8-K: Current report filing
Published on June 30, 2000
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-11316
OMEGA HEALTHCARE INVESTORS, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland 38-3041398
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
900 Victors Way, Suite 350 48108
Ann Arbor, Michigan (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code: 734-887-0200
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class Which Registered
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Common Stock, $.10 Par Value New York Stock Exchange
8.5% Convertible Debentures, Due 2001 New York Stock Exchange
9.25% Series A Preferred Stock, $1 Par Value New York Stock Exchange
8.625% Series B Preferred Stock, $1 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and 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 [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $44,811,746 based on the $2.30 closing price per share for
such stock on the New York Stock Exchange on February 28, 2001.
As of February 28, 2001 there were 19,987,552 shares
of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement, which will be filed with the
Commission on or before April 30, 2001, is incorporated by reference in Part III
of this Form 10-K.
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PART I
Item 1 -- Business of the Company
Overview
Omega Healthcare Investors, Inc. (the "Company") was incorporated in the
state of Maryland on March 31, 1992. It is a self-administered real estate
investment trust ("REIT") investing in income-producing healthcare facilities,
principally long-term care facilities located in the United States. The Company
provides lease or mortgage financing to qualified operators of skilled nursing
facilities and, to a lesser extent, assisted living and acute care facilities.
Financing for investments has been historically provided by borrowings under the
Company's revolving lines of credit, private placements or public offerings of
debt or equity, the assumption of secured indebtedness, or a combination of
these methods. The Company also finances acquisitions through the exchange of
properties or the issuance of shares of its capital stock when such transactions
otherwise satisfy the Company's investment criteria.
In November 1997, the Company formed Omega Worldwide, Inc. ("Worldwide"), a
company which provides asset management services and management advisory
services, as well as equity and debt capital to the healthcare industry,
particularly residential healthcare services to the elderly. On April 2, 1998,
the Company contributed substantially all of its assets in Principal Healthcare
Finance Limited, ("Principal") an Isle of Jersey (United Kingdom) company, to
Worldwide in exchange for approximately 8.5 million shares of Worldwide common
stock and 260,000 shares of Series B preferred stock. Of the 8,500,000 shares of
Worldwide common stock received by the Company, approximately 5,200,000 were
distributed on April 2, 1998 to the shareholders of the Company, and 2,300,000
shares were sold by the Company on April 3, 1998. As of December 31, 2000, the
carrying value of the Company's investment in Worldwide is $5,435,000,
represented by 1,163,000 shares of common stock and 260,000 shares of preferred
stock. The Company also holds a $1,615,000 investment in Principal represented
by 990,000 ordinary shares of Principal and a $1,266,000 investment in the
Principal Healthcare Finance Trust, an Australian Unit Trust. ("Trust") (See
Note 11 to the Company's Consolidated Financial Statements Related Party
Transactions).
On July 17, 2000, the Company received gross proceeds of $100 million from
the issuance of one million shares of Series C Convertible Preferred Stock
("Series C") at $100 per share to Explorer Holdings, L.P. Proceeds were used to
pay maturing debt. The Series C shares are initially convertible into 16 million
shares of common stock, par value $.10 per share, of the Company (the "Common
Stock"). Dividends on the Series C are cumulative from the date of original
issue and are payable quarterly commencing on November 15, 2000. Holders of
Series C are entitled to receive dividends at the greater of 10% per annum of
the liquidation preference and the amount per share paid by Omega on its Common
Stock based on the number of shares of Common Stock into which the shares of
Series C are then convertible. (See Note 10 to the Company's Consolidated
Financial Statements - Shareholders' Equity and Stock Options).
During 1998, the Company initiated a plan to dispose of certain properties
judged to have limited long-term potential and re-deploy the proceeds. The
Company recorded a provision for impairment of $6.8 million in 1998 to adjust
the carrying value of those assets judged to be impaired to their fair value,
less cost of disposal. During the fourth quarter of 1999, management initiated a
plan for additional asset sales to be completed in 2000 and recorded a provision
for impairment of $19.5 million. During 2000, the Company recorded an additional
provision for impairment of $14.4 million related to assets held for sale. (See
Item 7 Management's Discussion and Analysis of Financial Condition and Results
of Operations).
As a consequence of the financial difficulties encountered by a number of
the Company's operators, the Company has recovered various long-term care assets
pledged as collateral for the operators' obligations either in connection with a
restructuring or settlement with certain operators or pursuant to foreclosure
proceedings. Under normal circumstances, the Company would classify such assets
as "assets held for sale" and seek to re-lease or otherwise dispose of such
assets as promptly as practicable. However, a number of companies are actively
marketing portfolios of similar assets and, in light of the current conditions
in the long-term care industry generally, it has become more difficult both to
sell such properties and for potential buyers to obtain financing to acquire
such properties. As a result, during 2000, $24.3 million of assets previously
classified as held for sale were reclassified to "owned and operated assets" as
the timing and strategy for sale or, alternatively, re-leasing, were revised in
light of prevailing market conditions.
As of December 31, 2000, the Company's portfolio of domestic investments
consisted of 264 healthcare facilities, located in 29 states and operated by 27
third-party operators. The Company's gross investments in these facilities
totaled $919 million at December 31, 2000. This portfolio is made up of 130
long-term healthcare facilities and 2 rehabilitation hospitals owned and leased
to third parties, fixed rate, participating and convertible participating
mortgages on 63 long-term healthcare facilities and 69 long-term healthcare
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facilities that were recovered from customers and are currently operated through
third-party management contracts for the Company's own account, including 12
facilities subject to third-party leasehold interests. The Company also holds
miscellaneous investments and closed healthcare facilities held for sale of
approximately $57.2 million at December 31, 2000, including $22.4 million
related to two non-healthcare facilities leased by the United States Postal
Service, Worldwide, Principal and Trust of $8.3 million and $15.6 million of
notes receivable.
