrowing base consisted of mortgage loans and leases not in default which, with the consent of the banks, are assigned to the lenders' collateral pool. Each borrowing base property was valued generally at the lower of the Company's cost or the market value of the underlying property with substantially all such properties valued at cost. As of December 31, 1995, the borrowing base under the revolving credit agreement limited the amount of the borrowing to $113,000,000. The Company's borrowing availability was limited by the exclusion of certain assets from the borrowing base such as construction loans. The Company anticipates that the completion of facilities under construction and the inclusion of leases and mortgage loans relating to completed facilities in its borrowing base will enable it to increase its borrowings to the $150,000,000 maximum availability. At December 31, 1995, the Company had $188,190,000 of unfunded commitments. The revolving credit agreement contains covenants that require the Company to maintain a ratio of cash flow (as defined in the agreement) to interest expense of not less than 2 to 1 in any quarter; a ratio of total funded debt to sum of net worth and convertible subordinated indebtedness of not more than 1.3 to 1; and a tangible net worth of $180,000,000. The Company was in compliance with those and all other covenants at December 31, 1995. At December 31, 1995, the Company had two unsecured lines of credit with two banks for a total of $35,000,000. Borrowings under these lines are made pursuant to notes payable, are due on each bank's demand and are subject to interest at each bank's prime rate of interest. The Company had $16,700,000 outstanding at December 31, 1995, under these lines of credit. The Company uses interest rate swap contracts solely to accomplish the Company's policy of reducing its interest rate risk, and thereby maintain a more consistent, predictable interest rate margin. The Company monitors the amount of its variable interest rate assets and debt and uses interest rate swap contracts to partially balance the amount of variable interest rate debt with its variable interest rate assets. Interest rate swap contracts permit the Company to match either by fixing interest rates on a portion of its line of credit borrowings, or converting a portion of its fixed rate debt to variable rate. At December 31, 1995, the Company had two five-year interest rate swap contracts which expire in 1996 and 1997, which hedge the Company's interest rate risk relating to $30,000,000 of variable interest rate borrowings. At December 31, 1995, the Company was at risk for rising rates because its variable interest rate debt exceeded its variable interest rate assets. Proceeds from the exercise of lease purchase options were approximately $38,330,000 and $12,085,000 for the years 1994 and 1993, respectively. At December 31, 1995, the Company had a limited number of direct financing leases and, therefore, anticipates that proceeds from the exercise of purchase options will be significantly reduced. In the last three years, the Company has had one public offering of Common Stock. In 1993, the Company issued 2,500,000 shares of Common Stock which provided net proceeds of $59,085,000 at $23.63 per share. The proceeds were initially used to pay down the Company's bank lines of credit. The dividend reinvestment plan and, to a lesser extent, the employee incentive stock option plan together represent a significant source of capital for the Company. During 1995, 1994 and 1993, issuance of Common Stock pursuant to these plans generated $3,104,000, $3,222,000, and $4,296,000, respectively, in cash for the Company. The Company believes that funds provided from operating activities, together with funds from new equity and debt issuances, present credit lines, scheduled loan repayments and equity issuances under Company stock plans, will be sufficient to meet current operating requirements and existing commitments. For example, the Company anticipates completing a $30,000,000 private note issuance in the first quarter of 1996.
SOURCES OF CAPITAL Year Ended December 31 1995 1994 1993 - ------------------------------- ----------- ----------- ------------ Dividend Reinvestment and Stock Option Plans $ 3,104,492 $ 3,221,667 $ 4,295,611 Net Increases (Decreases) in Long-Term Borrowings Under Line of Credit Arrangements 35,800,000 35,900,000 (43,900,000) Borrowings Under Senior Notes 52,000,000 Equity Offering-Net 59,085,030 ----------- ----------- ------------ $38,904,492 $39,121,667 $ 71,480,641
Results of Operations - --------------------- Gross income increased $1,864,000, $6,714,000 and $7,110,000 in 1995, 1994 and 1993, respectively. In 1995, interest income on loans receivable, operating lease rents, and loan and commitment fees each increased while direct financing lease income decreased when compared to 1994. The increases in interest income on loans receivable, operating lease rents, and loan and commitment fees are attributable to the growth in the loan and operating lease properties portfolio, a long-term trend which the Company anticipates will continue. The decrease in direct financing lease income is a reflection of another long-term trend which should also continue. In 1994, interest income on loans receivable and operating lease rents both increased while direct financing lease income decreased when compared to 1993. These changes in components of gross income reflect the trend of change in the components of the investment portfolio discussed above. Net income totalled $13,635,000 in 1995, $24,953,000 in 1994, and $20,055,000 in 1993 and is the result of a number of factors. Generally, the principal factors are the difference between the Company's average earnings on assets versus its average cost of borrowings and the Company's debt-to-equity ratio. Other factors are the settlement of management contract, management fees, other operating expenses and the provision for losses. The 1995 decrease in net income was due in large part to the $5,794,000 charge for settlement of management contract, a $4,800,000 provision for losses and a decrease in net interest margin. On November 30, 1995, the Manager merged with and into the Company pursuant to a Revised Merger Agreement. Consideration for this transaction of $5,048,000, plus $792,000 of related expenses, less $46,000 in net assets acquired, were accounted for as a settlement of a management contract. Also in 1995, the Company charged operations $4,800,000 for provision for losses which primarily relates to non-performing loans as well as an increase in the general allowance. The