UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the Quarterly period ended June 30, 2010
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o
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the transition period from
to
Commission File Number: 001-33549
Care Investment Trust Inc.
(Exact name of Registrant as specified in its charter)
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Maryland
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38-3754322
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(State or other jurisdiction of
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(IRS Employer
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incorporation or organization)
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Identification Number)
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505 Fifth Avenue, 6th Floor, New York, New York 10017
(Address of Registrants principal executive offices)
(212) 771-0505
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
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(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2
under the Securities Exchange Act of 1934.
Yes
o
No
þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practical date.
As of July 28, 2010, there were 20,235,924 shares, par value $0.001, of the registrants
common stock outstanding.
Part I Financial Information
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ITEM 1.
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Financial Statements
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Care Investment Trust Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands except share and per share data)
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June 30, 2010
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December 31,
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(Unaudited)
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2009
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Assets:
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Real Estate:
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Land
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$
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5,020
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$
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5,020
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Buildings and improvements
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101,000
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101,000
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Less: accumulated depreciation and amortization
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(5,998
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)
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(4,481
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Total real estate, net
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100,022
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101,539
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Cash and cash equivalents
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134,894
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122,512
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Investments in loans held at LOCOM
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9,584
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25,325
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Investments in partially-owned entities
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51,837
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56,078
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Accrued interest receivable
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56
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177
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Deferred financing costs, net of accumulated amortization of $1,187 and $1,122, respectively
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648
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713
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Identified intangible assets leases in place, net
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4,305
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4,471
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Other assets
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4,910
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4,617
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Total assets
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$
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306,256
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$
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315,432
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Liabilities and Stockholders Equity
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Liabilities:
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Mortgage notes payable
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$
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81,472
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$
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81,873
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Accounts payable and accrued expenses
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2,520
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2,245
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Accrued expenses payable to related party
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2,500
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544
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Obligation to issue operating partnership units
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3,158
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2,890
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Other liabilities
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525
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1,087
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Total liabilities
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90,175
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88,639
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Commitments and Contingencies (Note 12)
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Stockholders Equity:
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Common stock: $0.001 par value, 250,000,000 shares authorized, 21,290,158 and 21,159,647
shares issued, respectively and 20,230,152 and 20,158,894 shares outstanding, respectively
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21
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21
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Treasury stock (1,060,006 and 1,000,753 shares, respectively)
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(8,824
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)
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(8,334
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Additional paid-in capital
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302,039
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301,926
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Accumulated deficit
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(77,155
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(66,820
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Total Stockholders Equity
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216,081
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226,793
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Total Liabilities and Stockholders Equity
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$
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306,256
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$
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315,432
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See Notes to Condensed Consolidated Financial Statements.
3
Care Investment Trust Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(dollars in thousands except share and per share data)
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Three Months Ended
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Three Months Ended
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Six Months Ended
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Six Months Ended
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June 30,
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June 30,
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June 30,
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June 30,
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2010
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2009
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2010
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2009
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Revenue
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Rental revenue
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$
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3,187
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$
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3,170
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$
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6,401
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$
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6,342
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Income from investments in loans
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403
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1,820
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1,147
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4,654
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Other income
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69
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162
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Total revenue
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3,590
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5,059
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7,548
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11,158
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Expenses
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Management fee and buyout
payments to related party
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375
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507
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8,304
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1,152
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Marketing, general and
administrative (including
stock-based compensation of $49
and $190 and $113 and $120,
respectively)
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2,367
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3,031
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4,183
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5,305
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Depreciation and amortization
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841
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855
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1,683
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1,692
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Realized gain on sales and
repayment of loans
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(4
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(22
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Adjustment to valuation
allowance on loans held at
LOCOM
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(84
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(1,247
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(829
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(3,167
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Operating expenses
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3,499
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3,146
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13,337
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4,960
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Loss from investments in
partially-owned entities
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876
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1,269
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1,459
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2,210
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Net unrealized (gain)/loss on
derivative instruments
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(310
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(259
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268
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(1,525
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Interest income
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(31
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(15
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(79
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(18
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Interest expense including
amortization and write-off of
deferred financing costs
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1,458
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1,458
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2,895
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3,569
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Net (loss)/income
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$
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(1,902
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$
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(540
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$
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(10,332
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$
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1,962
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Net (loss)/income per share of
common stock
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Net (loss)/income, basic and
diluted
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$
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(0.09
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$
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(0.03
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$
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(0.51
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$
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0.10
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Basic and diluted weighted
average common shares
outstanding
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20,229,659
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20,052,583
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20,217,983
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20,041,683
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See Notes to Condensed Consolidated Financial Statements.
4
Care Investment Trust Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders Equity (Unaudited)
(dollars in thousands, except share data)
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Common Stock
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Treasury
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Additional
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Accumulated
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Shares
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$
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Stock
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Paid-in Capital
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Deficit
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Total
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Balance at December 31, 2009
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20,158,894
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$
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21
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$
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(8,334
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)
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$
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301,926
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$
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(66,820
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)
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$
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226,793
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Net loss
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(10,332
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(10,332
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Stock-based compensation fair value (1)
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116,877
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Stock-based compensation to directors for
services rendered
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13,634
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*
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*
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113
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113
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Treasury purchases(2)
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(59,253
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(490
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)
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(490
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)
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Dividends accrued on performance shares (3)
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(3
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(3
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Balance at June 30, 2010
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20,230,152
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$
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21
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$
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(8,824
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)
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$
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302,039
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$
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(77,155
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)
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$
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216,081
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*
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Less than $500
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(1)
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Shares vested January 28, 2010 for which compensation was recognized in prior years (see Note
10).
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(2)
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Shares purchased from employees of the Manager and its affiliates pursuant to the tax
withholding net settlement feature of Company equity incentive awards (see Note 10).
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(3)
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Amounts accrued based on performance share award targets.
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See Notes to Condensed Consolidated Financial Statements.
5
Care Investment Trust Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in thousands)
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For the Six
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For the Six
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Months
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Months
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Ended
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Ended
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June 30,
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June 30,
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2010
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2009
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Cash Flow From Operating Activities
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Net (loss)/income
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$
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(10,332
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)
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$
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1,962
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Adjustments to reconcile net (loss)/income to net cash provided by
operating activities:
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Increase in deferred rent receivable
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(1,139
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)
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(1,273
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Realized gain on sales and repayment of loans
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(4
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)
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(22
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)
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Loss from investments in partially-owned entities
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1,459
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2,210
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Distribution of income from partially-owned entities
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3,469
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2,901
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Amortization of loan premium paid on investments in loans
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545
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Amortization and write-off of deferred financing cost
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65
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625
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Amortization of deferred loan fees
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(15
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)
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(121
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)
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Stock-based non-employee compensation
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113
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270
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Depreciation and amortization on real estate, including intangible assets
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1,683
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1,732
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Unrealized loss/(gain) on derivative instruments
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268
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(1,525
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)
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Adjustment to valuation allowance on loans held at LOCOM
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(829
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)
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(3,167
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)
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Changes in operating assets and liabilities:
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Accrued interest receivable
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121
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488
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Other assets
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848
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(109
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)
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Accounts payable and accrued expenses
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275
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4,404
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Other liabilities including payable to related party
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1,394
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(2,685
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)
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Net cash (used in)/provided by operating activities
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(2,624
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)
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6,235
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Cash Flow From Investing Activities
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Sale of loans to Manager
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22,549
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Sale of loans to third party
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5,880
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Loan repayments
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10,707
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38,932
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Investments in partially-owned entities
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(687
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)
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(1,063
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)
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Net cash provided by investing activities
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15,900
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60,418
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Cash Flow From Financing Activities
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Principal payments under warehouse line of credit
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(37,781
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)
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Principal payments under mortgage notes payable
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(401
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)
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(35
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)
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Treasury stock purchases
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(490
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)
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Dividends paid
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(3
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)
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(6,886
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)
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Net cash used in financing activities
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(894
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)
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(44,702
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)
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Net increase in cash and cash equivalents
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12,382
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21,951
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Cash and cash equivalents, beginning of period
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122,512
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31,800
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Cash and cash equivalents, end of period
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$
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134,894
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|
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$
|
53,751
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|
|
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|
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Supplemental Disclosure of Cash Flow Information
Cash interest paid during the six months ended June 30, 2010 and 2009 is approximately $2.8
million and $2.9 million, respectively.
See Notes to Condensed Consolidated Financial Statements.
6
Care Investment Trust Inc. and Subsidiaries
Notes to
Condensed Consolidated Financial Statements (Unaudited)
June 30, 2010
Note 1
Organization
Care Investment Trust Inc. (together with its subsidiaries, the Company or Care unless
otherwise indicated or except where the context otherwise requires, we, us or our) is a real
estate investment trust (REIT) with a geographically diverse portfolio of senior housing and
healthcare-related assets in the United States. Care is externally managed and advised by CIT
Healthcare LLC (Manager). As of June 30, 2010, Cares portfolio of assets consisted of real
estate and mortgage related assets for senior housing facilities, skilled nursing facilities,
medical office properties and first mortgage liens on healthcare related assets. Our owned senior
housing facilities are leased, under triple-net leases, which require the tenants to pay all
property-related expenses.
Care elected to be taxed as a REIT under the Internal Revenue Code commencing with our taxable
year ended December 31, 2007. To maintain our tax status as a REIT, we are required to distribute
at least 90% of our REIT taxable income to our stockholders. At present, Care does not have any
taxable REIT subsidiaries (TRS), but in the normal course of business expects to form such
subsidiaries as necessary.
Note 2
Basis of Presentation and Significant Accounting Policies
Basis of Presentation
On December 10, 2009, our Board of Directors approved a plan of liquidation and recommended
that our shareholders approve the plan of liquidation. On January 28, 2010, our shareholders
approved the plan of liquidation. The Board of Directors reserved the right to continue to solicit
and entertain proposals from third parties to acquire all or substantially all of the Companys
outstanding common stock. Subsequent to our shareholders approval of the plan of liquidation, on
March 16, 2010, the Company entered into a purchase and sale agreement with Tiptree Financial
Partners, L.P. (Tiptree) providing for a combination of an equity investment by Tiptree in newly
issued common stock at $9.00 per share and a cash tender offer by the Company for up to all of
Cares issued and outstanding shares of common stock at the same price, provided that 10,300,000
shares are validly tendered (and not withdrawn) prior to the expiration date of the tender offer,
and the other conditions to the issuance and tender offer are satisfied or waived. On July 15,
2010, the Company commenced a tender offer to purchase up to 100% of its currently issued and
outstanding common stock at a price of $9.00 per share subject to a minimum subscription of
10,300,000 shares and certain other conditions. See Note 13 Tiptree Transaction. Since it is not
probable that the Company will liquidate, the Company has presented its financial statements on a
going concern basis.
The accompanying condensed consolidated financial statements are unaudited. In our opinion,
all adjustments (which include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows have been made. The condensed consolidated
balance sheet as of December 31, 2009 has been derived from the audited consolidated balance sheet
as of that date. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the United
States of America (GAAP) have been omitted in accordance with Article 10 of Regulation S-X and
the instructions to Form 10-Q. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K, as amended, for the year ended December 31, 2009, as filed with the Securities
and Exchange Commission (SEC). The results of operations for the three and six months ended June
30, 2010 are not necessarily indicative of the operating results for the full year.
The Company has no items of other comprehensive income, and accordingly, net income or loss is
equal to comprehensive income or loss for all periods presented.