Summary Financial Information
The following tables summarize the Company's Net Revenues and Real
Estate Assets by asset category for December 31, 2000, 1999 and 1998, setting
forth the effect of the results of operations of property recovered due to
foreclosure and settlements with troubled operators that are held for sale or
operated on an interim basis for the Company's own account until such time as
the properties are sold or re-leased. Historical information for 1999 and 1998
is reclassified, for comparative purposes, to the presentation for 2000. (See
Item 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations, Note 2 Properties, Note 3 - Mortgage Notes Receivable and Note 18
- - Segment Information to the Company's Consolidated Financial Statements).
Description of the Business
The Company maintains a diversified portfolio of long-term healthcare
facilities or mortgages on healthcare facilities located in the United States.
In making investments, the Company generally seeks and intends to focus on
established, creditworthy, middle-market healthcare operators that meet the
Company's standards for quality and experience of management. The Company seeks
to diversify its investments in terms of geographic locations, operators and
facility types.
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In evaluating potential investments, the Company considers such factors as:
(i) the quality and experience of management and the credit worthiness of the
operator of the facility; (ii) the facility's historical, current and forecasted
cash flow and its adequacy to meet operational needs, capital expenditures and
lease or debt service obligations, providing a competitive return on investment
to the Company; (iii) the construction quality, condition and design of the
facility; (iv) the geographic area and type of facility; (v) the tax, growth,
regulatory and reimbursement environment of the community in which the facility
is located; (vi) the occupancy and demand for similar healthcare facilities in
the same or nearby communities; and (vii) the payor mix of private, Medicare and
Medicaid patients.
A fundamental investment strategy of the Company is to obtain contractual
rent escalations under long-term, non-cancelable, "triple-net" leases and
revenue participation through participating mortgage loans, and to obtain
substantial liquidity deposits. Additional security is typically provided by
covenants regarding minimum working capital and net worth, liens on accounts
receivable and other operating assets, and various provisions for cross-default,
cross-collateralization and corporate/personal guarantees, when appropriate.
The Company prefers to invest in equity ownership of properties. Due to
regulatory, tax or other considerations, the Company sometimes pursues
alternative investment structures, including convertible participating and
participating mortgages, that achieve returns comparable to equity investments.
The following summarizes the four primary investment structures currently used
by the Company. Average annualized yields reflect existing contractual
arrangements and an estimate of restructured arrangements for one of the
Company's troubled operators. However, in view of the ongoing financial
challenges in the long-term care industry, no assurance can be given that the
operators of the Company's facilities will meet their payment obligations in
full or when due. Certain operators have recently indicated to the Company that
they intend to delay or reduce the payment of their contractual obligations to
the Company, and therefore the annualized yields as of January 1, 2001 set forth
below are not necessarily indicative of or a forecast of actual yields, which
may be lower. (See Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 15 to the Company's Consolidated
Financial Statements - Subsequent Events).
Purchase/Leaseback. The Company's owned properties are generally leased
under provisions of leases for terms ranging from 8 to 17 years, plus
renewal options. The leases originated by the Company generally provide for
minimum annual rentals which are subject to annual formula increases (i.e.,
based upon such factors as increases in the Consumer Price Index ("CPI") or
increases in the revenues of the underlying properties), with certain fixed
minimum and maximum levels. Generally, the operator holds an option to
repurchase at set dates at prices based on specified formulas. The average
annualized yield from leases was 11.19% at January 1, 2001.
Convertible Participating Mortgage. Convertible Participating Mortgages are
secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor. Interest rates are usually subject to annual
increases based upon increases in the CPI or increases in revenues of the
underlying long-term care facilities, with certain maximum limits.
Convertible Participating Mortgages afford the Company an option to convert
its mortgage into direct ownership of the property, generally at a point
six to nine years from inception; they are then subject to a leaseback to
the operator for the balance of the original agreed term and for the
original agreed participations in revenues or CPI adjustments. This allows
the Company to capture a portion of the potential appreciation in value of
the real estate. The operator has the right to buy out the Company's option
at prices based on specified formulas. The average annualized yield on
these mortgages was approximately 12.99% at January 1, 2001.
Participating Mortgage. Participating Mortgages are secured by first
mortgage liens on the underlying real estate and personal property of the
mortgagor. Interest rates are usually subject to annual increases based
upon increases in the CPI or increases in revenues of the underlying
long-term care facilities, with certain maximum limits. The average
annualized yield on these investments was approximately 13.26% at January
1, 2001.
Fixed-Rate Mortgage. These Mortgages have a fixed interest rate for the
mortgage term and are secured by first mortgage liens on the underlying
real estate and personal property of the mortgagor. The average annualized
yield on these investments was 11.20% at January 1, 2001.
The following table identifies the years of expiration of the payment
obligations to the Company under existing contractual obligations as of January
1, 2001, or in the case of one of the Company's troubled operators, under an
estimated restructured arrangement. This information is provided solely to
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indicate the scheduled expiration of payment obligations to the Company, and is
not a forecast of expected revenues. (See Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations and Note 15 to the
Company's Consolidated Financial Statements - Subsequent Events).
The table set forth in Item 2 -- Properties, herein, contains information
regarding the Company's real estate properties, their geographic locations, and
the types of investment structures as of December 31, 2000.
Borrowing Policies. The Company may incur additional indebtedness and
anticipates it will generally maintain a long-term debt-to-total capitalization
(total capitalization is total shareholders equity plus long-term debt) ratio in
the range of 40% to 50%. The Company intends to review periodically its policy
with respect to its debt-to-total capitalization ratio and to modify such policy
as its management deems prudent in light of prevailing market conditions. The
Company's strategy generally has been to match the maturity of its indebtedness
with the maturity of its investment assets, and to employ long-term, fixed-rate
debt to the extent practicable in view of market conditions in existence from
time to time.