Company's net interest margin decreased 116 basis points from 1994, which is almost solely due to a net decline in gains on exercise of options and prepayment fees. Without those items, average earnings on assets would have declined approximately three basis points in 1995 versus 1994. The average cost of borrowing was virtually the same for 1995 versus 1994, but in 1995, there was a constant quarter-to-quarter decline, which is a reflection of a general decline in interest rates during the year. The Company anticipates that in 1996, its core average earnings on assets will increase modestly and its average cost of debt will decline. The Company's 1995 net income was also affected by an increase in the average quarter-end, debt-to-equity ratio from .65 to 1 in 1994 to .85 to 1 in 1995. During 1995, the Company was propor- tionally using more debt as a source of funds. Therefore, the Company proportionally incurred more interest expense for every dollar of revenue, and thereby decreased its net interest margin and net income. The 1994 increase in net income was due in large part to the growth in net interest margin. The Company's average earnings on assets increased approximately 67 basis points from the same period in 1993, while the Company's average cost of borrowing increased 37 basis points, thereby resulting in a 30 basis point increase in net interest margin. The increase in the average earnings on assets was solely due to gains on exercise of options and prepayment fees. Without those items, average earnings on assets would have declined approximately 35 basis points in 1994 versus 1993. The increase in average cost of borrowing was due to a general rise in interest rates in 1994 over 1993 as well as an increase in the LIBOR interest rate spread in the Company's amended and expanded revolving line of credit agreement. The Company's 1994 net income was also affected by a decrease in the average quarter-end, debt-to-equity ratio from 1 to 1 in 1993 to .65 to 1 in 1994. During 1994, the Company was proportion- ally using less debt as a source of funds. Therefore, the Company proportionally incurred less interest expense, and thereby increased its net interest margin and net income. Management fees and other operating expenses were $5,284,000 in 1995, $5,072,000 in 1994, and $3,878,000 in 1993. Management fees declined significantly in 1995 versus 1994 due primarily to lower net income in 1995, which reduced the incentive portion of the fee, as well as the termination of the management contract on November 30, 1995. The higher management fee in 1994 was due to both higher net income and the 1993 equity offering which substantially increased the base portion of the management fee. The increase in other operating expenses in 1995 and 1994 resulted from increased professional fees, general growth of the Company, and increased marketing activity. The Company anticipates that due to the management buyout, other operating expenses will be lower than 1995's combined management fee and operating expenses, both in aggregate dollars and as a percentage of revenues. The Company has three loans totalling $14,712,000 from debtors in bankruptcy. The Company has not recorded any interest income on any of these loans since March 1995. In addition, the Company has working capital loans totalling $2,518,000 at December 31, 1995, which have been on a non-accrued status for several years. The facility's financial performance has improved in recent years, and the Company is recognizing interest income on a cash basis. COMPONENTS OF GROSS INCOME
Year Ended December 31 1995 1994 1993 - ------------------------------------------------------------------------------- Interest and Other Income $35,049,164 78% $26,225,155 61% $21,733,705 61% Direct Financing and Operating Leases 7,880,477 18% 9,833,424 23% 10,906,652 30% Gain on Exercise of Options 5,489,428 13% 2,175,334 6% Loan and Commitment Fees 1,666,286 4% 1,184,024 3% 1,202,516 3% - ------------------------------------------------------------------------------- $44,595,927 100% $42,732,031 100% $36,018,207 100% ===============================================================================
Impact of Inflation - ------------------- During the past three years, inflation has not significantly affected the earnings of the Company because of the moderate inflation rate. Additionally, earnings of the Company are primarily long-term investments with fixed interest rates. These investments are mainly financed with a combination of equity, senior notes and borrowings under the revolving lines of credit, of which a portion is hedged with interest rate swaps. During inflationary periods, which generally are accompanied by rising interest rates, the Company's ability to grow may be adversely affected because the yield on new investments may increase at a slower rate than new borrowing costs. Presuming the current inflation rate remains moderate and long-term interest rates do not increase significantly, the Company believes that equity and debt financing will be available. CONSOLIDATED BALANCE SHEETS
December 31 1995 1994 ------------ ------------ Assets Real estate related investments: Loans receivable, including amounts from related parties of $29,112,548 and $29,283,939, respectively $291,998,722 $254,923,711 Operating-lease properties, less accumulated depreciation of $4,220,655 and $2,803,787, respectively 58,628,509 57,231,651 Direct financing leases 11,246,492 11,427,721 - ------------------------------------------------------------------------------ 361,873,723 323,583,083 Less allowance for losses 9,950,000 5,150,000 - ------------------------------------------------------------------------------ Net real estate related investments 351,923,723 318,433,083 Other Assets: Deferred loan expenses 1,747,537 2,469,260 Cash and cash equivalents 860,350 935,449 Investment securities available for sale 845,297 Receivables and other assets 2,715,146 2,264,197 - ------------------------------------------------------------------------------ 6,168,330 5,668,906 - ------------------------------------------------------------------------------ Total assets $358,092,053 $324,101,989 ============================================================================== Liabilities and shareholders' equity Liabilities: Borrowings under line of credit arrangements $106,700,000 $ 70,900,000 Senior notes 52,000,000 52,000,000 Other long-term obligations 4,059,639 5,372,790 Accrued expenses and other liabilities 7,734,618 6,649,424 - ------------------------------------------------------------------------------ Total liabilities 170,494,257 134,922,214 Shareholders' equity: Preferred Stock, $1.00 par value: Authorized - 10,000,000 shares Issued and outstanding - None Common Stock, $1.00 par value: Authorized - 40,000,000 shares Issued and outstanding - 12,034,196 shares in 1995 and 11,595,115 shares in 1994 12,034,196 11,595,115 Capital in excess of par value 168,800,194 161,086,758 Undistributed net income 5,918,109 16,497,902 Unrealized gains on investment securities available for sale 845,297 - ------------------------------------------------------------------------------ Total shareholders' equity 187,597,796 189,179,775 Commitments and contingencies - ------------------------------------------------------------------------------ Total liabilities and shareholders' equity $358,092,053 $324,101,989 ============================================================================== See accompanying notes.