Loans held at LOCOM
Investments in loans amounted to $9.6 million at June 30, 2010 as compared with $25.3 million
at December 31, 2009. We account for our investment in loans in accordance with Accounting
Standards Codification 948, which codified the Financial
7
Accounting Standards Boards (FASBs)
Accounting for Certain Mortgage Banking Activities
(ASC 948). Under ASC 948, loans expected to be held for the foreseeable future or to maturity
should be held at amortized cost, and all other loans should be held at the lower of cost or market
(LOCOM), measured on an individual basis.
Recently Issued Accounting Pronouncements
Accounting Standards Codification (ASC)
In June 2009, the FASB issued a pronouncement establishing the FASB Accounting Standards
Codification as the source of authoritative accounting principles recognized by the FASB to be
applied in the preparation of financial statements in conformity with GAAP. The standard explicitly
recognizes rules and interpretive releases of the SEC under federal securities laws as
authoritative GAAP for SEC registrants. This standard is effective for financial statements issued
for fiscal years and interim periods ending after September 15, 2009. The Company adopted this
standard in the third quarter of 2009.
Loans
In July 2010, the FASB issued ASU 2010-20, which amends ASC 3102 by requiring additional
information about the credit quality of an entitys financing receivables, including loans, and its
allowance for losses. New disclosures that relate to information as of the end of a reporting
period will be effective for the first interim or annual reporting periods ending on or after
December 15, 2010. The Company is evaluating whether or not the adoption of the standard will have
a material effect on its consolidated financial statements and will adopt it when it becomes
effective.
Note 3
Investments in Loans held at LOCOM
As of June 30, 2010 and December 31, 2009, our net investments in loans amounted to $9.6
million and $25.3 million, respectively. During the six months ended June 30, 2010, we received
$10.7 million in principal repayments as compared with $38.9 million received during the six months
ended June 30, 2009. The 2010 first quarter repayments include proceeds of approximately $10.0
million for the full settlement of a loan with one borrower and the 2009 second quarter repayments
include proceeds of approximately $36.9 million for the full repayment of loans with two borrowers.
Our mortgage loan investment at June 30, 2010 is a participation secured primarily by real estate
as well as pledges of ownership interests, direct liens and other security interests. This
investment is variable rate at June 30, 2010, had an effective yield of 4.65% at June 30, 2010, and
matures on February 1, 2011. At December 31, 2009 the investments in loans had a weighted average
spread of 6.76% over one month LIBOR and an average maturity of 1.0 year. The effective yield on
the portfolio for the year ended December 31, 2009, was 6.99%. One month LIBOR was 0.35% at June
30, 2010 and 0.23% at December 31, 2009.
June 30, 2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
|
Cost
|
|
|
Interest
|
|
|
Maturity
|
|
Property Type (a)
|
|
City
|
|
|
State
|
|
|
Basis
|
|
|
Rate
|
|
|
Date
|
|
SNF / Sr. Appts / ALF
|
|
Various
|
|
Texas / Louisiana
|
|
$
|
13,518
|
|
|
|
L+4.30
|
%
|
|
|
2/1/2011
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(3,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Held at LOCOM
|
|
|
|
|
|
|
|
|
|
$
|
9,584
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location
|
|
|
Cost
|
|
|
Interest
|
|
|
Maturity
|
|
Property Type (a)
|
|
City
|
|
|
State
|
|
|
Basis
|
|
|
Rate
|
|
|
Date
|
|
SNF/ALF (b)/(c)
|
|
Nacogdoches
|
|
Texas
|
|
$
|
9,338
|
|
|
|
L+3.15
|
%
|
|
|
10/02/11
|
|
SNF/Sr. Appts/ALF
|
|
Various
|
|
Texas/Louisiana
|
|
|
14,226
|
|
|
|
L+4.30
|
%
|
|
|
02/01/11
|
|
SNF (b)/(d)
|
|
Various
|
|
Michigan
|
|
|
10,178
|
|
|
|
L+7.00
|
%
|
|
|
02/19/10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in loans, gross
|
|
|
|
|
|
|
|
|
|
$
|
33,742
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(8,417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held at LOCOM
|
|
|
|
|
|
|
|
|
|
$
|
25,325
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
SNF refers to skilled nursing facilities; ALF refers to assisted living facilities; and Sr.
Appts refers to senior living apartments.
|
8
|
|
|
(b)
|
|
The mortgages are subject to various interest rate floors ranging from 6.00% to 11.5%.
|
|
(c)
|
|
Loan sold to a third party in March 2010 for approximately $6.1 million of cash proceeds
before selling costs.
|
|
(d)
|
|
Loan repaid at maturity in February 2010 for approximately $10.0 million.
|
For the six months ended June 30, 2010, the Company received proceeds of $10.7 million related
to the repayment of balances related to mortgage loans and received proceeds of $5.9 million, net
of $0.2 million of selling costs, related to the sale to a third party of one mortgage loan. See
Note 9 for a roll forward of the investment in loans held at fair value from December 31, 2009 to
June 30, 2010.
Note 4
Investments in Partially-Owned Entities
For the three and six months ended June 30, 2010, the net loss in our equity interest related
to the Cambridge Holdings, Inc. (Cambridge) portfolio amounted to approximately $1.2 million and
$2.1 million, respectively. This included $2.3 million and $4.6 million, respectively, attributable
to our share of the depreciation and amortization expense associated with the Cambridge properties.
During the first six months of 2010, the Company invested approximately $687,000 in tenant
improvements related to the Cambridge properties. The Companys investment in the Cambridge
entities was $45.0 million at June 30, 2010 and $49.3 million at December 31, 2009. We received
approximately $2.9 million of distributions during the first six months of 2010 related to our
share of distributions for the 2009 fourth quarter and the 2010 first quarter.
For the three and six months ended June 30, 2010, we recognized approximately $0.3 million and
$0.6 million, respectively, in equity income from our interest in Senior Management Concepts, LLC
(SMC) and received approximately $0.3 million and $0.6 million, respectively, in distributions.
Our agreements with SMC require that SMC pay a preferred return to the Company. In accordance with
ASC 970-323, the payment of the preferred return to Care represents income to us that will be
recorded whether SMC has net income or net loss for any period.
Note 5 Summarized Financial InformationPartially-Owned Entities
The Cambridge portfolio contains approximately 767,000 square feet and is located in major
metropolitan markets in Texas (8) and Louisiana (1). The properties are situated on leading medical
center campuses or adjacent to prominent acute care hospitals or ambulatory surgery centers.
Affiliates of Cambridge will act as managing general partners of the entities that own the
properties, as well as manage and lease these facilities.
Four of the eight Cambridge legal entities had a 2009 pre-tax loss which was greater than 20%
of the Companys 2009 loss. Summarized financial data for those four entities individually and
aggregated for the remaining Cambridge entities with greater than 10% and less than 10% of the
Companys 2009 loss as of and for the three and six months ended June 30, 2010 and June 30, 2009 is
as follows (amounts in millions):
June 30, 2010
Balance Sheet Detail
Dollars in millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entites with <20% Significance
|
|
|
|
|
|
|
|
|
|
|
Nassau
|
|
|
Walnut Hill
|
|
|
|
|
|
|
>10% of Cares
|
|
|
<10% of Cares
|
|
|
|
|
|
|
Plano
|
|
|
Bay
|
|
|
(Dallas)
|
|
|
Allen
|
|
|
2009 Loss (A)
|
|
|
2009 Loss (B)
|
|
|
Combined
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
$
|
56.7
|
|
|
$
|
20.7
|
|
|
$
|
35.5
|
|
|
$
|
13.1
|
|
|
$
|
52.5
|
|
|
$
|
20.7
|
|
|
$
|
199.2
|
|
Other Assets
|
|
|
5.0
|
|
|
|
2.0
|
|
|
|
3.1
|
|
|
|
1.5
|
|
|
|
8.3
|
|
|
|
1.8
|
|
|
|
21.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
61.7
|
|
|
$
|
22.7
|
|
|
$
|
38.6
|
|
|
$
|
14.6
|
|
|
$
|
60.8
|
|
|
$
|
22.5
|
|
|
$
|
220.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Debt
|
|
$
|
55.0
|
|
|
$
|
14.0
|
|
|
$
|
28.5
|
|
|
$
|
12.1
|
|
|
$
|
50.2
|
|
|
$
|
18.6
|
|
|
$
|
178.4
|
|
Other Liabilities
|
|
|
3.7
|
|
|
|
0.9
|
|
|
|
1.7
|
|
|
|
1.1
|
|
|
|
4.0
|
|
|
|
0.3
|
|
|
|
11.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
58.7
|
|
|
$
|
14.9
|
|
|
$
|
30.2
|
|
|
$
|
13.2
|
|
|
$
|
54.2
|
|
|
$
|
18.9
|
|
|
$
|
190.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
3.0
|
|
|
$
|
7.8
|
|
|
$
|
8.4
|
|
|
$
|
1.4
|
|
|
$
|
6.6
|
|
|
$
|
3.6
|
|
|
$
|
30.8
|
|
9
June 30, 2009
Balance Sheet Detail
Dollars in millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entites with <20% Significance
|
|
|
|
|
|
|
|
|
|
|
Nassau
|
|
|
Walnut Hill
|
|
|
|
|
|
|
>10% of Cares
|
|
|
<10% of Cares
|
|
|
|
|
|
|
Plano
|
|
|
Bay
|
|
|
(Dallas)
|
|
|
Allen
|
|
|
2009 Loss (A)
|
|
|
2009 Loss (B)
|
|
|
Combined
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate
|
|
$
|
59.5
|
|
|
$
|
19.7
|
|
|
$
|
37.2
|
|
|
$
|
13.9
|
|
|
$
|
54.8
|
|
|
$
|
21.6
|
|
|
$
|
206.7
|
|
Other Assets
|
|
|
5.4
|
|
|
|
2.4
|
|
|
|
3.4
|
|
|
|
1.5
|
|
|
|
10.3
|
|
|
|
2.3
|
|
|
|
25.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
64.9
|
|
|
$
|
22.1
|
|
|
$
|
40.6
|
|
|
$
|
15.4
|
|
|
$
|
65.1
|
|
|
$
|
23.9
|
|
|
$
|
232.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Debt
|
|
$
|
55.0
|
|
|
$
|
14.0
|
|
|
$
|
28.5
|
|
|
$
|
12.1
|
|
|
$
|
50.5
|
|
|
$
|
18.6
|
|
|
$
|
178.7
|
|
Other Liabilities
|
|
|
3.3
|
|
|
|
0.7
|
|
|
|
1.6
|
|
|
|
1.0
|
|
|
|
5.1
|
|
|
|
0.3
|
|
|
|
12.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
$
|
58.3
|
|
|
$
|
14.7
|
|
|
$
|
30.1
|
|
|
$
|
13.1
|
|
|
$
|
55.6
|
|
|
$
|
19.0
|
|
|
$
|
190.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
6.6
|
|
|
$
|
7.4
|
|
|
$
|
10.5
|
|
|
$
|
2.3
|
|
|
$
|
9.5
|
|
|
$
|
5.0
|
|
|
$
|
41.3
|
|