The Company may use proceeds of any additional indebtedness to provide
permanent financing for investments in additional healthcare facilities. The
Company may obtain either secured or unsecured indebtedness, and may obtain
indebtedness which may be convertible into capital stock or be accompanied by
warrants to purchase capital stock. Where debt financing is present on terms
deemed favorable, the Company generally may invest in properties subject to
existing loans, secured by mortgages, deeds of trust or similar liens on
properties.
The Company has two secured revolving lines of credit (the "credit
facilities") which permit borrowings of up to $175 million and $75 million,
respectively. These credit facilities provide working capital for the Company
and temporary funds for new investments in healthcare facilities. The Company's
strategy has been to periodically replace funds drawn on the credit facilities
through long-term, fixed-rate borrowings, the issuance of equity-linked
borrowings, or the issuance of additional shares of capital stock.
The Company also has $50 million of available funds through July 1, 2001
pursuant to an Investment Agreement with Explorer Holdings, L.P. ("Explorer")
which can be used, upon satisfaction of certain conditions, to fund growth.
Following the drawing in full or expiration of this commitment, Explorer will
have the option to provide up to an additional $50 million to fund growth for an
additional twelve-month period. (See Note 10 - Shareholders' Equity and Stock
Options).
Industry turmoil and continuing adverse economic conditions have caused the
terms on which the Company can obtain additional borrowings to become
unfavorable. If the Company is in need of capital to repay indebtedness as it
matures, the Company may be required to liquidate investments in properties at
times which may not permit realization of the maximum recovery on such
investments. This also could result in adverse tax consequences to the Company.
The Company may also be required to pursue dilutive equity issuances. See Item 7
- -- Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources.
Government Healthcare Regulation, Reimbursements and Industry Concentration
Risks. The healthcare industry is highly regulated by federal, state and local
law, and is directly affected by state and local licensure, fines and loss of
certification to participate in the Medicare and Medicaid programs, as well as
potential criminal penalties. The Balanced Budget Act of 1997 (the "Budget Act")
enacted a number of anti-fraud and abuse provisions and contains civil monetary
penalties for an operator's violation of the anti-kickback laws. The Budget Act
also imposes an affirmative duty on operators to ensure they do not employ or
contract with persons excluded from the Medicare or other governmental programs.
4
It also provides a minimum ten-year period for exclusion from participation in
federal healthcare programs for operators convicted of a prior healthcare
offense.
Governmental investigations and enforcement of healthcare laws have
increased dramatically and are expected to continue to increase. The increase in
governmental investigations, the Budget Act, future healthcare legislation or
other changes in administration or interpretation of governmental healthcare
programs may have a material adverse effect on the liquidity, financial
condition or results of operations of the Company's operators, which could also
have a material adverse effect on their ability to make rent and interest
payments to the Company.
Based on information provided by the operators of the Company's facilities,
the following table sets forth the approximate payor mix for the most recently
reported twelve-month period:
General liability and professional liability costs in the long-term care
industry have significantly increased over the past several years, with
increases in the number and average size of claims. Excluding Florida, where
recent experience is materially inconsistent with most other states, the number
of claims in the long-term industry has been increasing annually at a rate of
approximately 8%, while the size of such claims has increased 14%. In Florida,
the number of claims has been increasing annually at a rate of approximately
23%, while the size of such claims has increased 18%.1 The increased magnitude
and unpredictability of losses has led a number of insurance companies to exit
from the long-term care industry, resulting in dramatically increased premiums
and increased difficulties in obtaining coverage.
Nearly all of the Company's properties are used as healthcare facilities,
therefore, the Company is directly affected by the risk associated with the
healthcare industry. The Company's lessees and mortgagors, as well as the
facilities owned and operated for the Company's account, derive a substantial
portion of their net operating revenues from third-party payers, including the
Medicare and Medicaid programs. Such programs are highly regulated and subject
to frequent and substantial changes. Due to the implementation of the terms of
the Budget Act, effective January 1, 1999, the majority of skilled nursing
facilities shifted from payments based on reimbursable cost to a prospective
payment system ("PPS") for services provided to Medicare beneficiaries.
Implementation of PPS has affected each long-term care facility to a different
degree depending upon the amount of revenue it derives from Medicare patients.
Long-term care facilities have had to attempt to restructure their operations to
operate profitably under the new Medicare PPS reimbursement policies.
In addition, private payors, including managed care payers, are
increasingly demanding discounted fee structures and the assumption by
healthcare providers of all or a portion of the financial risk of operating a
healthcare facility. Efforts to impose greater discounts and more stringent cost
controls are expected to continue. Any changes in reimbursement policies which
reduce reimbursement levels could adversely affect revenues of the Company's
lessees and borrowers and thereby adversely affect those lessees' and borrowers'
abilities to make their monthly lease or debt payments to the Company.
The possibility that the healthcare facilities will not generate income
sufficient to meet operating expenses or will yield returns lower than those
available through investments in comparable real estate or other investments are
additional risks of investing in healthcare-related real estate. Income from
properties and yields from investments in such properties may be affected by
many factors, including changes in governmental regulation (such as zoning
laws), general or local economic conditions (such as fluctuations in interest
rates and employment conditions), the available local supply and demand for
improved real estate, a reduction in rental income as the result of an inability
to maintain occupancy levels, natural disasters (such as earthquakes and floods)
or similar factors.
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1 Data taken from AON Florida Long Term Care General Liability and Professional
Liability Actuarial Analysis, February 12, 2001.