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31 1995 1994 1993 ----------- ----------- ----------- Gross income, including amounts from related parties of $3,798,347, $3,810,340, and $3,611,580 for 1995, 994 and 1993, respectively: Interest on loans receivable $34,918,572 $26,038,471 $21,603,573 Direct financing leases: Lease income 1,528,655 4,353,192 8,094,184 Gain on exercise of options 5,389,399 2,175,334 Operating leases: Rents 6,351,822 5,480,232 2,812,468 Gain on exercise of options 100,029 Loan and commitment fees 1,666,286 1,184,024 1,202,516 Interest and other income 130,592 186,684 130,132 - -------------------------------------------------------------------------------- 44,595,927 42,732,031 36,018,207 Expenses: Interest: Line of credit arrangements 7,472,418 3,537,555 3,819,054 Senior notes and other long- term obligations 5,279,232 6,146,589 6,997,992 Loan expense 752,115 637,625 328,187 Management fees 2,385,535 3,086,988 2,426,639 Provision for depreciation 1,579,544 1,385,077 790,471 Provision for losses 4,800,000 1,000,000 150,000 Settlement of management contract 5,793,534 Other operating expenses 2,898,576 1,985,279 1,450,926 - -------------------------------------------------------------------------------- 30,960,954 17,779,113 15,963,269 - -------------------------------------------------------------------------------- Net income $13,634,973 $24,952,918 $20,054,938 ================================================================================ Net income per share $ 1.16 $ 2.17 $ 2.15 Average number of shares outstanding 11,709,642 11,519,123 9,339,081 ================================================================================ See accompanying notes.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Capital in Common Excess of Undistributed Unrealized Stock Par Value Net Income Gains Total ----------- ------------ ------------ ---------- ------------ Balances at January 1, 1993 $ 8,751,972 $ 97,327,593 $ 12,868,429 $ $118,947,994 Net income 20,054,938 20,054,938 Proceeds from the sale of 2,500,000 shares less related expenses of $3,727,470 2,500,000 56,585,030 59,085,030 Proceeds from issuance of 194,277 shares under the dividend reinvestment and stock option plans 194,277 4,101,334 4,295,611 Cash dividends paid--$1.93 per share (18,251,745) (18,251,745) - -------------------------------------------------------------------------------------------------------------- Balances at December 31, 1993 11,446,249 158,013,957 14,671,622 184,131,828 Net income 24,952,918 24,952,918 Proceeds from issuance of 148,866 shares under the dividend reinvestment and stock option plans 148,866 3,072,801 3,221,667 Cash dividends paid--$2.01 per share (23,126,638) (23,126,638) - -------------------------------------------------------------------------------------------------------------- Balances at December 31, 1994 11,595,115 161,086,758 16,497,902 189,179,775 Net income 13,634,973 13,634,973 Proceeds from issuance of 156,674 shares under the dividend reinvestment and stock option plans 156,674 2,947,818 3,104,492 Issuance of 282,407 shares related to settlement of management contract 282,407 4,765,618 5,048,025 Unrealized gains on invest- ment securities available for sale 845,297 845,297 Cash dividends paid--$2.075 per share (24,214,766) (24,214,766) - -------------------------------------------------------------------------------------------------------------- Balances at December 31, 1995 $12,034,196 $168,800,194 $ 5,918,109 $845,297 $187,597,796 ============================================================================================================== See accompanying notes.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 1995 1994 1993 -------------------------------------------- OPERATING ACTIVITIES Net income $ 13,634,973 $ 24,952,918 $ 20,054,938 Adjustments to reconcile net income to net cash provided from operating activities: Amortization of loan and organization expenses 749,270 639,781 328,546 Provision for losses 4,800,000 1,000,000 150,000 Provision for depreciation 1,579,544 1,385,077 790,471 Settlement of management contract 5,001,624 Loan and commitment fees earned less than cash received 1,466,865 693,213 494,292 Direct financing lease income less than cash received 181,229 905,860 376,046 Interest income less than cash received 524,907 2,120,035 586,092 (Decrease) increase in accrued expenses and other liabilities (381,671) 856,127 547,715 Increase in receivables and other assets (403,955) (575,571) (148,487) - ------------------------------------------------------------------------------- Net cash provided from operating activities 27,152,786 31,977,440 23,179,613 INVESTING ACTIVITIES Investment in loans receivable (107,296,680) (118,204,990) (90,650,648) Investment in operating- lease properties (2,976,000) (14,053,050) (20,766,000) Investment in direct financing leases (1,300,000) Principal collected on loans 69,696,762 48,760,717 43,696,715 Proceeds from exercise of purchase options 38,330,065 12,085,262 Other (3,150) 135,000 - ------------------------------------------------------------------------------- Net cash used in investing activities (40,579,068) (46,467,258) (55,499,671) FINANCING ACTIVITIES Increase in borrowings under line of credit arrangements 176,000,000 266,900,000 209,400,000 Principal payments on borrow- ings under line of credit arrangements (140,200,000) (231,000,000) (253,300,000) Borrowings under senior notes 52,000,000 Principal payments on other long-term obligations (1,313,151) (3,938,325) (15,508,351) Proceeds from the issuance of shares 3,104,492 3,221,667 63,380,641 Increase in deferred loan expense (25,392) (1,527,751) (770,041) Cash distributions to shareholders (24,214,766) (23,126,638) (18,251,745) - ------------------------------------------------------------------------------- Net cash provided from financing activities 13,351,183 10,528,953 36,950,504 - ------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (75,099) (3,960,865) 4,630,446 Cash and cash equivalents at beginning of year 935,449 4,896,314 265,868 - ------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 860,350 $ 935,449 $ 4,896,314 =============================================================================== See accompanying notes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES AND RELATED MATTERS Industry - -------- The Company is predominantly engaged in financing and leasing of health care and related properties in domestic markets. Principles of Consolidation - --------------------------- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary (organized in 1993) after the elimination of all significant intercompany accounts and transactions. Use of Estimates - ---------------- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Loans Receivable - ---------------- Loans receivable consist of construction-period loans maturing in two years or less, working capital loans to related parties, and long-term mortgage loans. Interest income on loans is recognized as earned based upon the principal amount outstanding. The loans are generally collateralized by a first or second mortgage on or assignment of partnership interest in the related facilities which consist of nursing homes, assisted living facilities, retirement centers, rehabilitation facilities, behavioral care facilities, primary care facilities and specialty care hospitals. Operating-Lease Properties - -------------------------- Certain properties owned by the Company are leased under operating leases. These properties are recorded at the lower of cost or net realizable value. Depreciation is provided for at rates which are expected to amortize the cost of the assets over their estimated useful lives using the straight-line method. Operating lease income includes the rent payments, which are generally recognized on a straight-line basis over the minimum lease period. Direct Financing Leases - ----------------------- Certain properties owned by the Company are subject to long-term leases which are accounted for by the direct financing method. The leases provide for payment of all taxes, insurance and maintenance by the lessees. The leases are generally for a term of 20 years and include an option to purchase the properties generally after a period of five years. Option prices equal or exceed the Company's original cost of the property. Income from direct financing leases is recorded based upon the implicit rate of interest over the lease term. This income is greater than the amount of cash received during the first six to seven years of the lease term. Allowance for Losses - -------------------- The allowance for losses is maintained at a level believed adequate to absorb potential losses in the Company's real estate related investments. The determination of the allowance is based on a quarterly evaluation of these earning assets (in the case of direct financing leases, estimated residual values), including general economic conditions, estimated collectibility of loan and lease payments, reappraisals (where appropriate), and the recoverability of the carrying amount of these investments in relationship to their net realizable value. Deferred Loan Expenses - ---------------------- Deferred loan expenses are costs incurred in acquiring financing for properties. The Company amortizes these costs by the straight-line method over the term of the debt. Cash and Cash Equivalents - ------------------------- Cash and cash equivalents consist of all highly liquid investments with an original maturity of three months or less. Investment Securities Available for Sale - ---------------------------------------- Management determines the appropriate classification of a security at the time of acquisition and reevaluates such designation as of each balance sheet date. Investment securities available for sale are stated at fair value, with unrealized gains and losses reported in a separate component of shareholders' equity. At December 31, 1995, available-for-sale securities are the common stock of a corporation, which were obtained by the Company at no cost. Loan and Commitment Fees - ------------------------ Loan and commitment fees are earned by the Company for its agreement to provide direct and standby financing to, and credit enhancement for, owners of health care facilities. The Company amortizes loan and commitment fees over the initial fixed term of the lease, the mortgage or the construction period related to such investments. Federal Income Tax - ------------------ No provision has been made for federal income taxes since the Company has elected to be treated as a real estate investment trust under the applicable provisions of the Internal Revenue Code, and the Company believes that it has met the requirements for qualification as such for each taxable year. See Note 8. Stock Options - ------------- The Company grants stock options for a fixed number of shares to employees with an exercise price equal to fair value of the shares at the date of the grant. The Company accounts for stock option grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly, recognizes no compensation expense for the stock option grants. Net Income Per Share - -------------------- Net income per share has been computed by dividing net income by the weighted daily average number of shares outstanding. Impact of Recently Issued Accounting Standards - ---------------------------------------------- In March 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". The Company's primary assets are real estate related investments which are not covered by FASB 121. Accordingly, based on the current circumstances, the Company does not believe FASB 121 is applicable. 2. LOANS RECEIVABLE The following is a summary of loans receivable: December 31 1995 1994 - ------------------------------------------------------------------- Mortgage loans $245,150,474 $208,566,120 Mortgage loans to related parties 22,333,209 22,215,685 Construction and other short-term loans 17,735,699 17,073,652 Working capital loans to related parties 6,779,340 7,068,254 - ------------------------------------------------------------------- TOTALS $291,998,722 $254,923,711 =================================================================== Loans to related parties included above are at competitive rates, but not at less than the Company's net interest cost on borrowings to support such loans. The amount of interest earned on loans to related parties amounted to $3,379,175, $3,220,092, and $2,869,911 for 1995, 1994 and 1993, respectively. The following is a summary of mortgage loans at December 31, 1995:
Final Number Principal Payment of Amount at Carrying Due Loans Payment Terms Inception Amount - ------- ------ ------------------------------ ------------ ------------ In Default 3 Loans in default which are currently due and not accruing interest. $ 15,495,000 $ 14,712,060 1996 2 Monthly payments from $676 to $34,447, including interest from 12.93% to 13% 3,190,000 3,125,193 1997 3 Monthly payments from $8,338 to $96,605, including interest from 11.5% to 13.44% 11,348,977 10,378,082 1998 2 1 monthly payment of $57,779 and 1 quarterly payment of $133,282, including interest from 11.62% to 12.93% 10,332,150 10,726,774 1999 1 Monthly payment of $15,435, including interest of 10.64% 1,850,000 1,908,449 2000 1 Quarterly payment of $136,817, including interest of 11.73% 5,310,000 5,628,600 2002 2 Monthly payments from $60,585 to $61,595, including interest from 12.55% to 13.17% 10,937,450 10,913,925 2003 1 Monthly payment of $45,158, including interest of 10.56% 4,761,192 4,751,326 2007 10 Monthly payments from $3,693 to $42,102, including interest from 8.75% to 12.26% 21,398,117 17,953,538 2008 13 Monthly payments from $17,765 to $271,529, including interest from 10.6% to 13.44% 78,480,000 78,147,845 2009 5 Monthly payments from $24,461 to $61,052, including interest from 10.35% to 11.91% 22,488,610 22,488,610 2010 3 Monthly payments from $14,713 to $130,615, including interest from 9.84% to 10.19% 24,450,000 24,450,000 2014 3 Monthly payments from $30,805 to $41,578, including interest from 11.3% to 13.44% 10,703,150 10,670,472 2015 6 Monthly payments from $21,958 to $111,169, including interest from 10.28% to 11.42% 39,197,063 39,092,809 2016 2 Monthly payments from $39,274 to $73,231, including interest from 10.39% to 10.7% 12,536,000 12,536,000 ------------ ------------ TOTALS $272,477,709 $267,483,683 ============ ============
One loan in default has a prior lien of approximately $1,195,000; and six loans maturing in 2007 have prior liens aggregating $1,515,000. Several monthly mortgage payments increase by 2% per year which also have negative amortization of principal due at maturity. The Company generally requires that the borrower have a substantial initial investment in the property. No mortgage loan, or multiple loans to a single borrower, has an outstanding principal balance which exceeds 10.5% of total assets. 3. INVESTMENT IN LEASES The following are the components of investment in direct financing leases: December 31 1995 1994 - ------------------------------------------------------------------ Total minimum lease payments receivable--(i) $ 18,833,646 $ 20,543,530 Estimated unguaranteed residual values of leased properties 6,063,649 6,063,649 Unearned income (13,650,803) (15,179,458) - ------------------------------------------------------------------ Investment in direct financing leases $ 11,246,492 $ 11,427,721 ================================================================== (i) The leases contain an option to purchase the leased property. Total minimum lease payments are computed assuming that the option will not be exercised. At December 31, 1995, future minimum lease payments receivable (assuming that the option will not be exercised) are as follows: Direct Financing Operating Leases Leases ------------------------------------------- 1996 $ 1,653,875 $ 6,003,963 1997 1,665,320 5,967,131 1998 1,697,486 6,180,587 1999 1,729,651 6,078,811 2000 1,761,058 6,173,976 Thereafter 10,326,256 22,093,166 ------------------------------------------- TOTALS $18,833,646 $52,497,634 =========================================== During 1994, the Company restructured two direct financing leases; one into a $3,324,000 mortgage loan and the other into a $3,582,000 operating lease. During 1993, the Company restructured a $10,500,000 mortgage loan into an operating lease. This noncash investing activity is appropriately not reflected in the accompanying statement of cash flows. 4. ALLOWANCE FOR LOSSES The following is a summary of the allowance for losses for 1995, 1994 and 1993. The portion of the allowance relating to loans receivable consists of amounts for specifically identified loans and an unallocated amount for other potential losses in the portfolio. Total Allowance Related to Loans Receivable ------------------------------------------------ Balances at January 1, 1993 $4,000,000 Provision for losses 150,000 ------------------------------------------------ Balances at December 31, 1993 4,150,000 Provision for losses 1,000,000 ------------------------------------------------ Balances at December 31, 1994 5,150,000 Provision for losses 4,800,000 ------------------------------------------------ Balances at December 31, 1995 $9,950,000 ================================================ The allowance consists of $6,500,000 relating to specifically identified loans of $14,712,000 and an unallocated amount for other potential losses in the portfolio. Interest income on impaired loans is recognized as payments are received. The Company recognized $323,000 of interest income on impaired loans in 1995. 5. BORROWINGS UNDER LINE OF CREDIT ARRANGEMENTS AND RELATED ITEMS The Company has a credit arrangement with a consortium of ten banks providing for a revolving line of credit (revolving credit) in the amount of $150,000,000 which expires on March 31, 1997. The agreement specifies that borrowings under the revolving credit are subject to interest payable in periods no longer than three months on either the agent bank's base rate of interest or 1.5% over LIBOR interest rate (based at the Company's option). The effective interest rate at December 31, 1995 was 7.32%. In addition, the Company pays a commitment fee at an annual rate of .5% of the unused line and an annual agent's fee of $75,000. At December 31, 1995, the revolving line of credit was collateralized by 37 real estate related investments in health care facilities. Principal is due upon expiration of the agreement, but the total amount outstanding may not exceed a specified percentage of the agreed-upon values of the collateral. The Company has two other lines of credit with two banks for a total of $35,000,000 which expire at various dates through May 31, 1996. Borrowings under these lines of credit are subject to interest at each bank's prime rate of interest (8.5% at December 31, 1995) and are due on demand. The following information relates to aggregate borrowings under the line of credit arrangements:
Year Ended December 31 1995 1994 1993 ------------------------------------------ Balance outstanding at December 31 $106,700,000 $ 70,900,000 $ 35,000,000 Maximum amount outstanding at any month end 119,100,000 70,900,000 107,900,000 Average amount outstanding (total of daily principal balances divided by days in year) 88,850,548 51,422,466 76,241,644 Weighted average interest rate (actual interest expense divided by average borrowings outstanding) 8.41% 6.88% 5.01% ===============================================================================
The Company has two five-year interest rate swap agreements which expire at various dates through 1997, aggregating $30,000,000 for the purpose of reducing the Company's interest rate risk on its borrowings under the revolving credit. Maximum rates of interest under the swap agreements are 8.77% and 10%. At December 31, 1995, the Company had elected to borrow $30,000,000 at six-month LIBOR. The differential to be paid or received is accrued as interest rates change and are recognized as an interest expense. The related amount payable to or receivable from counterparties is included in other liabilities or assets. The fair value of the swap agreements are not recognized in the financial statements. The Company may or may not elect to continue to match certain of its borrowings with interest rate swap agreements. Such decisions are principally based on the Company's policy to match its variable rate investments with comparable borrowings, but is also based on the general trend in interest rates at the applicable dates and the Company's perception of future volatility of interest rates. At December 31, 1995, the Company was at risk for rising interest rates because its variable interest rate debt exceeded its variable interest rate assets. The Company is exposed to a credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. However, the Company does not anticipate nonperformance by the counterparties. Interest paid amounted to $13,083,783, $9,256,551 and $10,409,852 for 1995, 1994 and 1993, respectively, which includes $706,318, $1,309,368 and $2,155,260, respectively, for the net cost of the swaps. 6. SENIOR NOTES AND OTHER LONG-TERM OBLIGATIONS The Company has $52,000,000 of Senior Notes with interest ranging from 7.16% to 8.24% and maturing in 1998, 2000 and 2003. These notes are collateralized by 15 real estate related investments in health care facilities. The following information relates to other long-term obligations: December 31 1995 1994 - ------------------------------------------------------------------ Notes payable related to industrial development bonds, collateralized by health care facilities--2 in 1995 and 3 in 1994, interest rates from 11.25% to 15%, maturing at various dates to 2002 $ 2,545,000 $ 3,620,000 Mortgage loans, collateralized by health care facilities--2 in 1995 and 1994, interest rates from 8.75% to 12%, maturing at various dates to 2005 1,514,639 1,752,790 - ------------------------------------------------------------------ TOTALS $ 4,059,639 $ 5,372,790 ================================================================== At December 31, 1995, the annual payments on these long-term obligations for the succeeding five years are as follows: Principal Interest Total ----------- ---------- ----------- 1996 $ 317,332 $4,453,791 $ 4,771,123 1997 665,764 4,401,306 5,067,070 1998 23,332,592 3,496,973 26,829,565 1999 203,326 2,619,681 2,823,007 2000 15,234,756 2,012,550 17,247,306 7. STOCK OPTION PLANS AND RETIREMENT ARRANGEMENTS The Company's 1995 Stock Incentive Plan authorized up to 600,000 shares of Common Stock to be issued at the discretion of the Board of Directors. The 1995 Plan replaced the 1985 Incentive Stock Option Plan which had previously authorized up to 450,000 shares of Common Stock to be issued at the discretion of the Board of Directors. There were 55,732 authorized shares which were unissued under the 1985 Plan when it expired in 1995. The options granted under the 1985 Plan continue to vest through 2005 and expire ten years from the date of grant. All future grants will be from the 1995 Plan under which officers and key salaried employees of the Company are eligible to participate. Such options expire ten years from the date of grant and one-fifth of all options granted become exercisable each year. The following summarizes the activity in the Plans: Year Ended December 31 1995 1994 - ----------------------------------------------------------- Number of shares under option at beginning of year 183,140 152,500 Options granted 316,268 51,000 Options exercised (14,140) (20,360) - ----------------------------------------------------------- Number of shares under option at end of year 485,268 183,140 =========================================================== At end of year: Shares exercisable 187,107 123,166 =========================================================== Shares available to be granted 388,000 160,000 =========================================================== At December 31, 1995, the option prices ranged from $15.1325 to $23.9375 per share. The option prices were equivalent to the market prices of the shares on the dates granted. Options exercised during 1995 and 1994 were at prices ranging from $11.9375 to $17.6875 per share. Effective December 1, 1995, the Company assumed First Toledo Advisory Company's (the Manager) 401-K Profit Sharing Plan covering all eligible employees. Under the Plan, eligible employees may make contributions, and the Company may make a profit sharing contribution. Company contributions to this Plan totaled $6,000 in 1995. 