Income Statement Detail for the 6 Months ended June 30, 2010
Dollars in millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entites with <20% Significance
|
|
|
|
|
|
|
|
|
|
|
Nassau
|
|
|
Walnut Hill
|
|
|
|
|
|
|
>10% of Cares
|
|
|
<10% of Cares
|
|
|
|
|
|
|
Plano
|
|
|
Bay
|
|
|
(Dallas)
|
|
|
Allen
|
|
|
2009 Loss (A)
|
|
|
2009 Loss (B)
|
|
|
Combined
|
|
|
|
|
Rental Revenue
|
|
$
|
2.4
|
|
|
$
|
1.4
|
|
|
$
|
1.1
|
|
|
$
|
0.6
|
|
|
$
|
2.9
|
|
|
$
|
0.9
|
|
|
$
|
9.3
|
|
Operating Expense Reimbursements
|
|
|
0.9
|
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
0.6
|
|
|
|
0.2
|
|
|
|
2.7
|
|
Other Income
|
|
|
0.1
|
|
|
|
0.0
|
|
|
|
0.5
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
3.4
|
|
|
$
|
1.6
|
|
|
$
|
2.1
|
|
|
$
|
0.9
|
|
|
$
|
3.6
|
|
|
$
|
1.2
|
|
|
$
|
12.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
$
|
0.9
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
|
$
|
0.4
|
|
|
$
|
1.4
|
|
|
$
|
0.2
|
|
|
$
|
4.1
|
|
Depreciation and Amortization
|
|
|
1.5
|
|
|
|
0.7
|
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
1.5
|
|
|
|
0.4
|
|
|
|
5.4
|
|
Total Expenses
|
|
|
4.2
|
|
|
|
1.7
|
|
|
|
2.4
|
|
|
|
1.3
|
|
|
|
4.4
|
|
|
|
1.2
|
|
|
|
15.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(0.8
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
|
|
|
$
|
(2.4
|
)
|
Income Statement Detail for the 6 Months ended June 30, 2009
Dollars in millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entites with <20% Significance
|
|
|
|
|
|
|
|
|
|
|
Nassau
|
|
|
Walnut Hill
|
|
|
|
|
|
|
>10% of Cares
|
|
|
<10% of Cares
|
|
|
|
|
|
|
Plano
|
|
|
Bay
|
|
|
(Dallas)
|
|
|
Allen
|
|
|
2009 Loss (A)
|
|
|
2009 Loss (B)
|
|
|
Combined
|
|
|
|
|
Rental Revenue
|
|
$
|
2.4
|
|
|
$
|
1.0
|
|
|
$
|
1.1
|
|
|
$
|
0.6
|
|
|
$
|
2.9
|
|
|
$
|
0.8
|
|
|
$
|
8.8
|
|
Operating Expense Reimbursements
|
|
|
0.9
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
0.2
|
|
|
|
2.7
|
|
Other Income
|
|
|
0.1
|
|
|
|
|
|
|
|
0.5
|
|
|
|
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
3.4
|
|
|
$
|
1.1
|
|
|
$
|
2.1
|
|
|
$
|
0.9
|
|
|
$
|
3.8
|
|
|
$
|
1.2
|
|
|
$
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
$
|
1.0
|
|
|
$
|
0.6
|
|
|
$
|
0.6
|
|
|
$
|
0.4
|
|
|
$
|
1.4
|
|
|
$
|
0.2
|
|
|
$
|
4.2
|
|
Depreciation and Amortization
|
|
|
1.5
|
|
|
|
0.7
|
|
|
|
1.0
|
|
|
|
0.4
|
|
|
|
1.5
|
|
|
|
0.5
|
|
|
|
5.6
|
|
Total Expenses
|
|
|
4.4
|
|
|
|
1.7
|
|
|
|
2.5
|
|
|
|
1.3
|
|
|
|
4.4
|
|
|
|
1.3
|
|
|
|
15.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1.0
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
(0.6
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
(3.1
|
)
|
Income Statement Detail for the 3 Months ended June 30, 2010
Dollars in millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entites with <20% Significance
|
|
|
|
|
|
|
|
|
|
|
Nassau
|
|
|
Walnut Hill
|
|
|
|
|
|
|
>10% of Cares
|
|
|
<10% of Cares
|
|
|
|
|
|
|
Plano
|
|
|
Bay
|
|
|
(Dallas)
|
|
|
Allen
|
|
|
2009 Loss (A)
|
|
|
2009 Loss (B)
|
|
|
Combined
|
|
|
|
|
Rental Revenue
|
|
$
|
1.2
|
|
|
$
|
0.7
|
|
|
$
|
0.5
|
|
|
$
|
0.3
|
|
|
$
|
1.4
|
|
|
$
|
0.4
|
|
|
$
|
4.5
|
|
Operating Expense Reimbursements
|
|
|
0.5
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
1.5
|
|
Other Income
|
|
|
0.0
|
|
|
|
0.1
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
1.7
|
|
|
$
|
0.9
|
|
|
$
|
1.0
|
|
|
$
|
0.5
|
|
|
$
|
1.7
|
|
|
$
|
0.6
|
|
|
$
|
6.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
$
|
0.6
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
$
|
0.7
|
|
|
$
|
0.1
|
|
|
$
|
2.2
|
|
Depreciation and Amortization
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
0.8
|
|
|
|
0.2
|
|
|
|
2.7
|
|
Total Expenses
|
|
|
2.3
|
|
|
|
0.9
|
|
|
|
1.2
|
|
|
|
0.7
|
|
|
|
2.2
|
|
|
|
0.6
|
|
|
|
7.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(0.6
|
)
|
|
$
|
|
|
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(0.4
|
)
|
|
$
|
|
|
|
$
|
(1.3
|
)
|
10
Income Statement Detail for the 3 Months ended June 30, 2009
Dollars in millions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Entites with <20% Significance
|
|
|
|
|
|
|
|
|
|
|
Nassau
|
|
|
Walnut Hill
|
|
|
|
|
|
|
>10% of Cares
|
|
|
<10% of Cares
|
|
|
|
|
|
|
Plano
|
|
|
Bay
|
|
|
(Dallas)
|
|
|
Allen
|
|
|
2009 Loss (A)
|
|
|
2009 Loss (B)
|
|
|
Combined
|
|
|
|
|
Rental Revenue
|
|
$
|
1.2
|
|
|
$
|
0.5
|
|
|
$
|
0.5
|
|
|
$
|
0.3
|
|
|
$
|
1.5
|
|
|
$
|
0.4
|
|
|
$
|
4.4
|
|
Operating Expense Reimbursements
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
0.2
|
|
|
|
0.1
|
|
|
|
0.4
|
|
|
|
0.1
|
|
|
|
1.3
|
|
Other Income
|
|
|
|
|
|
|
|
|
|
|
0.3
|
|
|
|
|
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
1.6
|
|
|
$
|
0.6
|
|
|
$
|
1.0
|
|
|
$
|
0.4
|
|
|
$
|
2.0
|
|
|
$
|
0.6
|
|
|
$
|
6.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
$
|
0.5
|
|
|
$
|
0.3
|
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
$
|
0.7
|
|
|
$
|
0.1
|
|
|
$
|
2.1
|
|
Depreciation and Amortization
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
0.5
|
|
|
|
0.2
|
|
|
|
0.7
|
|
|
|
0.3
|
|
|
|
2.8
|
|
Total Expenses
|
|
|
2.2
|
|
|
|
0.9
|
|
|
|
1.3
|
|
|
|
0.6
|
|
|
|
2.2
|
|
|
|
0.6
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(0.6
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
(0.2
|
)
|
|
$
|
|
|
|
$
|
(1.6
|
)
|
|
|
|
(A)
|
|
Aggregated amounts for the following three entities whose 2009 significance is between
10% and 20% to Care: Howell, Gorbutt and Westgate.
|
|
(B)
|
|
Amounts for one entity, Southlake, whose 2009 significance is less than 10% to Care.
|
Summarized financial information as of and for the three and six months ended June 30, 2010
and June 30, 2009, for the Companys unconsolidated interest in SMC is as follows (amounts in
millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and
|
|
|
As of and
|
|
|
|
For the
|
|
|
For the
|
|
|
for the
|
|
|
for the
|
|
|
|
Three
|
|
|
Three
|
|
|
Six
|
|
|
Six
|
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30,
|
|
|
June
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2010
|
|
|
30, 2009
|
|
|
2010
|
|
|
2009
|
|
Assets
|
|
|
|
|
|
|
|
|
|
$
|
56.0
|
|
|
$
|
58.1
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
53.8
|
|
|
|
54.2
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
2.2
|
|
|
|
3.9
|
|
Revenue
|
|
$
|
1.3
|
|
|
$
|
1.2
|
|
|
|
2.7
|
|
|
|
2.5
|
|
Expenses
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
2.8
|
|
|
|
2.8
|
|
Net loss
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
Note 6 Warehouse Line of Credit
On October 1, 2007, Care entered into a master repurchase agreement with Column Financial,
Inc. (Column), an affiliate of Credit Suisse, one of the underwriters of Cares initial public
offering in June 2007. This type of lending arrangement is often referred to as a warehouse
facility. The master repurchase agreement provided an initial line of credit of up to $300 million.
On March 6, 2009, the Board authorized the repayment in full of the $37.8 million outstanding
balance on the Column warehouse line of credit, and the
line was paid off on March 9, 2009. In connection with the payoff, the Company wrote off
approximately $0.5 million of deferred charges.
Note 7 Borrowings under Mortgage Notes Payable
On June 26, 2008, in connection with the acquisition of the twelve properties from Bickford
Senior Living Group LLC (Bickford), the Company entered into a mortgage loan with Red Mortgage
Capital, Inc. for $74.6 million. The terms of the mortgage require interest-only payments at a
fixed interest rate of 6.845% for the first twelve months. Commencing on the first anniversary and
every month thereafter, the mortgage loan requires a fixed monthly payment of $0.5 million for both
principal and interest, which we began paying in July 2009, until the maturity in July 2015 when
the then outstanding balance of $69.6 million is due and payable. The mortgage loan is
collateralized by the properties.
11
On September 30, 2008 with the acquisition of the two additional properties from Bickford, the
Company entered into an additional mortgage loan with Red Mortgage Capital, Inc. for $7.6 million.
The terms of the mortgage require payments based on a fixed interest rate of 7.17%. Commencing on
the first of November 2008 and every month thereafter, the mortgage loan requires a fixed monthly
payment of approximately $52,000 for both principal and interest until the maturity in July 2015
when the then outstanding balance of $7.1 million is due and payable. The mortgage loan is
collateralized by the properties.
Note 8 Related Party Transactions
Management Agreement
In connection with our initial public offering in 2007, we entered into a Management Agreement
with our Manager (the Management Agreement), which describes the services to be provided by our
Manager and its compensation for those services. Under the Management Agreement, our Manager,
subject to the oversight of the Board of Directors of Care, is required to manage the day-to-day
activities of the Company, for which the Manager receives a base management fee and is eligible for
an incentive fee. The Manager is also entitled to charge the Company for certain expenses incurred
on behalf of Care.
On September 30, 2008, we amended our Management Agreement (Amendment 1). Pursuant to the
terms of the amendment, the Base Management Fee (as defined in the Management Agreement) payable to
the Manager under the Management Agreement was reduced to a monthly amount equal to 1/12 of 0.875%
of the Companys equity (as defined in the Management Agreement). In addition, pursuant to the
terms of the Amendment, the Incentive Fee (as defined in the Management Agreement) to the Manager
pursuant to the Management Agreement was eliminated and the Termination Fee (as defined in the
Management Agreement) to the Manager upon the termination or non-renewal of the Management
Agreement shall be equal to the average annual Base Management Fee as earned by the Manager during
the immediately preceding two years multiplied by three, but in no event shall the Termination Fee
be less than $15.4 million.