5
Real estate investments are relatively illiquid and, therefore, tend to
limit the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions. The Company's properties are "special
purpose" properties that could not be readily converted to general residential,
retail or office use. Healthcare facilities that participate in Medicare and/or
Medicaid programs must meet extensive program requirements, including physical
plant and operational requirements, which are revised from time to time. Such
requirements may include a duty to admit Medicare and Medicaid patients, thereby
limiting the ability of the facility to increase its private pay census beyond
certain limits. Medicare and Medicaid facilities are regularly inspected to
determine compliance and may be excluded from the programs -- in some cases
without a prior hearing -- for failure to meet program requirements. Transfers
of nursing homes and other healthcare-related facilities between operators are
subject to regulatory approvals not required for transfers of other types of
commercial operations and other types of real estate. Thus, if the operation of
any of the Company's properties becomes unprofitable due to competition, age of
improvements or other factors such that the lessee or borrower becomes unable to
meet its obligations on the lease or mortgage loan, the liquidation value of the
property may be substantially less, particularly relative to the amount owing on
any related mortgage loan, than would be the case if the property were readily
adaptable to other uses.
Other changes in the healthcare industry include continuing trends toward
shorter lengths of stay, increased use of outpatient services, increased
federal, state and third-party regulation and oversight of healthcare company
operations and business practices and increased demand for capitated healthcare
services (delivery of services at a fixed price per capita basis to a defined
group of covered parties). The entrance of insurance companies into managed care
programs is also accelerating the introduction of managed care in new
localities, and states and insurance companies continue to negotiate actively
the amounts they will pay for services. Moreover, the percentage of healthcare
services that are reimbursed under Medicare and Medicaid programs continues to
increase as the population ages and as states expand their Medicaid programs.
Continued eligibility to participate in these programs is crucial to a
provider's financial strength. Finally, healthcare regulation through
Certificates of Need ("CON") has tended to limit construction of new long-term
care facilities in many states. Several states in which the Company has
investments have repealed CON legislation, including California and Texas,
opening up opportunities for additional competition for the Company's
facilities. As a result of the foregoing, the revenues and margins of the
operators of the Company's facilities may decrease, resulting in a reduction of
the Company's rent/interest coverage from investments.
Potential Risks from Bankruptcies. Generally, the Company's lease arrangements
with a single operator who operates more than one of the Company's facilities is
designed pursuant to a single master lease (a "Master Lease" or collectively,
the "Master Leases"). Although each lease or Master Lease provides that the
Company may terminate the Master Lease upon the bankruptcy or insolvency of the
tenant, the Bankruptcy Reform Act of 1978 ("Bankruptcy Code") provides that a
trustee in a bankruptcy or reorganization proceeding under the Bankruptcy Code
(or debtor-in-possession in a reorganization under the Bankruptcy Code) has the
power and the option to assume or reject the unexpired lease obligations of a
debtor-lessee. In the event that the unexpired lease is assumed on behalf of the
debtor-lessee, all the rental obligations thereunder generally would be entitled
to a priority over other unsecured claims. However, the court also has the power
to modify a lease if a debtor-lessee in a reorganization were required to
perform certain provisions of a lease that the court determined to be unduly
burdensome. It is not possible at this time to determine whether or not a court
would hold that any lease or Master Lease contains any such provisions. If a
lease is rejected, the lessor has a general unsecured claim limited to any
unpaid rent already due plus an amount equal to the rent reserved under the
lease, without acceleration, for the greater of one year or 15% of the remaining
term of such lease, not to exceed the rent obligation for three years.
Generally, with respect to the Company's mortgage loans, the imposition of
an automatic stay under the Bankruptcy Code precludes the Company from
exercising foreclosure or other remedies against the debtor. A mortgagee also is
treated differently from a landlord in three key respects. First, the mortgage
loan is not subject to assumption or rejection because it is not an executory
contract or a lease. Second, the mortgagee's loan may be divided into (1) a
secured loan for the portion of the mortgage debt that does not exceed the value
of the property and (2) a general unsecured loan for the portion of the mortgage
debt that exceeds the value of the property. A secured creditor such as the
Company is entitled to the recovery of interest and costs only if and to the
extent that the value of the collateral exceeds the amount owed. If the value of
the collateral is less than the debt, a lender such as the Company would not
receive or be entitled to any interest for the time period between the filing of
the case and confirmation. If the value of the collateral does exceed the debt,
interest and allowed costs may not be paid during the bankruptcy proceeding but
accrue until confirmation of a plan or reorganization or some other time as the
court orders. Finally, while a lease generally would either be rejected or
assumed with all of its benefits and burdens intact, the terms of a mortgage,
including the rate of interest and timing of principal payments, may be modified
if the debtor is able to effect a "cramdown" under the Bankruptcy Code.
The receipt of liquidation proceeds or the replacement of an operator that
has defaulted on its lease or loan could be delayed by the approval process of
any federal, state or local agency necessary for the transfer of the property or
the replacement of the operator licensed to manage the facility. In addition,
certain significant expenditures associated with real estate investment (such as
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real estate taxes and maintenance costs) are generally not reduced when
circumstances cause a reduction in income from the investment. In order to
protect its investments, the Company may take possession of a property or even
become licensed as an operator, which might expose the Company to successorship
liability to government programs or require the Company to indemnify subsequent
operators to whom it might transfer the operating rights and licenses. Third
party payors may also suspend payments to the Company following foreclosure
until the Company receives the required licenses to operate the facilities.
Should such events occur, the Company's income and cash flows from operations
would be adversely affected. See Note 3 - Mortgage Notes Receivable and Note 5 -
Concentration of Risk, to the Company's Consolidated Financial Statements.
Risks Related to Owned and Operated Assets. As a consequence of the financial
difficulties encountered by a number of the Company's operators, the Company has
recovered various long-term care assets, pledged as collateral for the
operators' obligations, either in connection with a restructuring or settlement
with certain operators or pursuant to foreclosure proceedings. Under normal
circumstances, the Company would classify such assets as "assets held for sale"
and seek to re-lease or otherwise dispose of such assets as promptly as
practicable. However, a number of companies are actively marketing portfolios of
similar assets and, in light of the current conditions in the long-term care
industry generally, it has become more difficult both to sell such properties
and for potential buyers to obtain financing to acquire such properties. During
2000, $24.3 million of assets previously classified as held for sale were
reclassified to "owned and operated assets" as the timing and strategy for sale
or, alternatively, re-leasing, were revised in light of prevailing market
conditions.