8. DISTRIBUTIONS In order to continue to qualify as a real estate investment trust for federal income tax purposes, 95% of taxable income (not including capital gains) must be distributed to shareholders. Real estate investment trusts which do not distribute a certain amount of current year taxable income in the current year are also subject to a 4% federal excise tax. The Company's excise tax expense was $326,000, $575,000 and $132,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Undistributed net income for federal income tax purposes amounted to $12,741,000 at December 31, 1995. The principal reasons for the difference between undistributed net income for federal income tax purposes and financial statement purposes are the use of the operating method of accounting for leases for federal income tax purposes, and the recording of settlement of management contract expense for reporting purposes. Cash distributions paid to shareholders, for federal income tax purposes, are as follows: Year Ended December 31 1995 1994 1993 - --------------------------------------------------------------- Per Share: Ordinary income $2.075 $ .72 $1.49 Capital gains 1.29 .44 - --------------------------------------------------------------- TOTALS $2.075 $2.01 $1.93 =============================================================== 9. COMMITMENTS AND CONTINGENCIES At December 31, 1995, the Company has outstanding commitments to provide financing for facilities in the approximate amount of $187,836,000. The Company also has commitments to provide working capital loans to related parties of approximately $354,000. The above commitments are generally on similar terms as existing financings of a like nature with rates of return to the Company based upon current market rates at the time of the commitment. The Company has entered into a number of agreements to purchase health care facilities, or the loans with respect thereto, in the event that the present owners default upon their obligations. In consideration for these agreements, the Company receives and recognizes fees annually related to these guarantees. Although the terms of these agreements vary, the purchase prices are equal to the amount of the outstanding obligations financing the facility. These agreements expire between the years 1997 and 2005. At December 31, 1995, obligations under these agreements for which the Company was contingently liable aggregated approximately $19,530,000, all of which were with related parties. The Company believes that it has the ability to obtain funds to meet these commitments. The Company also believes that such commitments represent no greater than normal risk. 10. MANAGEMENT AGREEMENT AND CERTAIN TRANSACTIONS WITH RELATED PARTIES Through November 30, 1995, the Company had a management agreement with the Manager. F. D. Wolfe and B. G. Thompson, two of the Company's nine directors, were officers and co-owners of the Manager. The Company accrued a fee to the Manager at a monthly rate of 1/10 of 1% of the Company's net assets, as defined in the Management Agreement. Further, the Manager was entitled to an annual incentive fee equal to 10% of the amount by which net profits exceed 10% of the monthly average net worth of the Company, as defined in the Management Agreement. On November 30, 1995, the Manager merged with and into the Company pursuant to a Revised Merger Agreement (the Merger). Consideration for this transaction totaled approximately $5,048,000 which was solely comprised of 282,407 shares of the Company's common stock. In addition, the Company acquired approximately $46,000 in net assets and incurred approximately $792,000 of related transaction expenses. The Merger was a tax-free reorganization. The consideration, plus related transaction expenses, were accounted for as a settlement of a management contract. Messrs. Wolfe and Thompson are also related to various entities: a) to which the Company has made mortgage loans and working capital loans yielding interest income (see Note 2); b) with which the Company has entered into agreements to purchase health care facilities, or the loans with respect thereto, upon default of obligations by their present owners which provides fee income of $383,100, $338,722 and $422,438 for 1995, 1994 and 1993, respectively; and c) with which the Company has entered into operating lease agreements (see Note 3). The Company recorded income from related parties as follows: 1995 1994 1993 - ------------------------------------------------------------------- Interest income $3,379,175 $3,220,092 $2,869,911 Loan and guaranty fees 419,172 377,658 469,362 Operating lease rents 112,561 272,307 Gain on exercise of options 100,029 - ------------------------------------------------------------------- TOTALS $3,798,347 $3,810,340 $3,611,580 =================================================================== In accordance with the By-Laws of the Company, such transactions were approved by a majority of the directors not affiliated with the transactions. 11. SHAREHOLDER RIGHTS PLAN Under the terms of a Shareholder Rights Plan approved by the Board of Directors in July 1994, a Preferred Share Right (Right) is attached to and automatically trades with each outstanding share of Health Care REIT, Inc. common stock. The Rights, which are redeemable, will become exercisable only in the event that any person or group becomes a holder of 15% or more of the Company's stock, or commences a tender or exchange offer which, if consummated, would result in that person or group owning at least 15% of the common stock. Once the Rights become exercisable, they entitle all other shareholders to purchase one one-thousandth of a share of a new series of junior participating preferred stock for an exercise price of $48.00. The Rights will expire on August 5, 2004 unless exchanged earlier or redeemed earlier by the Company for $.01 per Right at any time before public disclosure that a 15% position has been acquired. 12. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. Mortgage Loans--The fair value of all mortgage loans, except those matched with debt, is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Mortgage loans matched with debt are presumed to be at fair value. Working Capital and Construction Loans--The carrying amount is a reasonable estimate of fair value for working capital and construction loans because the interest earned on these instruments is variable. Cash and Cash Equivalents--The carrying amount approximates fair value because of the short maturity of these financial instruments. Investment Securities Available-for-Sale--The asset is recorded at its fair market value. Borrowings Under Line of Credit Arrangements and Related Items--The carrying amount of the line of credit approximates fair value because the borrowings are interest rate adjustable. The fair value of interest rate swaps is the estimated amount, taking into account the current interest rate, that the Company would receive or pay to terminate the swap agreements at the reporting date. Senior Notes and Industrial Development Bonds--The fair value of the senior notes payable and the industrial development bonds was estimated by discounting the future cash flow using the current borrowing rate available to the Company for similar debt. Mortgage Loans Payable--Mortgage loans payable is a reasonable estimate of fair value because they are matched with loans receivable. Commitments to Finance and Guarantees of Obligations--The fair value of the commitments to finance and guarantees of obligations are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, and the counterparties' credit standing. The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 1995 and 1994 are as follows:
December 31, 1995 December 31, 1994 - -------------------------------------------------------------------------------- Carrying Carrying Amount Fair Value Amount Fair Value - -------------------------------------------------------------------------------- Financial Assets: Mortgage loans $267,483,683 $270,148,000 $230,781,805 $225,306,000 Working capital and construction loans 24,515,039 24,515,039 24,141,906 24,141,906 Cash and cash equivalents 860,350 860,350 935,449 935,449 Investment securities available-for-sale 845,297 845,297 Financial Liabilities: Borrowings under line of credit arrange- ments 106,700,000 106,700,000 70,900,000 70,900,000 Senior notes payable 52,000,000 54,203,000 52,000,000 46,307,000 Industrial development bonds 2,545,000 3,054,000 3,620,000 4,343,000 Mortgage loans payable 1,514,639 1,514,639 1,752,790 1,752,790 Unrecognized Financial Instruments: Interest rate swap agreements 550,000 339,000 Commitments to finance 188,190,000 188,190,000 135,141,000 135,141,000 Guarantees of obliga- tions 19,530,000 19,530,000 20,175,000 20,175,000 ================================================================================
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a summary of the unaudited quarterly results of operations of the Company for the years ended December 31, 1995 and 1994:
Year Ended December 31, 1995 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ---------------------------------------------------- Gross Income $9,624,993 $ 9,677,526 $13,315,515 $11,977,893 Net Income 4,864,965 4,637,190 3,346,835 785,983 Net Income Per Share .42 .40 .28 .06 Year Ended December 31, 1994 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter ----------------------------------------------------- Gross Income $8,441,239 $12,730,715 $10,518,166 $11,041,911 Net Income 4,984,250 7,799,857 6,326,167 5,842,644 Net Income Per Share .43 .68 .55 .51
REPORT OF INDEPENDENT AUDITORS SHAREHOLDERS AND DIRECTORS HEALTH CARE REIT, INC. We have audited the accompanying consolidated balance sheets of Health Care REIT, Inc. as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Health Care REIT, Inc. at December 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. \S\ ERNST & YOUNG LLP -------------------- ERNST & YOUNG LLP Toledo, Ohio February 6, 1996 MARKET AND DIVIDEND INFORMATION The following table sets forth, for the periods indicated, the high and low prices of the Company's Common Stock on the New York Stock Exchange, as reported on the Composite Tapes, and dividends paid per share. There were 5,370 stockholders of record as of December 31, 1995. Sales Price High Low Dividends Paid 1995 - ---------------------------------------------------------------- First Quarter 22 3/8 19 7/8 $.515 Second Quarter 23 1/8 20 3/8 .52 Third Quarter 21 1/2 15 1/2 .52 Fourth Quarter 19 1/8 15 3/4 .52 ================================================================ 1994 - ---------------------------------------------------------------- First Quarter 25 3/8 22 1/2 $.495 Second Quarter 25 1/4 23 1/4 .50 Third Quarter 25 22 .505 Fourth Quarter 22 5/8 19 3/4 .51 INCOME TAX INFORMATION
1995 Tax Information - ----------------------------------------------------------------------------- Taxable Non-Taxable as Ordinary Taxable as Return Dividend Payment Income Capital Gains of Capital Totals - ----------------------------------------------------------------------------- February 20, 1995 $ .515 $.00 $.00 $ .515 May 19, 1995 .520 .00 .00 .520 August 21, 1995 .520 .00 .00 .520 November 20, 1995 .520 .00 .00 .520 - ----------------------------------------------------------------------------- $2.075 $.00 $.00 $2.075 ============================================================================= BOARD OF DIRECTORS COMMITTEES - ---------- 1. Audit Committee; 2. Executive Committee; 3. Compensation Committee; 4. Investment Committee; 5. Nominating Committee; 6. Planning Committee; 7. Special Committee [PHOTO of each Director with the Committees on which they serve, titles and companies appear above each of their names.] Bruce G. Thompson 2, 4, 6 Chairman and Chief Executive Officer Health Care REIT, Inc. Toledo, Ohio George L. Chapman 4, 6 President Health Care REIT, Inc. Toledo, Ohio Frederic D. Wolfe 2, 4, 6 Chairman First Toledo Corporation Toledo, Ohio Pier C. Borra 3, 4, 6, 7 Chairman, President and Chief Executive Officer Arbor Health Care Company Lima, Ohio George Chopivsky, Jr. 4, 5, 6 Chairman United Psychiatric Corporation Washington, D.C. Bruce Douglas 4, 6 Chairman of the Board The Douglas Company Toledo, Ohio Richard C. Glowacki 1, 2, 5, 6, 7 President Danberry Management Company and subsidiary companies Toledo, Ohio Richard A. Unverferth 1, 2, 3, 4, 5, 6, 7 Chairman Unverferth Manufacturing Company, Inc. Kalida, Ohio Chairman of the Board H.C.F., Inc. Kalida, Ohio Sharon M. Oster (picture not shown) 6 Professor of Management Yale School of Management, Yale University New Haven, Connecticut SHAREHOLDER INFORMATION Officers Transfer Agent - -------- -------------- Bruce G. Thompson Chemical Mellon Shareholder Chairman and Chief Services Executive Officer Stock Transfer Department P. O. Box 469 George L. Chapman Washington Bridge Station President New York, New York 10033 (800) 851-9677 Robert J. Pruger Chief Financial Dividend Reinvestment Agent Officer and Treasurer -------------------------- Chemical Bank Erin C. Ibele c/o Chemical Mellon Share- Vice President and holder Services Corporate Secretary P. O. Box 750 Pittsburgh, PA 15230 Raymond W. Braun (800) 851-9677 Vice President and Assistant General Annual Meeting Counsel -------------- The Annual Meeting of Stock- Kathleen S. Prephan holders is scheduled for Controller Tuesday, May 21, 1996 in Toledo, Ohio General Offices Form 10-K - --------------- --------- Health Care REIT, Inc. The Company's Form 10-K Annual One SeaGate, Suite 1950 Report, filed with the Securi- P. O. Box 1475 ties and Exchange Commission, Toledo, Ohio 43603-1475 is available at no charge upon (419) 247-2800 written request to the Corpor- (419) 247-2826 Fax ate Secretary. Legal Counsel Exchange Listing - ------------- ---------------- Shumaker, Loop & Kendrick New York Stock Exchange Toledo, Ohio Trading Symbol: HCN Independent Auditors Member - -------------------- ------ Ernst & Young LLP National Association of Real Toledo, Ohio Estate Investment Trusts, Inc. [BACK INSIDE COVER] - A picture of the company logo with company name and address.
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