On January 15, 2010, the Company entered into an Amended and Restated Management Agreement,
dated as of January 15, 2010 (Amendment 2) which amended and restated the Management Agreement,
dated June 27, 2007, as amended by Amendment No. 1 to the Management Agreement. Amendment 2 became
effective upon approval by the Companys stockholders of the plan of liquidation on January 28,
2010. Amendment 2 shall continue in effect, unless earlier terminated in accordance with the terms
thereof, until December 31, 2011. Amendment 2 reduced the base management fee to a monthly amount
equal to $125,000 beginning February 1, 2010 which could decrease subject to additional provisions.
Pursuant to the terms of Amendment 2, the Company shall pay the Manager a buyout payment of
$7.5 million, which replaces the $15.4 million Termination Fee and is payable in three installments
of $2.5 million. The first two installments were each paid when due on January 28, 2010 and April
1, 2010. The third and final payment is payable on either June 30, 2011 or the effective date of
the termination of the agreement if earlier. As of June 30, 2010, we have accrued $2.5 million for
the final payment. Pursuant to the terms of the agreement with Tiptree, the Management Agreement
will be terminated upon closing of the transaction with Tiptree. Pursuant to the terms of Amendment
2, the Manager is eligible for an incentive fee of $1.5 million under certain conditions where cash
distributed or distributable to stockholders equals or exceeds $9.25 per share. See Note 12.
We are also responsible for reimbursing the Manager for its pro rata portion of certain
expenses detailed in the initial agreement and subsequent amendments, such as rent, utilities,
office furniture, equipment, and overhead, among others, required for our operations. Transactions
with our Manager during the six months ended June 30, 2010 and June 30, 2009 included:
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Our expense recognition of $7.5 million for the six months ended June 30, 2010 for the
buyout payment obligation, of which $2.5 million is recorded as a liability as of June 30,
2010.
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Our expense recognition of $804,000 and $1,152,000 for the six months ended June 30, 2010
and June 30, 2009 for the base management fee.
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On February 3, 2009, the Company closed on the sale of a loan to our Manager for proceeds
of $22.5 million.
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12
Care does not have any employees. Our officers are employees of our Manager and its
affiliates. Care does not have any separate facilities and is completely reliant on our Manager,
which has significant discretion as to the implementation of our operating policies and strategies.
We depend on the diligence, skill and network of business contacts of our Manager. Our executive
officers and the other employees of our Manager and its affiliates evaluate, service and monitor
our investments.
Note 9 Fair Value of Financial Instruments
The Company has established processes for determining fair values and fair value is based on
quoted market prices, where available. If listed prices or quotes are not available, then fair
value is based upon internally developed models that primarily use inputs that are market-based or
independently-sourced market parameters.
A financial instruments categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement. The three levels of
valuation hierarchy are defined as follows:
Level 1
inputs to the valuation methodology are quoted prices (unadjusted) for identical
assets or liabilities in active markets.
Level 2
inputs to the valuation methodology include quoted prices for similar assets and
liabilities in active markets, and inputs that are observable for the asset or liability, either
directly or indirectly, for substantially the full term of the financial instrument.
Level 3
inputs to the valuation methodology are unobservable and significant to the fair value
measurement.
The following describes the valuation methodologies used for the Companys financial
instruments measured at fair value, as well as the general classification of such instruments
pursuant to the valuation hierarchy.
Investment in loans held at LOCOM
the fair value of the portfolio is based primarily on
appraisals from third parties. Investing in healthcare-related commercial mortgage debt is
transacted through an over-the-counter market with minimal pricing transparency. Loans are
infrequently traded and market quotes are not widely available and disseminated. The Company also
gives consideration to its knowledge of the current marketplace and the credit worthiness of the
borrowers in determining the fair value of the portfolio. At June 30, 2010, we valued our one loan
using an internal valuation model and considering available market data.
Obligation to issue operating partnership units
the fair value of our obligation to issue
operating partnership units is based on an internally developed valuation model, as quoted market
prices are not available nor are quoted prices for similar liabilities. Our model involves the use
of management estimates as well as some Level 2 inputs. The variables in the model include the
estimated release dates of the shares out of escrow, based on the expected performance of the
underlying properties, a discount factor of approximately 14.4%, and the market price and expected
quarterly dividend of Cares common shares at each measurement date.
The following table presents the Companys financial instruments carried at fair value on the
condensed consolidated balance sheets as of June 30, 2010 and December 31, 2009:
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Fair Value at June 30, 2010
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(dollars in millions)
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Level 1
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Level 2
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Level 3
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Total
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Assets
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Investment in loans held at LOCOM
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$
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$
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$
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9.6
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$
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9.6
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Liabilities
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Obligation to issue operating partnership units
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$
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$
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$
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3.2
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$
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3.2
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Fair Value at December 31, 2009
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(dollars in millions)
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Level 1
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Level 2
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Level 3
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Total
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Assets
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Investment in loans held at LOCOM
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$
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$
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16.1
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$
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9.2
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$
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25.3
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|
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Liabilities
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|
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|
|
|
|
|
|
|
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Obligation to issue operating partnership units
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$
|
|
|
|
$
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|
|
|
$
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2.9
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$
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2.9
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13
The tables below present reconciliations for all assets and liabilities measured at fair value
on a recurring basis using significant Level 3 inputs during the six months ended June 30, 2010.
Level 3 instruments presented in the tables include a liability to issue operating partnership
units, which are carried at fair value. The Level 3 instruments were valued using internally
developed valuation models that, in managements judgment, reflect the assumptions a marketplace
participant would use at June 30, 2010:
14
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Level 3
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Instruments
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Fair Value Measurements
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Obligation to
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Investment
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issue
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in Loans Held
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Partnership
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At Lower of Cost
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(dollars in millions)
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Units
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or Market
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Balance, December 31, 2009
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$
|
(2.9
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)
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$
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25.3
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Repayments of loans
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(10.7
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)
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Sales of loan to a third party
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|
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(5.9
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)
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Total unrealized (loss)/gain included in income statement
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(0.3
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)
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|
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0.9
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|
|
|
|
|
|
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Balance, June 30, 2010
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$
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(3.2
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)
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$
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9.6
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|
|
|
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|
|
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Net change in unrealized loss/(gain) from obligations owed/investments held at June 30, 2010
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$
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(0.3
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)
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$
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0.9
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In addition we are required to disclose fair value information about financial instruments,
whether or not recognized in the financial statements, for which it is practical to estimate that
value. In cases where quoted market prices are not available, fair value is based upon the
application of discount rates to estimated future cash flows based on market yields or other
appropriate valuation methodologies. Considerable judgment is necessary to interpret market data
and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts we could realize on disposition of the financial instruments. The use of
different market assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
In addition to the amounts reflected in the financial statements at fair value as noted above,
cash equivalents, accrued interest receivable, and accounts payable and accrued expenses reasonably
approximate their fair values due to the short maturities of these items. Management believes that
the remaining balance of mortgage notes payable of approximately $74.0 million and $7.5 million
that were incurred from the acquisitions of the Bickford properties on June 26, 2008 and September
30, 2008, respectively, have a fair value of approximately $84.6 million as of June 30, 2010.
The Company is exposed to certain risks relating to its ongoing business. The primary risk
managed by using derivative instruments is interest rate risk. Interest rate caps are entered into
to manage interest rate risk associated with the Companys borrowings. The company has no interest
rate caps as of June 30, 2010.
We are required to recognize all derivative instruments as either assets or liabilities at
fair value in the statement of financial position. The Company has not designated any of its
derivatives as hedging instruments. The Companys financial statements included the following fair
value amounts and gains and losses on derivative instruments (dollars in thousands):
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June 30,
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December 31,
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2010
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2009
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Balance
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Balance
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Balance
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Derivatives not designated as
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Sheet
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Fair
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Sheet
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Fair
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hedging instruments
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Location
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Value
|
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|
Location
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Value
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Operating Partnership Units
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Obligation to issue operating partnership units
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$
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(3,158
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)
|
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Obligation to issue operating partnership units
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$
|
(2,890
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)
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|
Amount of (Gain)/Loss
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|
|
Recognized in Income on
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Derivative
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|
|
Location of (Gain)/Loss
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Six Months Ended
|
|
Derivatives not designated as
|
|
Recognized in Income on
|
|
June 30,
|
|
|
June 30,
|
|
hedging instruments
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|
Derivative
|
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2010
|
|
|
2009
|
|
Operating Partnership Units
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|
Unrealized loss/(gain) on derivative instruments
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|
$
|
268
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|
|
$
|
(1,527
|
)
|
Interest Rate Caps
|
|
Unrealized loss/(gain) on derivative instruments
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|
|
|
|
|
|
2
|
|
|
|
|
|
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|
|
|
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Total
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|
$
|
268
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|
|
$
|
(1,525
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)
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15
Note 10
Stockholders Equity
Our authorized capital stock consists of 100,000,000 shares of preferred stock, $0.001 par
value and 250,000,000 shares of common stock, $0.001 par value. As of June 30, 2010, no shares of
preferred stock were issued and outstanding and 21,290,158 shares and 20,230,152 shares of common
stock were issued and outstanding, respectively.
On May 12, 2008, the Committee approved two new long-term equity incentive programs under the
Equity Plan. The first program is an annual performance-based RSU award program (the RSU Award
Program). All RSUs granted under the RSU Award Program vest over four years. The second program is
a performance share plan (the Performance Share Plan) which consisted of a three-year award
program and a special transaction award program.
Certain employees of the Manager and its affiliates were granted Restricted Stock Units
(RSUs) and performance share awards pursuant to the Equity Plan from inception of the Company
through November 5, 2009. Under the terms of each of these awards, shareholder approval of the plan
of liquidation accelerated the vesting of the awards on that day; a total of 116,877 shares vested
on January 28, 2010 upon shareholder approval of the plan of liquidation. The employees of the
Manager and its affiliates were required to pay withholding and other taxes upon vesting of their
awards and elected to sell their eligible unrestricted shares to the Company for up to the amount
of the aggregate tax they were required to pay. Treasury purchases of 59,253 shares were made by
the Company from employees of the Manager and its affiliates on January 28, 2010. Compensation
expense related to these shares was recognized in 2009 and prior periods. Approximately $0.8
million of the expense recorded in 2009 related to accelerated vesting in the aggregate. All of the
shares issued under our Equity Plan are considered non-employee awards. Accordingly, the expense
for each period is determined based on the fair value of each share or unit awarded over the
required performance period.
On December 10, 2009, the Company granted special transaction performance share awards to plan
participants for an aggregate amount of 15,000 shares at target levels and an aggregate maximum of
30,000 shares. On February 23, 2009, the terms of the awards were modified such that the awards are
now triggered upon the execution, during 2010, of one or more of the following transactions that
results in a return of liquidity to the Companys stockholders within the parameters expressed in
the special transaction performance share awards agreement: (i) a merger or other business
combination resulting in the disposition of all of the issued and outstanding equity securities of
the Company, (ii) a tender offer made directly to the Companys stockholders either by the Company
or a third party for at least a majority of the Companys issued and outstanding common stock, or
(iii) the declaration of aggregate distributions by the Companys Board equal to or exceeding $8.00
per share.
As of June 30, 2010, 243,882 shares remain available for future issuances under the Equity
Plan. Under the purchase and sale agreement with Tiptree, Care is prohibited from making grants
until the earlier of the termination of the purchase and sale agreement or the Closing Date (as
defined in the purchase and sale agreement that was filed as Exhibit 10.1 to Cares Form 8-K on
March 16, 2010).