The Company is typically required to hold applicable leases and is
responsible for the regulatory compliance at its owned and operated facilities.
The Company's management contracts with third-party operators for such
properties provide that the third-party operator is responsible for regulatory
compliance, but the Company could be sanctioned for violation of regulatory
requirements. In addition, the risk of third-party claims such as patient care
and personal injury claims may be higher with respect to Company owned and
operated properties as compared to the Company's leased and mortgaged assets.
Competition. The Company competes for additional healthcare facility investments
with other healthcare investors, including other real estate investment trusts.
The operators of the facilities compete with other regional or local nursing
care facilities for the support of the medical community, including physicians
and acute care hospitals, as well as the general public. Some significant
competitive factors for the placing of patients in skilled and intermediate care
nursing facilities include quality of care, reputation, physical appearance of
the facilities, services offered, family preferences, physician services and
price.
Federal Income Tax Considerations. At all times, the Company intends to make and
manage its investments (including the sale or disposition of property or other
investments) and to operate in such a manner as to be consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code") (or
regulations thereunder) to qualify as a REIT, unless, because of changes in
circumstances or changes in the Code (or regulations thereunder), the Board of
Directors determines that it is no longer in the best interest of the Company to
qualify as a REIT. As a REIT, the Company generally will not pay federal income
taxes on the portion of its income which is distributed to shareholders,
although income earned from foreclosure property (the owned and operated
assets), after deducting depreciation expense, is subject to corporate level
taxation.
Executive Officers of the Company. At the date of this report, the executive
officers of the Company are:
Thomas W. Erickson (50) has served as the Company's Interim President and
Chief Executive Officer since October 2000. Mr. Erickson is also President and
Chief Executive Officer of CareSelect Group, Inc. and ECG Ventures, Inc., an
operator of physician clinics and a healthcare venture capital firm,
respectively. Mr. Erickson has been a director of the Company since July 2000.
Richard M. FitzPatrick (47) joined the Company as Acting Chief Financial
Officer in July 2000. Mr. FitzPatrick has been the Chief Financial Officer for
The Hampstead Group since 1989 and has served as Acting Chief Financial Officer
for a number of Hampstead's affiliated investments, including, in 1992, The
Forum Group, Inc. (a senior housing owner/operator), and in 1995, Bristol Hotels
and Resorts. Mr. FitzPatrick holds a BS in Accounting as well as an MBA from
DePaul University.
F. Scott Kellman (44) joined the Company as Senior Vice
President-Acquisitions in August 1993 and was appointed Executive Vice President
in August 1994 and Chief Operating Officer in March 1998. Mr. Kellman holds a
bachelor's degree and a J.D. from the University of Michigan.
Susan A. Kovach (41) joined the Company in December 1997 as Vice President,
General Counsel and Secretary. Before she joined the Company, she was a lawyer
with Dykema Gossett PLLC in Detroit, Michigan for 12 years, the last three years
as a senior member of the firm.
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Laurence D. Rich (41) joined the Company in January 1998 after five years as
a lawyer with the firms of Dykema Gossett PLLC and Pepper, Hamilton & Scheetz.
He was appointed Vice President of Acquisitions in January 1999. Mr. Rich earned
a B.A. at the University of Michigan, an MBA from Emory University and J.D.,
magna cum laude, from the University of Detroit College of Law.
At January 31, 2001, the Company employed 27 full-time employees. The
executive offices of the Company are located at 900 Victors Way, Suite 350, Ann
Arbor, Michigan, 48108. Its telephone number is (734) 887-0200.
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Item 2 - Properties
At December 31, 2000, the Company's real estate investments include
long-term care facilities and rehabilitation hospital investments, either in the
form of purchased facilities which are leased to operators, mortgages on
facilities which are operated by the mortgagors or their affiliates and
facilities owned and operated for the Company's account, including facilities
subject to leasehold interests. The facilities are located in 29 states and are
operated by 27 unaffiliated operators. Basic information regarding investments
as of December 31, 2000 is as follows:
9
The following table presents the concentration of the Company's facilities
by state as of December 31, 2000:
(1) Beds include a total of 361 assisted living units.
10
Item 3 - Legal Proceedings
On June 20, 2000, the Company and its chief executive officer, chief
financial officer and chief operating officer were named as defendants in
certain litigation brought by Ronald M. Dickerman, in his individual capacity,
in the United States District Court for the Southern District of New York. In
the complaint, Mr. Dickerman contends that the Company and the named executive
officers violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder. Mr. Dickerman subsequently amended the
complaint to assert his claims on behalf of an unnamed class of plaintiffs. On
July 28, 2000, Benjamin LeBorys commenced a class action lawsuit making similar
allegations against the Company and certain of its officers and directors in the
United States District Court for the Southern District of New York. The cases
have been consolidated, and Mr. LeBorys has been named lead plaintiff. The
plaintiffs seek unspecified damages. The Company has reported the litigation to
its directors and officers liability insurer. The Company believes that the
litigation is without merit and is defending vigorously. The Company's Motion to
Dismiss was filed with the Court on February 16, 2001.
On June 21, 2000, the Company was named as a defendant in certain litigation
brought against it by Madison/OHI Liquidity Investors, LLC ("Madison"), a
customer that claims that the Company has breached and/or anticipatorily
breached a commercial contract. Mr. Dickerman is a partner of Madison and is a
guarantor of Madison's obligations to the Company. Madison claims damages as a
result of the alleged breach of approximately $700,000. Madison seeks damages as
a result of the claimed anticipatory breach in the amount of $15 million or, in
the alternative, Madison seeks specific performance of the contract as modified
by a course of conduct that Madison alleges developed between Madison and the
Company. The Company contends that Madison is in default under the contract in
question. The Company believes that the litigation is meritless. The Company is
defending vigorously and on December 5, 2000, filed counterclaims against
Madison and the guarantors, including Mr. Dickerman, seeking repayment of
approximately $8.5 million that Madison owes the Company.
Karrington Health, Inc. brought suit against the Company alleging that the
Company repudiated and ultimately breached a financing contract to provide
$95,000,000 of financing for the development of 13 assisted living facilities.
Karrington seeks recovery of approximately $20,000,000 in damages it alleges to
have incurred as a result of the breach. The Company denies that it entered into
a valid and binding contract with Karrington and is vigorously defending the
litigation.
Item 4 -- Submission of Matters to a Vote of Security Holders
No matters were submitted to shareholders during the fourth quarter of the
year covered by this report.
PART II
Item 5 -- Market for Registrants' Common Equity and Related Shareholder Matters
The Company's shares of Common Stock are traded on the New York Stock
Exchange under the symbol OHI. The following table sets forth, for the periods
shown, the high and low closing prices as reported on the New York Stock
Exchange Composite for the periods indicated and cash dividends per share:
The closing price on December 29, 2000 was $3.75 per share. As of December
31, 2000, there were 20,037,995 shares of common stock outstanding with
approximately 2,300 registered holders and approximately 17,700 beneficial
owners.
On February 1, 2001, the Company announced the suspension of common and
preferred dividends, to preserve cash to strengthen the Company's balance sheet
in order to facilitate the Company's ability to obtain financing to fund debt
maturing in 2002.
The Company anticipates that it will reinstate dividends on the common and
preferred stock when the Company determines that it has sufficient resources or
11
satisfactory plans to meet its 2002 debt maturities. The Company can give no
assurance as to when the dividends will be reinstated or the amount of the
dividends, if and when such payments are recommenced. All accrued and unpaid
dividends on the Company's outstanding shares of Series A, B and C preferred
stock must be paid in full before dividends on the Common Stock can be resumed.
(See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations Liquidity and Capital Resources.)
Item 6 -- Selected Financial Data
The following selected financial data with respect to the Company should be
read in conjunction with the Company's Consolidated Financial Statements which
are listed herein under Item 14 and are included on pages F-1 through F-26.
12
Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations
"Safe Harbor" Statement Under the United States Private Securities
Litigation Reform Act of 1995
Certain information contained in this report includes forward looking
statements. Forward looking statements include statements regarding the
Company's expectations, beliefs, intentions, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements other than statements of historical facts. These statements may be
identified, without limitation, by the use of forward looking terminology such
as "may" "will" "anticipates" "expects" "believes" "intends" "should" or
comparable terms or the negative thereof. All forward looking statements
included herein are based on information available on the date hereof. Such
statements only speak as of the date hereof and no obligation to update such
forward looking statements should be assumed. Actual results may differ
materially from those reflected in such forward looking statements as a result
of a variety of factors, including, among other things: (i) the ability of the
Company to dispose of assets held for sale on a timely basis and at appropriate
prices; (ii) uncertainties relating to the operation of the Company's Owned and
Operated Assets, including those relating to reimbursement by third-party
payors, regulatory matters and occupancy levels; (iii) the general distress of
the healthcare industry; (iv) continued deterioration of the operating results
and financial condition of the Company's operators; (v) the ability of the
Company's operators in bankruptcy to reject unexpired lease obligations, modify
the terms of the Company's mortgages, and impede the ability of the Company to
collect unpaid rent or interest during the pendency of a bankruptcy proceeding
and retain security deposits for the debtor's obligations; (vi) the availability
and cost of capital; (vii) regulatory and other changes in the healthcare
sector; (viii) the ability of the Company to manage, re-lease or sell its owned
and operated facilities; (ix) competition in the financing of healthcare
facilities; (x) the effect of economic and market conditions and changes in
interest rates; (xi) the resumption of dividends; (xii) the amount and yield of
any additional investments; (xiii) changes in tax laws and regulations affecting
real estate investment trusts; access to the capital markets and the cost of
capital (xiv) changes in the ratings of the Company's debt securities; (xv) and
the risk factors set forth under Item 1 - Business - Government Healthcare
Regulation, Reimbursements and Industry Concentration Risks, Potential Risks
from Bankruptcies," and Item 7A - Qualitative and Quantitative Disclosures About
Market Risks.
Overview
The long-term care industry has experienced unprecedented financial
challenges in the recent past that have had an adverse impact on the Company
during 2000. These challenges are due principally to the introduction in 1998 of
PPS for the reimbursement of skilled nursing facilities, implementing an
acuity-based reimbursement system in lieu of the cost-based reimbursement system
historically used. The effect of PPS was to significantly reduce payments to
nursing home operators; that reduction, in turn, has negatively affected the
revenues of the Company's nursing home facilities and the ability of the
Company's nursing home operators to service their capital costs to the Company.
These current challenges have forced many nursing home operators in
America into financial distress. A number of the Company's large nursing home
operators ultimately sought protection under Chapter 11 of the Bankruptcy Code,
including: Allegheny Health Systems in 1998; Sun Healthcare Group and Frontier
Group, Inc. in 1999; and Integrated Health Services, RainTree Healthcare Corp.
and Mariner Post-Acute Network, Inc. in 2000. Another operator, Advocat, Inc.,
suspended payment of rent to the Company during the first quarter of 2000,
reinstated partial payments in April 2000, and negotiated a restructuring
arrangement with the Company in November 2000.
These developments negatively affected the Company's financial results and
the Company's access to capital sources to fund growth as well as refinance
existing indebtedness. To obtain sufficient liquidity to enable the Company to
address the maturity in July 2000 and February 2001 of indebtedness totaling
$129.8 million, the Company issued $100.0 million of Series C preferred stock to
Explorer Holdings, L.P. in July, 2000. (See Note 10 to the Company's
Consolidated Financial Statements - Shareholders' Equity and Stock Options).