Shares Issued to Directors for Board Fees:
On January 4, 2010, April 8, 2010 and July 2, 2010, 8,030, 5,604 and 5,772 shares of common
stock with an aggregate fair value of approximately $162,500 were granted to our independent
directors as part of their annual retainer. Each independent director receives an annual base
retainer of $100,000, payable quarterly in arrears, of which 50% is paid in cash and 50% in common
stock of Care. Shares granted as part of the annual retainer vest immediately and are included in
general and administrative expense.
Note 11
(Loss)/Income per Share (in thousands, except share and per share data)
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|
|
|
|
|
|
|
|
Three Months
|
|
|
Three Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
(Loss) per share, basic and diluted Numerator
|
|
$
|
(0.09
|
)
|
|
$
|
(0.03
|
)
|
Net (loss)
|
|
$
|
(1,902
|
)
|
|
$
|
(540
|
)
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and diluted
|
|
|
20,229,659
|
|
|
|
20,052,583
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
Six Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
June 30, 2010
|
|
|
June 30, 2009
|
|
(Loss)/income per share, basic and diluted Numerator
|
|
$
|
(0.51
|
)
|
|
$
|
0.10
|
|
Net (loss)/income
|
|
$
|
(10,332
|
)
|
|
$
|
1,962
|
|
Denominator
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic and diluted
|
|
|
20,217,893
|
|
|
|
20,041,683
|
|
Note 12
Commitments and Contingencies
As of June 30, 2010 Care was obligated to provide approximately $1.2 million in tenant
improvements in 2010 related to our purchase of the Cambridge properties.
Under our Management Agreement, our Manager, subject to the oversight of the Companys board
of directors, is required to manage the day-to-day activities of Care, for which the Manager
receives a base management fee. The Management Agreement was amended on January 15, 2010, effective
on January 28, 2010 (see Note 8).
Under the amended terms, the agreement expires on December 31, 2011. The base management fee
is payable monthly in arrears in an amount equal to 1/12 of 0.875% of the Companys stockholders
GAAP equity for January 2010 and a monthly amount equal to $125,000 beginning February 1, 2010
which could decrease subject to additional provisions. In addition, under the amended terms, the
Company shall pay the Manager a buyout payment of $7.5 million, payable in three installments of
$2.5 million. The first two installments were each paid when due on January 28, 2010 and April 1,
2010. The third and final payment is payable on either June 30, 2011 or the effective date of the
termination of the Management Agreement if earlier. As of June 30, 2010, we have accrued $2.5
million for the final payment. Pursuant to the terms of the agreement with Tiptree, the Management
Agreement will be terminated upon closing of the transaction with Tiptree.
In connection with the Companys evaluation of strategic alternatives, the Company engaged the
services of a financial advisor. In connection with the completion of certain events by the
Company, including a liquidation or change in control transaction, the Company will be obligated to
pay its financial advisor a transaction fee of $4.0 million. As of June 30, 2010, the Company has
accrued $0.5 million of its contingent payment obligation to its financial advisor.
On September 18, 2007, a class action complaint for violations of federal securities laws was
filed in the United States District Court, Southern District of New York alleging that the
Registration Statement relating to the initial public offering of shares of our common stock, filed
on June 21, 2007, failed to disclose that certain of the assets in the contributed portfolio were
materially impaired and overvalued and that we were experiencing increasing difficulty in securing
our warehouse financing lines. On January 18, 2008, the court entered an order appointing colead
plaintiffs and co-lead counsel. On February 19, 2008, the co-lead plaintiffs filed an amended
complaint citing additional evidentiary support for the allegations in the complaint. We believe
the complaint and allegations are without merit and intend to defend against the complaint and
allegations vigorously. We filed a motion to dismiss the complaint on April 22, 2008. The
plaintiffs filed an opposition to our motion to dismiss on July 9, 2008, to which we filed our
reply on September 10, 2008. On March 4, 2009, the court denied our motion to dismiss. Care filed
its answer on April 15, 2009. At a conference held on May 15, 2009, the Court ordered the parties
to make a joint submission (the Joint Statement) setting forth: (i) the specific statements that
Plaintiffs claim are false and misleading; (ii) the facts on which Plaintiffs rely as showing each
alleged misstatement was false and misleading; and (iii) the facts on which Defendants rely as
showing those statements were true. The parties filed the Joint Statement on June 3, 2009. On July
31, 2009, the parties entered into a stipulation that narrowed the scope of the proceeding to the
single issue of the warehouse financing disclosure in the Registration Statement. Fact discovery
closed on April 23, 2010.
The Court ordered the parties to file an abbreviated joint pre-trial statement on June 9,
2010, and scheduled a pre-trial conference for June 11, 2010. At the conclusion of the pre-trial
conference, the Court asked the parties to agree on a summary judgment briefing schedule, which the
parties did. Defendants filed their motion for summary judgment on July 9, 2010. Plaintiffs are
to file their opposition on August 20, 2010 and Defendants are to file their reply on September 17,
2010. The outcome of this matter cannot currently be predicted. To date, Care has incurred
approximately $1.0 million to defend against this complaint and any incremental costs to defend
will be paid by Cares insurer. No provision for loss related to this matter has been accrued at
June 30, 2010.
On November 25, 2009, we filed a lawsuit in the U.S. District Court for the Northern District
of Texas against Mr. Jean-Claude Saada and 13 of his companies (the Saada Parties), seeking
declaratory judgments that (i) we have the right to engage in a business
17
combination transaction involving our company or a sale of our wholly owned subsidiary that
serves as the general partner of the partnership that holds the direct investment in the portfolio
without the approval of the Saada Parties, (ii) the contractual right of the Saada Parties to put
their interests in the Cambridge medical office building portfolio has expired and (iii) the
operating partnership units held by the Saada Parties do not entitle them to receive any special
cash distributions made to our stockholders. We also brought affirmative claims for tortious
interference by the Saada Parties with a prospective contract and for their breach of the implied
covenant of good faith and fair dealing.
On January 27, 2010, the Saada Parties answered our complaint, and simultaneously filed
Counterclaims that named our subsidiaries ERC Sub LLC and ERC Sub, L.P., external manager CIT
Healthcare LLC, and board chairman Flint D. Besecker, as additional third-party defendants. The
Counterclaims seek four declaratory judgments construing certain contracts among the parties that
are largely the mirror image of our declaratory judgment claims. In addition, the Counterclaims
also seek monetary damages for purported breaches of fiduciary duty and the duty of good faith and
fair dealing, as well as fraudulent inducement, against us and the third-party defendants jointly
and severally.
The Counterclaims further request indemnification by ERC Sub, L.P., pursuant to a contract
between the parties, and the imposition of a constructive trust on our current assets to be
disposed as part of any future liquidation of Care, including all proceeds from those assets.
Although the Counterclaims do not itemize their asserted damages, they assign these damages a value
of $100 million or more. In addition, the Saada Parties filed a motion to dismiss our tortious
interference and breach of the implied covenant of good faith and fair dealing claims on January
27, 2010. In response to the Counterclaims, we filed on March 5, 2010, an omnibus motion to dismiss
all of the Counterclaims.
On March 22, 2010, we received a letter from Cambridge Holdings, which asserted that the
transactions with Tiptree were in violation of our agreements with the Saada Parties.
The Saada Parties filed their opposition to our omnibus motion to dismiss on March 26, 2010,
and we filed our response on April 9, 2010.
On April 14, 2010, the Saada Parties motion to dismiss was denied and our motion to dismiss
was also denied.
On April 27, 2010, we filed an answer to the Saada Parties third-party complaint. We continue
to believe that the arguments advanced by Cambridge Holdings lack merit. See Risk Factors Risks
Related to the Tiptree Transaction. On May 28, 2010, Cambridge Holdings filed a motion for leave
to amend its previously-asserted counterclaims and third-party complaint to include a new claim for
breach of contract against Care. This proposed new claim asserts that Cambridge Holdings and Care
agreed, in October 2009, upon a sale of ERC Sub, L.P.s 85% limited partnership interest in the
Cambridge properties back to Cambridge Holdings for $20 million in cash plus certain other
arrangements involving the cancellation of partnership units and existing escrow accounts. The
proposed new claim further asserts that Care reneged on this purported agreement after having
previously agreed to all of its material terms, thus breaching the agreement. Further, the
proposed new claim seeks specific performance of the purported contract. Care denies that any
agreement of the sort alleged by Cambridge Holdings was ever reached, and Care also believes that
the proposed new claim suffers from several deficiencies. Care filed its opposition on June 18,
2010 and Cambridge Holdings replied on July 1, 2010. In the meantime, on June 21, 2010, ERC Sub
sought leave to amend its counterclaims to assert a breach of contract action against Cambridge
Holdings. Cambridge Holdings did not oppose ERC Subs motion. To date, the Court has not acted on
either of these pending motions for leave to amend. The outcome of this matter cannot currently be
predicted. To date, Care has incurred approximately $0.6 million to defend against this complaint.
No provision for loss related to this matter has been accrued at June 30, 2010.
Care is not presently involved in any other material litigation nor, to our knowledge, is any
material litigation threatened against us or our investments, other than routine litigation arising
in the ordinary course of business. Management believes the costs, if any, incurred by us related
to litigation will not materially affect our financial position, operating results or liquidity.
Note 13
Tiptree Transaction
On March 16, 2010, we executed a definitive agreement with Tiptree for the sale of a
significant equity stake in the Company through a series of related transactions. Under the
agreement, the parties have agreed to sell a quantity of shares to the Buyer immediately following
the completion of a cash tender offer by us for Cares outstanding common shares. The quantity of
shares to be
18
sold to the Buyer will depend upon the quantity of shares tendered, but is expected to
represent at least 53.4% of the shares of the Companys common stock on a fully diluted basis after
completion of the Companys cash tender offer. The agreement is subject to customary closing
conditions and our ability to proceed with the cash tender offer.
In connection with the sale transaction contemplated by the agreement, on July 15, 2010, the
Company commenced a tender offer to purchase up to 100% of its currently issued and outstanding
common stock at a price of $9.00 per share subject to a minimum subscription of 10,300,000 shares
and certain other conditions. Upon the satisfaction of certain closing conditions, Tiptree is
required to deliver $60,430,932 into escrow, which will be used, in part, by Care to fund the
purchase of tendered shares. Also, in connection with the transaction, it is anticipated that the
resulting company will be advised by an affiliate of Tiptree.
A special meeting of the Companys stockholders will be held on August 13, 2010, to seek
shareholder approval to issue the shares to Tiptree and abandon the plan of liquidation that was
approved by our stockholders on January 28, 2010 in favor of pursuing the transactions contemplated
in the agreement with Tiptree. If our stockholders do not approve the abandonment of the plan of
liquidation or if the contemplated transactions are not completed, we may pursue the plan of
liquidation as approved by the stockholders on January 28 or we may consider other strategic
alternatives to liquidation. In the event that a liquidation of the Company is pursued, material
adjustments to these going concern financial statements may need to be recorded to present
liquidation basis financial statements. Material adjustments which may be required for liquidation
basis accounting primarily relate to reflecting assets and liabilities at their net realizable
value and costs to be incurred to carry out the plan of liquidation.
19
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following should be read in conjunction with the consolidated financial statements and
notes included herein. This Managements Discussion and Analysis of Financial Condition and
Results of Operations contains certain non-GAAP financial measures. See Non-GAAP Financial
Measures and supporting schedules for reconciliation of our non-GAAP financial measures to the
comparable GAAP financial measures.
Overview
Care Investment Trust Inc. (all references to Care, the Company, we, us, and our
means Care Investment Trust Inc. and its subsidiaries) is an externally-managed real estate
investment trust (REIT) formed principally to invest in healthcare-related real estate and
mortgage debt. Care was incorporated in Maryland in March 2007, and we completed our initial public
offering on June 22, 2007. We were originally positioned to make mortgage investments in
healthcare-related properties, and to opportunistically invest in real estate through utilizing the
origination platform of our external manager, CIT Healthcare LLC (CIT Healthcare or our
Manager). We acquired our initial portfolio of mortgage loan assets from the Manager in exchange
for cash proceeds from our initial public offering and common stock. In response to dislocations in
the overall credit market, and in particular the securitized financing markets, in late 2007, we
redirected our focus to place greater emphasis on high quality healthcare-related real estate
equity investments.
Our Manager is a healthcare finance company that offers a full-spectrum of financing solutions
and related strategic advisory services to companies across the healthcare industry throughout the
United States. Our Manager was formed in 2004 and is a wholly-owned subsidiary of CIT Group Inc.
(CIT), a leading middle market global commercial finance company that provides financial and
advisory services.
As of June 30, 2010, we maintained a diversified investment portfolio of $161.4 million which
was comprised of $51.8 million in real estate owned through joint ventures (32%), $100.0 million in
wholly-owned real estate (62%) and $9.6 million in investments in loans held at the lower of cost
or market (6%). Our current investments in healthcare real estate include medical office buildings
and assisted and independent living and Alzheimer facilities. Our loan portfolio is composed of
first mortgages on skilled nursing facilities, assisted living facilities and senior apartments.
As a REIT, we generally will not be subject to federal taxes on our REIT taxable income to the
extent that we distribute our taxable income to stockholders and maintain our status as a qualified
REIT.
On March 16, 2010, we announced the entry into a definitive purchase and sale agreement with
Tiptree Financial Partners, L.P. under which we have agreed to sell newly issued common stock to
Tiptree at $9.00 per share which is expected to result in a change in control of our company (the
Transaction). Additionally, pursuant to the purchase and sale agreement and in conjunction with
the sale of newly issued common stock to Tiptree, we have launched a cash tender offer to all of
our stockholders to purchase up to all of our common stock at $9.00 per share. The discussion of
the terms of the purchase and sale agreement above is qualified in its entirety by the terms of the
agreement itself, which has been filed as Exhibit 10.1 to the Companys Form 8-K filed on March 16,
2010.
There can be no assurance that the Tiptree transaction or the associated tender offer will be
consummated in a timely fashion, under the same terms or at all.
Critical Accounting Policies
A summary of our critical accounting policies is included in our Annual Report on Form 10-K,
as amended, for the year ended December 31, 2009 in Managements Discussion and Analysis of
Financial Condition and Results of Operations. There have been no significant changes to those
policies during the three month period ended June 30, 2010.
20
Results of Operations
Results for the three months ended June 30, 2010
Revenue
During the three month period ended June 30, 2010, we recognized $3.2 million of rental
revenue on the twelve properties acquired in the Bickford transaction in June 2008 and the
acquisition of two additional properties from Bickford in September 2008, as compared with $3.2
million during the comparable three month period ended June 30, 2009.
We earned investment income on our portfolio of mortgage investments of $0.4 million for the
three month period ended June 30, 2010 as compared with $1.8 million for the comparable three month
period ended June 30, 2009, a decrease of approximately $1.4 million. Our investment in one
mortgage loan as of June 30, 2010 is floating based upon LIBOR. The decrease in income related to
this portfolio is primarily attributable to a lower average outstanding principal loan balance
during the three month period ended June 30, 2010 as compared with the comparable period during
2009, which was the result of loan prepayments and loan sales that occurred during the second half
of 2009 and the first quarter of 2010 in connection with the companys decision to shift our
operating strategy to place greater emphasis on acquiring high quality healthcare-related real
estate investments and away from mortgage investments. The decrease in income related to our
mortgage portfolio is also the result of the decrease in average LIBOR during the quarter ended
June 30, 2010 as compared with the quarter ended June 30, 2009. The average one month LIBOR during
the three month period ended June 30, 2010 was 0.31% as compared with 0.37% for the three-month
period ended June 30, 2009. Our mortgage loan investment is variable rate, and at June 30, 2010,
had an effective yield of 4.65% and matures on February 1, 2011. The effective yield on the
portfolio at June 30, 2009 was 5.95%.
Expenses
For the three months ended June 30, 2010, we recorded management fee expense payable to our
Manager under our Management Agreement of $0.4 million as compared with $0.5 million for the three
month period ended June 30, 2009, a decrease of approximately $0.1 million. The decrease in
management fee expense is primarily attributable to the reduction in the monthly base management
fee in connection with the Amended and Restated Management Agreement with our Manager. The Amended
and Restated Management Agreement also reduced the fee payable to our Manager upon termination of
the Management Agreement from $15.4 million to a buyout payment of $7.5 million, payable in three
equal amounts of $2.5 million. We recorded buyout payment expense of $7.5 million for the six month
period ended June 30, 2010 in connection with the obligation which includes the $5.0 million paid
in the first half of 2010 and the final $2.5 million payment to be made on the earlier of June 30,
2011 or upon termination of the agreement.
Marketing, general and administrative expenses were $2.4 million for the quarter ended June
30, 2010 and consist of fees for professional services, insurance, general overhead costs for the
Company and real estate taxes on our facilities, as compared with $3.0 million for the three-month
period ended June 30, 2009, a decrease of approximately $0.6 million. The decrease is primarily the
result of a reduction in strategic legal services. We recognized expense of approximately $50,000
for the three month period ended June 30, 2010 related to stock-based compensation as compared with
an expense of $0.2 million for the three month period ended June 30, 2009, an increase of
approximately $150,000, which includes expenses of approximately $50,000 and $75,000 related to
shares of our common stock earned by our independent directors as part of their compensation for
the three month periods ended June 30, 2010 and 2009, respectively. The decrease in stock-based
compensation to our directors was the result of fewer directors
serving on our Board of
Directors. Each independent director is paid a base retainer of $100,000 annually, which is
payable 50% in cash and 50% in stock. Payments are made quarterly in arrears. Shares of our
common stock issued to our independent directors as part of their annual compensation vest
immediately and are expensed by us accordingly.
The management fees, expense reimbursements, and the relationship between our Manager and us
are discussed further in Note 8.
21
Loss from investments in partially-owned entities
For the three month period ended June 30, 2010, net loss from partially-owned entities
amounted to $0.9 million as compared with a loss of $1.3 million for the three month period ended
June 30, 2009, a decrease of approximately $0.4 million. The change is the result of an
improvement in the performance of the Cambridge properties, including returns on investments in
Cambridge tenant renovations and build out. Our equity in the non-cash operating loss of the
Cambridge properties for the quarter ended June 30, 2010 was $1.2 million, which included
$2.3 million attributable to our share of the depreciation and amortization expenses associated
with the Cambridge properties, which was partially offset by our share of equity income in the SMC
properties of $0.3 million.
Unrealized gain on derivatives
We recognized a $0.3 million unrealized gain on the fair value of our obligation to issue
partnership units related to the Cambridge transaction for the three month period ended June 30,
2010 as compared with an unrealized gain of $0.3 million for the three month period ended June 30,
2009.
Interest Expense
We incurred interest expense of $1.5 million for the three month period ended June 30,
2010 as compared with interest expense of $1.5 million for the three month period ended June 30,
2009. Interest expense for the quarter was related to the interest payable on the mortgage debt
which was incurred for the acquisition of 14 facilities from Bickford.
Results for the six months ended June 30, 2010
Revenue
During the six months ended June 30, 2010, we recognized $6.4 million of rental revenue on the
twelve properties acquired in the Bickford transaction on June 26, 2008 and the acquisition of two
additional properties from Bickford on September 30, 2008, as compared with $6.3 million during the
comparable period ended June 30, 2009, an increase of approximately $0.1 million.
We earned investment income on our portfolio of mortgage investments of approximately
$1.1 million for the six month period ended June 30, 2010 as compared to $4.7 million for the
comparable period in 2009. Our mortgage portfolio is floating rate based upon LIBOR. The decrease
in income related to this portfolio is primarily attributable to a lower average outstanding
principal loan balance during the six month period ended June 30, 2010 as compared with the
comparable period during 2009, which was the result of loan prepayments and loan sales that
occurred during the second half of 2009 and the first quarter of 2010 in connection with the
companys decision to shift our operating strategy to place greater emphasis on acquiring high
quality healthcare-related real estate investments and away from mortgage investments. The
decrease in income related to our mortgage portfolio is also the result of the decrease in average
LIBOR during the six months ended June 30, 2010 versus the comparable period ended June 30, 2009.
The average one month LIBOR during the six month period ended June 30, 2010 was 0.27% as compared
with 0.42% for the six month period ended June 30, 2009.
Expenses
For the six months ended June 30, 2010, we recorded management fee expense payable to our
Manager under our management agreement of approximately $0.8 million consisting of the base
management fee payable to our Manager under our management agreement as compared to $1.2 million
for the six month period ended June 30, 2009. The decrease in management fee expense is primarily
attributable to the reduction in the monthly base management fee in connection with the January
2010 amendment to the Management Agreement with our manager, which also reduced the fee payable to
our Manager upon termination of the Management Agreement from $15.4 million to a buyout payment of
$7.5 million, payable in three equal amounts of $2.5 million as specified in the Amended and
Restated Management Agreement. We recorded a buyout payment expense of $7.5 million for the three
month period ended March 31, 2010 in connection with the obligation which includes $2.5 million
paid in the 2010 first quarter, $2.5 million which was paid in the 2010 second quarter, and the
final $2.5 million payment to be made on the earlier of June 30, 2011 or upon termination of the
agreement.
Marketing, general and administrative expenses were approximately $4.2 million for the
six months ended June 30, 2010 and consist of fees for professional services, insurance, general
overhead costs for the Company and real estate taxes on our facilities as compared with $5.3
million for the comparative six month period ended June 30, 2009, a decrease of $1.1 million. The
decrease is
22
primarily the result of a reduction in strategic legal and advisory services. We recognized
$0.1 million in expense for the six month period ended June 30, 2010 related to stock-based
compensation as compared with an expense of $0.1 million for the six month period ended June 30,
2009, which includes expenses of $0.2 million and $0.3 million related to shares of our common
stock earned by our independent directors as part of their compensation for the six month periods
ended June 30, 2010 and 2009, respectively. The decrease in stock-based compensation to our
directors was the result of fewer directors serving on our Board of Directors. Each independent
director is paid a base retainer of $100,000 annually, which is payable 50% in cash and 50% in
stock. Payments are made quarterly in arrears. Shares of our common stock issued to our
independent directors as part of their annual compensation vest immediately and are expensed by us
accordingly.
The management fees, expense reimbursements, and the relationship between our Manager and
us are discussed further in Note 8.
Loss from investments in partially-owned entities
For the six months ended June 30, 2010, net loss from partially-owned entities amounted
to $1.5 million as compared to a net loss of $2.2 million for the six months ended June 30, 2009.
Our equity in the non-cash operating loss of the Cambridge properties for the six month period
ended June 30, 2010 was $2.1 million, which included $4.6 million attributable to our share of the
depreciation and amortization expenses associated with the Cambridge properties, partially offset
by our share of equity income in SMC of $0.6 million.
Unrealized gains on derivatives
We recognized a $0.3 million unrealized loss on the fair value of our obligation to issue
partnership units related to the Cambridge transaction during the six month period ended June 30,
2010 as compared to an unrealized gain of $1.5 million for the comparable period ended June 30,
2009.