Simultaneously with the issuance of the Series C preferred, the Company also
refinanced its existing credit facilities.
As a consequence of the financial difficulties encountered by a number of
the Company's operators, the Company has recovered various long-term care assets
pledged as collateral for the operators' obligations either in connection with a
restructuring or settlement with certain operators or pursuant to foreclosure
proceedings. Under normal circumstances, the Company would classify such assets
as "assets held for sale" and seek to re-lease or otherwise dispose of such
assets as promptly as practicable. However, a number of companies are actively
marketing portfolios of similar assets and, in light of the current conditions
in the long-term care industry generally, it has become more difficult both to
sell such properties and for potential buyers to obtain financing to acquire
13
such properties. As a result, during 2000, $24.3 million of assets previously
classified as held for sale were reclassified to "owned and operated assets" as
the timing and strategy for sale or, alternatively, re-leasing, were revised in
light of prevailing market conditions.
As of December 31, 2000, the Company owned 69 long-term healthcare
facilities that had been recovered from customers and are currently operated for
the Company's own account. During 1999 and 2000, the Company experienced a
significant increase in nursing home revenues attributable to the increase in
owned and operated assets. In addition, in connection with the recovery of such
assets, the Company often funds working capital and deferred capital expenditure
needs for a transitional period until license transfers and other regulatory
matters are completed and reimbursement from third-party payors recommences.
Management intends to sell or re-lease such assets as promptly as possible
consistent with achieving valuations that reflect management's estimate of fair
realizable value of such assets. There can be no assurance, however, if or when
such dispositions will be completed or whether such dispositions will be
completed on terms that will enable the Company to realize the fair value of
such assets.
In November 2000, Explorer agreed to defer receipt until April 2, 2001
of $4.7 million in dividends declared in October 2000 on the Series C preferred.
The Company requested this deferral in light of the maturity in February of 2001
of $16.6 million of subordinated debentures. In February 2001, the Company
suspended payment of all dividends on all classes of capital stock until such
time as management has identified alternative sources of capital to address
indebtedness maturing in 2002. In light of the prevailing conditions in the
long-term care industry and the capital markets generally accessed by the
Company, on March 30, 2001, the Company exercised its option to pay the deferred
Series C dividend and associated waiver fee by issuing 48,420 additional shares
of Series C to Explorer. These shares are convertible into 774,722 shares of
Common Stock at $6.25 per share. This action, together with the general
suspension of dividends on all classes of the Company's capital stock, is
intended to preserve cash to strengthen the Company's balance sheet in order to
facilitate the Company's ability to obtain financing to fund the 2002 debt
maturities. The Company currently intends to resume paying dividends at such
time as the Company identifies sufficient resources or satisfactory plans to
address its 2002 debt maturities. There can be no assurance, however, as to the
timing of any resumption of dividends or the amount of any dividends if and when
such dividends are resumed. All accrued and unpaid dividends on the Company's
Series A, B and C preferred stock must be paid in full before dividends on the
Company's Common Stock can be resumed. (See Liquidity and Capital Resources
below and Note 15 to the Company's Consolidated Financial Statements -
Subsequent Events).
The following is a discussion of the consolidated results of operations,
financial position and liquidity and capital resources of the Company, which
should be read in conjunction with the consolidated financial statements and
accompanying notes.
Results of Operations
Year Ended December 31, 2000 compared to Year Ended December 31, 1999
Revenues for the year ended December 31, 2000 totaled $275.8 million, an
increase of $127.7 million over 1999 revenues. This increase is principally due
to the inclusion of revenue from nursing home operations for assets owned and
operated for the Company's account recovered pursuant to foreclosure and
settlements with troubled operators in 2000 and revenues associated with
foreclosure assets that were previously classified as Assets Held for Sale and
reclassified to Owned and Operated assets during the third quarter of 2000.
Excluding nursing home revenues of Owned and Operated Assets, revenues were
$96.8 million for the twelve-month period ended December 31, 2000, a decrease of
$26.1 million from the comparable prior year period.
Rental income for the year ended December 31, 2000 totaled $67.3 million, a
decrease of $9.1 million over 1999 rental income. The decrease is due to $8.7
million from reductions in lease revenue due to foreclosures, bankruptcies and
restructurings, and $4.9 million from reduced investments caused by 1999 and
2000 asset sales. These decreases are offset by $2.4 million in additional
revenue from 1999 investments held for a full year, $1.3 million relating to
contractual increases in rents that became effective in 2000 as defined under
the related agreements and $0.8 million from a mortgage that converted to a
lease in 1999.
Mortgage interest income for the year ended December 31, 2000 totaled $24.1
million, decreasing $12.2 million over 1999 mortgage interest income. The
decrease is due to $7.3 million from reductions due to foreclosures,
bankruptcies and restructurings, $4.7 million from reduced investments caused by
the payoffs of mortgages and $0.8 million reduction from a mortgage that
converted to a lease in 1999. These decreases are offset by $0.5 million
relating to contractual increases in interest income that became effective in
2000 as defined under the related agreements.
14
Nursing home revenues of owned and operated assets for the year ended
December 31, 2000 totaled $175.6 million, increasing $149.3 million over 1999
nursing home revenues. The increase is due to the increased number of facilities
classified as owned and operated assets in 2000 as a result of bankruptcies,
foreclosures and restructurings.
Expenses for the year ended December 31, 2000 totaled $335.3 million,
increasing approximately $217.4 million over expenses of $117.9 million for
1999.
Nursing home expenses for owned and operated assets increased to $179.0
million from $25.2 million in 1999 due to the increase in the number of nursing
homes operated for the Company's account.