Interest Expense
We incurred interest expense of $2.9 million for the six month period ended June 30, 2010
as compared with interest expense of $3.6 million for the six month period ended June 30, 2009, a
decrease of approximately $0.7 million. Interest expense for the six months ended June 30, 2010
was related to the interest payable on the mortgage debt which was incurred for the acquisition of
14 facilities from Bickford. The decrease in interest expense is attributable to a $0.6 million
write off of deferred financing charges during the three month period ended March 31, 2009 and $0.1
million related to the borrowings under our terminated warehouse line of credit during the three
month period ended March 31, 2009.
Cash Flows
Cash and cash equivalents were $134.9 million at June 30, 2010 as compared with $53.8
million at June 30, 2009, an increase of approximately $81.1 million. Cash during the first six
months of 2010 was generated from $15.9 million in proceeds from our investing activities, offset
by $2.6 million used for operating activities and $0.9 million used for financing activities during
the period.
Net cash used in operating activities for the six months ended June 30, 2010 amounted to
$2.6 million as compared with $6.2 million provided by operating activities for the six months
ended June 30, 2009, a decrease of approximately $8.8 million. Net loss before adjustments was
$10.3 million. Equity in the operating results of, and distributions from, investments in
partially-owned entities added $4.9 million. Non-cash charges for straight-line effects of lease
revenue, gains on sales of loans, adjustment to our valuation allowance on loans at LOCOM,
amortization of deferred loan fees, amortization and write-off of deferred financing costs, stock
based compensation, unrealized loss on derivative instruments, and depreciation and amortization
provided $0.1 million. The net change in operating assets and liabilities provided $2.6 million
and consisted of a decrease in accrued interest receivable and other assets of $1.0 million, offset
by an increase in accounts payable and accrued expenses of $0.3 million and a $1.4 million increase
in other liabilities including amounts due to a related party.
Net cash provided by investing activities for the six months ended June 30, 2010 was
$15.9 million as compared with $60.4 million for the six months ended June 30, 2009, a decrease of
approximately $44.5 million. The decrease is primarily attributable to the sale of a loan to a
third party for $5.9 million and loan repayments received of $10.7 million during the first six
months of 2010, as compared with the sale of a loan to our Manager for $22.5 million and loan
repayments received of $38.9 million during the comparable period in 2009.
23
Net cash used in financing activities for the six months ended June 30, 2010 was $0.9
million as compared with net cash used in financing activities of $44.7 million for the six months
ended June 30, 2009, a decrease of $43.8 million. The decrease is primarily attributable to the
repayment of $37.8 million and subsequent termination of our warehouse line of credit and payment
of dividends totaling $6.9 million during the six month period ended June 30, 2009.
Liquidity and Capital Resources
Liquidity is a measurement of our ability to meet potential cash requirements, including
ongoing commitments to repay borrowings, fund and maintain loans and other investments, pay
dividends and other general business needs. Our primary sources of liquidity are rental income
from our real estate properties, distributions from our joint ventures, net interest income earned
on our portfolio of mortgage loans and interest income earned from our available cash balances. We
also obtain liquidity from repayments of principal by our borrowers in connection with our loans.
As of June 30, 2010, the Company had $134.9 million in cash and cash equivalents.
Historically, we relied on borrowings under a warehouse line of credit along with a Mortgage
Purchase Agreement (MPA) with our Manager to fund our investments. In October 2007, we obtained
a warehouse line of credit from Column Financial, an affiliate of Credit Suisse, under which we
borrowed funds collateralized by the mortgage loans in our portfolio. In March 2009, we repaid
these borrowings in full with cash on hand. In September 2008, we entered into an MPA with our
Manager in order to secure a potential additional source of liquidity. Pursuant to the MPA, we had
the right, subject to the conditions of the MPA, to cause the Manager to purchase our mortgage
loans at their then-current fair market value, as determined by a third party appraiser. In
January 2010, upon the effective date of the amended and restated management agreement with our
Manager, the MPA was terminated and all outstanding notices of our intent to sell additional loans
to our Manager were rescinded.
To maintain our status as a REIT under the Code, we must distribute annually at least 90% of
our REIT taxable income. These distribution requirements limit our ability to retain earnings and
thereby replenish or increase capital for operations.
Capitalization
As of June 30, 2010, we had 20,230,152 shares of common stock outstanding, plus 1,060,006
shares held in treasury.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk includes risks that arise from changes in interest rates, commodity prices, equity
prices and other market changes that affect market sensitive instruments. In pursuing our business
plan, we expect that the primary market risks to which we will be exposed are real estate and
interest rate risks.
Real Estate Risk
The value of owned real estate, commercial mortgage assets and net operating income
derived from such properties are subject to volatility and may be affected adversely by a number of
factors, including, but not limited to, national, regional and local economic conditions which may
be adversely affected by industry slowdowns and other factors, local real estate conditions (such
as an oversupply of retail, industrial, office or other commercial space), changes or continued
weakness in specific industry segments, construction quality, age and design, demographic factors,
retroactive changes to building or similar codes, and increases in operating expenses (such as
energy costs). In the event net operating income decreases, or the value of property held for sale
decreases, a borrower may have difficulty paying our rent or repaying our loans, which could result
in losses to us. Even when a propertys net operating income is sufficient to cover the propertys
debt service, at the time an investment is made, there can be no assurance that this will continue
in the future.
The current turmoil in the residential mortgage market may continue to have an effect on the
commercial mortgage market and real estate industry in general.
Interest Rate Risk
Interest rate risk is highly sensitive to many factors, including the availability of
liquidity, governmental monetary and tax policies, domestic and international economic and
political considerations and other factors beyond our control.
24
Our operating results will depend in large part on differences between the income from assets
in our real estate and mortgage loan portfolio and our borrowing costs. At present, our portfolio
of variable rate mortgage loans is funded by our equity as restrictive conditions in the
securitized debt markets have not enabled us to leverage the portfolio as we originally intended.
Accordingly, the income we earn on these loans is subject to variability in interest rates. At
current investment levels, changes in one month LIBOR at the magnitudes listed would have the
following estimated effect on our annual income from investments in loans (one month LIBOR was
0.35% at June 30, 2010):
|
|
|
|
|
|
Increase / (decrease) in
|
|
|
income
|
|
|
from investments in loans
|
Increase / (decrease) in one-month LIBOR
|
|
(dollars in thousands)
|
(20) basis points
|
|
$(27
|
)
|
(10) basis points
|
|
(14
|
)
|
Base interest rate
|
|
0
|
|
+100 basis points
|
|
135
|
|
+200 basis points
|
|
270
|
|
In the event of a significant rising interest rate environment and/or economic downturn,
delinquencies and defaults could increase and result in credit losses to us, which could adversely
affect our liquidity and operating results. Further, such delinquencies or defaults could have an
adverse effect on the spreads between interest-earning assets and interest-bearing liabilities.
Our funding strategy involves utilizing asset-specific debt to finance our real estate
investments. Currently, the availability of liquidity is constrained due to investor concerns over
dislocations in the debt markets, hedge fund losses, the large volume of unsuccessful leveraged
loan syndications and related impact on the overall credit markets. These concerns have materially
impacted liquidity in the debt markets, making financing terms for borrowers less attractive. We
cannot foresee when credit markets may stabilize and liquidity becomes more readily available.
Non-GAAP Financial Measures
Funds from Operations
Funds From Operations, or FFO, which is a non-GAAP financial measure, is a widely recognized
measure of REIT performance. We compute FFO in accordance with standards established by the
National Association of Real Estate Investment Trusts, or NAREIT, which may not be comparable to
FFO reported by other REITs that do not compute FFO in accordance with the NAREIT definition, or
that interpret the NAREIT definition differently than we do.
The revised White Paper on FFO, approved by the Board of Governors of NAREIT in April 2002
defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of properties, plus real estate related depreciation and
amortization and after adjustments for unconsolidated partnerships and joint ventures.
Adjusted Funds from Operations
Adjusted Funds From Operations, or AFFO, is a non-GAAP financial measure. We calculate AFFO as
net income (loss) (computed in accordance with GAAP), excluding gains (losses) from debt
restructuring and gains (losses) from sales of property, plus the expenses associated with
depreciation and amortization on real estate assets, non-cash equity compensation expenses, the
effects of straight lining lease revenue, excess cash distributions from the Companys equity
method investments and one-time events pursuant to changes in GAAP and other non-cash charges.
Proportionate adjustments for unconsolidated partnerships and joint ventures will also be taken
when calculating the Companys AFFO.
We believe that FFO and AFFO provide additional measures of our core operating performance by
eliminating the impact of certain non-cash expenses and facilitating a comparison of our financial
results to those of other comparable REITs with fewer or no non-cash charges and comparison of our
own operating results from period to period. The Company uses FFO and AFFO in this way, and also
uses AFFO as one performance metric in the Companys executive compensation program. The Company
also believes that
25
its investors also use FFO and AFFO to evaluate and compare the performance of the Company and
its peers, and as such, the Company believes that the disclosure of FFO and AFFO is useful to (and
expected of) its investors.
However, the Company cautions that neither FFO nor AFFO represent cash generated from
operating activities in accordance with GAAP and they should not be considered as an alternative to
net income (determined in accordance with GAAP), or an indication of our cash flow from operating
activities (determined in accordance with GAAP), a measure of our liquidity, or an indication of
funds available to fund our cash needs, including our ability to make cash distributions. In
addition, our methodology for calculating FFO and / or AFFO may differ from the methodologies
employed by other REITs to calculate the same or similar supplemental performance measures, and
accordingly, our reported FFO and / or AFFO may not be comparable to the FFO and AFFO reported by
other REITs.
FFO and AFFO for the three and six months ended June 30, 2010 were as follows (in thousands,
except share and per share data):
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
|
|
June 30, 2010
|
|
|
|
FFO
|
|
|
AFFO
|
|
Net (Loss)
|
|
$
|
(1,902
|
)
|
|
$
|
(1,902
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Depreciation and amortization from partially-owned entities
|
|
|
2,280
|
|
|
|
2,280
|
|
Depreciation and amortization on owned properties
|
|
|
841
|
|
|
|
841
|
|
Adjustment to valuation allowance for loans carried at LOCOM
|
|
|
|
|
|
|
(84
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
49
|
|
Straight-line effect of lease revenue
|
|
|
|
|
|
|
(569
|
)
|
Excess cash distributions from the Companys equity method investments
|
|
|
|
|
|
|
179
|
|
Gain on loans sold
|
|
|
|
|
|
|
|
|
Obligation to issue OP Units
|
|
|
|
|
|
|
(310
|
)
|
|
|
|
|
|
|
|
Funds From Operations and Adjusted Funds From Operations
|
|
$
|
1,219
|
|
|
$
|
484
|
|
FFO and Adjusted FFO per share basic and diluted
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
Weighted average shares outstanding basic and diluted
|
|
|
20,229,659
|
|
|
|
20,229,659
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended
|
|
|
|
June 30, 2010
|
|
|
|
FFO
|
|
|
AFFO
|
|
Net (Loss)
|
|
$
|
(10,332
|
)
|
|
$
|
(10,332
|
)
|
Add:
|
|
|
|
|
|
|
|
|
Depreciation and amortization from partially-owned entities
|
|
|
4,576
|
|
|
|
4,576
|
|
Depreciation and amortization on owned properties
|
|
|
1,683
|
|
|
|
1,683
|
|
Adjustment to valuation allowance for loans carried at LOCOM
|
|
|
|
|
|
|
(829
|
)
|
Stock-based compensation
|
|
|
|
|
|
|
113
|
|
Straight-line effect of lease revenue
|
|
|
|
|
|
|
(1,139
|
)
|
Excess cash distributions from the Companys equity method investments
|
|
|
|
|
|
|
360
|
|
Gain on loans sold
|
|
|
|
|
|
|
(4
|
)
|
Obligation to issue OP Units
|
|
|
|
|
|
|
268
|
|
|
|
|
|
|
|
|
Funds From Operations and Adjusted Funds From Operations
|
|
$
|
(4,073
|
)
|
|
$
|
(5,304
|
)
|
FFO and Adjusted FFO per share basic and diluted
|
|
$
|
(0.20
|
)
|
|
$
|
(0.26
|
)
|
Weighted average shares outstanding basic and diluted
|
|
|
20,217,983
|
|
|
|
20,217,983
|
|
FORWARD-LOOKING INFORMATION
We make forward looking statements in this Form 10-Q that are subject to risks and
uncertainties. These forward looking statements include information about possible or assumed
future results of our business and our financial condition, liquidity, results of operations, plans
and objectives. They also include, among other things, statements concerning anticipated revenues,
income or loss, capital expenditures, dividends, capital structure, or other financial terms, as
well as statements regarding subjects that are forward looking by their nature, such as:
|
|
|
our ability to complete the Tiptree transaction;
|
26
|
|
|
if we do not complete the Tiptree transaction, our ability to sell one or more of our
assets;
|
|
|
|
|
if we do not complete the Tiptree transaction, our ability to conduct an orderly
liquidation;
|
|
|
|
|
if we do not complete the Tiptree transaction, our ability to make one or more special
cash distributions;
|
|
|
|
|
our business and financing strategy;
|
|
|
|
|
our ability to acquire investments on attractive terms;
|
|
|
|
|
our understanding of our competition;
|
|
|
|
|
our projected operating results;
|
|
|
|
|
market trends;
|
|
|
|
|
estimates relating to our future dividends;
|
|
|
|
|
completion of any pending transactions;
|
|
|
|
|
projected capital expenditures; and
|
|
|
|
|
the impact of technology on our operations and business.
|
The forward looking statements are based on our beliefs, assumptions, and expectations of our
future performance, taking into account the information currently available to us. These beliefs,
assumptions, and expectations can change as a result of many possible events or factors, not all of
which are known to us. If a change occurs, our business, financial condition, liquidity, and
results of operations may vary materially from those expressed in our forward looking statements.
You should carefully consider this risk when you make a decision concerning an investment in our
securities, along with the following factors, among others, that could cause actual results to vary
from our forward looking statements:
|
|
|
the factors referenced in this Form 10-Q;
|
|
|
|
|
general volatility of the securities markets in which we invest and the market price of
our common stock;
|
|
|
|
|
uncertainty in obtaining stockholder approval, to the extent it is required, for a
strategic alternative;
|
|
|
|
|
changes in our business or investment strategy;
|
|
|
|
|
changes in healthcare laws and regulations;
|
|
|
|
|
availability, terms and deployment of capital;
|
|
|
|
|
availability of qualified personnel;
|
|
|
|
|
changes in our industry, interest rates, the debt securities markets, the general economy
or the commercial finance and real estate markets specifically;
|
|
|
|
|
the degree and nature of our competition;
|
|
|
|
|
the performance and financial condition of borrowers, operators and corporate customers;
|
|
|
|
|
increased rates of default and/or decreased recovery rates on our investments;
|
27
|
|
|
changes in governmental regulations, tax rates and similar matters;
|
|
|
|
|
legislative and regulatory changes (including changes to laws governing the taxation of
REITs or the exemptions from registration as an investment company);
|
|
|
|
|
the adequacy of our cash reserves and working capital; and
|
|
|
|
|
the timing of cash flows, if any, from our investments.
|
When we use words such as will likely result, may, shall, believe, expect,
anticipate, project, intend, estimate, goal, objective, or similar expressions, we
intend to identify forward looking statements. You should not place undue reliance on these forward
looking statements. We are not obligated to publicly update or revise any forward looking
statements, whether as a result of new information, future events, or otherwise.
ITEM 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms, and that such information
is accumulated and communicated to our management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Notwithstanding the foregoing, no matter how well a control system is designed and operated, it can
provide only reasonable, not absolute, assurance that it will detect or uncover failures within our
company to disclose material information otherwise required to be set forth in our periodic
reports.
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the three
months ended June 30, 2010 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
28
Part II. Other Information
ITEM 1. Legal Proceedings
On September 18, 2007, a class action complaint for violations of federal securities laws was
filed in the United States District Court, Southern District of New York alleging that the
Registration Statement relating to the initial public offering of shares of our common stock, filed
on June 21, 2007, failed to disclose that certain of the assets in the contributed portfolio were
materially impaired and overvalued and that we were experiencing increasing difficulty in securing
our warehouse financing lines. On January 18, 2008, the court entered an order appointing colead
plaintiffs and co-lead counsel. On February 19, 2008, the co-lead plaintiffs filed an amended
complaint citing additional evidentiary support for the allegations in the complaint. We believe
the complaint and allegations are without merit and intend to defend against the complaint and
allegations vigorously. We filed a motion to dismiss the complaint on April 22, 2008. The
plaintiffs filed an opposition to our motion to dismiss on July 9, 2008, to which we filed our
reply on September 10, 2008. On March 4, 2009, the court denied our motion to dismiss. Care filed
its answer on April 15, 2009. At a conference held on May 15, 2009, the Court ordered the parties
to make a joint submission (the Joint Statement) setting forth: (i) the specific statements that
Plaintiffs claim are false and misleading; (ii) the facts on which Plaintiffs rely as showing each
alleged misstatement was false and misleading; and (iii) the facts on which Defendants rely as
showing those statements were true. The parties filed the Joint Statement on June 3, 2009. On July
31, 2009, the parties entered into a stipulation that narrowed the scope of the proceeding to the
single issue of the warehouse financing disclosure in the Registration Statement. Fact discovery
closed on April 23, 2010.
The Court ordered the parties to file an abbreviated joint pre-trial statement on June 9,
2010, and scheduled a pre-trial conference for June 11, 2010. At the conclusion of the pre-trial
conference, the Court asked the parties to agree on a summary judgment briefing schedule, which the
parties did. Defendants filed their motion for summary judgment on July 9, 2010. Plaintiffs are
to file their opposition on August 20, 2010 and Defendants are to file their reply on September 17,
2010. The outcome of this matter cannot currently be predicted.
On November 25, 2009, we filed a lawsuit in the U.S. District Court for the Northern District
of Texas against Mr. Jean-Claude Saada and 13 of his companies (the Saada Parties), seeking
declaratory judgments that (i) we have the right to engage in a business combination transaction
involving our company or a sale of our wholly owned subsidiary that serves as the general partner
of the partnership that holds the direct investment in the portfolio without the approval of the
Saada Parties, (ii) the contractual right of the Saada Parties to put their interests in the
Cambridge medical office building portfolio has expired and (iii) the operating partnership units
held by the Saada Parties do not entitle them to receive any special cash distributions made to our
stockholders. We also brought affirmative claims for tortious interference by the Saada Parties
with a prospective contract and for their breach of the implied covenant of good faith and fair
dealing.
On January 27, 2010, the Saada Parties answered our complaint, and simultaneously filed
Counterclaims that named our subsidiaries ERC Sub LLC and ERC Sub, L.P., external manager CIT
Healthcare LLC, and board chairman Flint D. Besecker, as additional third-party defendants. The
Counterclaims seek four declaratory judgments construing certain contracts among the parties that
are largely the mirror image of our declaratory judgment claims. In addition, the Counterclaims
also seek monetary damages for purported breaches of fiduciary duty and the duty of good faith and
fair dealing, as well as fraudulent inducement, against us and the third-party defendants jointly
and severally.
The Counterclaims further request indemnification by ERC Sub, L.P., pursuant to a contract
between the parties, and the imposition of a constructive trust on our current assets to be
disposed as part of any future liquidation of Care, including all proceeds from those assets.
Although the Counterclaims do not itemize their asserted damages, they assign these damages a value
of $100 million or more. In addition, the Saada Parties filed a motion to dismiss our tortious
interference and breach of the implied covenant of good faith and fair dealing claims on January
27, 2010. In response to the Counterclaims, we filed on March 5, 2010, an omnibus motion to dismiss
all of the Counterclaims.
On March 22, 2010, we received a letter from Cambridge Holdings, which asserted that the
transactions with Tiptree were in violation of our agreements with the Saada Parties.
The Saada Parties filed their opposition to our omnibus motion to dismiss on March 26, 2010,
and we filed our response on April 9, 2010.
29
On April 14, 2010, the Saada Parties motion to dismiss was denied and our motion to dismiss
was also denied.
On April 27, 2010, we filed an answer to the Saada Parties third-party complaint. We continue
to believe that the arguments advanced by Cambridge Holdings lack merit. See Risk Factors Risks
Related to the Tiptree Transaction. On May 28, 2010, Cambridge Holdings filed a motion for leave
to amend its previously-asserted counterclaims and third-party complaint to include a new claim for
breach of contract against Care. This proposed new claim asserts that Cambridge Holdings and Care
agreed, in October 2009, upon a sale of ERC Sub, L.P.s 85% limited partnership interest in the
Cambridge properties back to Cambridge Holdings for $20 million in cash plus certain other
arrangements involving the cancellation of partnership units and existing escrow accounts. The
proposed new claim further asserts that Care reneged on this purported agreement after having
previously agreed to all of its material terms, thus breaching the agreement. Further, the
proposed new claim seeks specific performance of the purported contract. Care denies that any
agreement of the sort alleged by Cambridge Holdings was ever reached, and Care also believes that
the proposed new claim suffers from several deficiencies. Care filed its opposition on June 18,
2010 and Cambridge Holdings replied on July 1, 2010. In the meantime, on June 21, 2010, ERC Sub
sought leave to amend its counterclaims to assert a breach of contract action against Cambridge
Holdings. Cambridge Holdings did not oppose ERC Subs motion. To date, the Court has not acted on
either of these pending motions for leave to amend. The outcome of this matter cannot currently be
predicted.
Care is not presently involved in any other material litigation nor, to our knowledge, is any
material litigation threatened against us or our investments, other than routine litigation arising
in the ordinary course of business. Management believes the costs, if any, incurred by us related
to litigation will not materially affect our financial position, operating results or liquidity.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
As part of our pending transaction with Tiptree, we have agreed that, until the earlier of the
closing date or the termination of the purchase and sale agreement, and subject to certain
exceptions, we will not, and will not permit any of our subsidiaries to declare or pay any dividend
or other distribution in respect of our capital stock other than dividends or other distributions
by our subsidiary to us or another wholly owned subsidiary and quarterly cash dividends of up to
$0.17 per share of our common stock, with record and payment dates consistent with past practice.
ITEM 6. Exhibits
Except as indicated by an asterisk (*), the following exhibits are filed herewith as part of
this Form 10-Q.
(a) Exhibits
|
|
|
31.1
|
|
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Care Investment Trust Inc.
|
|
|
|
|
|
|
|
August 5, 2010
|
By:
|
/s/ Paul F. Hughes
|
|
|
|
Paul F. Hughes
|
|
|
|
Chief Financial Officer and Treasurer
|
|
31
EXHIBIT INDEX
Except as indicated by an asterisk (*), the following exhibits are filed herewith as part of
this Form 10-Q.
|
|
|
Exhibit No.
|
|
Description
|
31.1
|
|
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
31.2
|
|
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.1
|
|
Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
|
32.2
|
|
Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
32
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