Interest expense for the year ended December 31, 2000 was approximately
$42.4 million, compared with $42.9 million for 1999. The decrease in 2000 is
primarily due to lower average outstanding borrowings during the 2000 period,
partially offset by higher average interest rates.
The 2000 provision for depreciation and amortization of real estate totaled
$23.3 million, decreasing $0.9 million over 1999. The decrease primarily
consists of $2.0 million depreciation expense for properties sold or held for
sale and a reduction in amortization of non-compete agreements of $0.8 million
offset by $1.6 million additional depreciation expense from properties
previously classified as mortgages and new investments placed in service in 1999
and 2000.
General and administrative expenses for 2000 totaled $6.4 million as
compared to $5.2 million for 1999, an increase of $1.2 million or 22.8%. The
increase is due in part to the incremental administrative costs incurred in 2000
to manage the owned and operated assets, $0.5 million of non-cash compensation
expense relating to the Dividend Equivalent Rights granted to management, and
increased consulting costs related to the foreclosure assets.
Legal expenses for 2000 totaled $2.5 million as compared to $0.4 million in
1999. The increase is largely attributable to legal costs associated with the
operator bankruptcy filings and negotiations with the Company's troubled
operators.
The Company recognized a $4.7 million charge for severance payments in 2000.
The charges are comprised of severance and consulting payments to the Company's
former Chief Executive Officer and former Chief Financial Officer.
The Company also recognized a provision for loss on mortgages and notes
receivable of $15.3 million in 2000, adjusting the carrying value of mortgages
and notes receivable to their net realizable value.
A provision for impairment of $61.7 million is included in expenses for
2000. This provision included $14.4 million for assets held for sale to reduce
properties to fair value less cost to dispose, $43.0 million for facilities
recovered from operators and now held as owned and operated assets to fair
value, $1.9 million for other real estate assets and $2.4 million of goodwill
which, due to the diminished value of the related real estate assets, management
has determined is impaired.
During 2000, the Company sold certain of its core and other assets
realizing proceeds of $34.7 million, resulting in a gain of $10.0 million.
During 1999, the Company completed asset sales yielding net proceeds of $18.2
million, realizing losses of $10.5 million.
Funds from operations (FFO) for the year ended December 31, 2000 on a fully
diluted basis totaled $19.2 million, a decrease of $52.6 million as compared to
the $71.9 million for 1999 due to factors mentioned above. After adjusting for
the non-recurring provision for loss on mortgages and notes receivable and
severance and consulting costs, FFO for the year was $39.3 million, a decrease
of $32.6 million from the year ended December 31, 1999. FFO is net earnings
available to common shareholders, excluding any gains or losses from debt
restructuring and the effects of asset dispositions, plus depreciation and
amortization associated with real estate investments. The Company considers FFO
to be one performance measure which is helpful to investors of real estate
companies because, along with cash flows from operating activities, financing
activities and investing activities, it provides investors and understanding of
the ability of the Company to incur and service debt and to make expenditures.
FFO in and of itself does not represent cash generated from operating activities
in accordance with GAAP and therefore should not be considered an alternative to
net earnings as an indication of operating performance or to net cash flow from
operating activities as determined by GAAP as a measure of liquidity and is not
necessarily indicative of cash available to fund cash needs.
15
No provision for Federal income taxes has been made since the Company
continues to qualify as a real estate investment trust under the provisions of
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
Accordingly, the Company has not been subject to Federal income taxes on amounts
distributed to shareholders, as it distributed at least 95% (90% in 2001) of its
real estate investment trust taxable income and has met certain other
conditions.
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Revenues for the year ended December 31, 1999 totaled $148.1 million,
increasing $38.8 million over 1998 revenues.
Rental income for the year ended December 31, 1999 totaled $76.4 million, an
increase of $4.3 million over 1999 rental income. The 1999 revenue growth stems
primarily from $11.7 million in revenue from additional investments during 1999
and a full year of revenue from investments made in 1998, $1.2 million relating
to contractual increases in rents that became effective in 1999 as defined under
the related agreements, and $1.3 million from mortgages that converted to leases
in 1999. These increases are offset by $9.9 million from reductions in lease
revenue due to foreclosure, bankruptcy and asset sales.
Mortgage interest income for the year ended December 31, 1999 totaled $36.4
million, an increase of $6.0 million over 1999 mortgage interest income. The
1999 revenue growth stems primarily from $9.3 million in revenue from additional
investments during 1999 and a full year of revenue from investments made in
1998, and $0.3 million relating to contractual increases in mortgage interest
that became effective in 1999 as defined under the related agreements. These
increases are offset by $2.4 million from reductions in interest revenue due to
the payment of mortgages and $1.3 million from mortgages that converted to
leases in 1999.
Nursing home revenues of owned and operated assets for the year ended
December 31, 1999 totaled $26.2 million. This is due the consolidation of
nursing home revenues for owned and operated assets as a result of foreclosures
occurring in 1999.
Expenses for the year ended December 31, 1999 totaled $117.9 million,
increasing approximately $51.8 million over expenses of $66.1 million for 1998.
Nursing home expenses attributable to owned and operated assets increased
$25.2 million due to recovery of nursing homes operated for the Company's own
account.
The 1999 provision for depreciation and amortization of real estate totaled
$24.2 million, increasing $2.7 million over 1998. This increase stems from a
full year provision for 1998 investments, plus a partial year provision for 1999
investments.
Interest expense for the year ended December 31, 1999 was approximately
$42.9 million, compared with $32.4 million for 1998. The increase in 1999 is
primarily due to higher average outstanding borrowings during the 1999 period,
partially offset by lower average interest rates.
During 1999, the Company completed asset sales yielding net proceeds of
$18.2 million, realizing losses of $10.5 million. In addition, management
initiated a plan in the 1999 fourth quarter for additional asset sales to be
completed in 2000. The additional assets identified as assets held for sale had
a cost of $33.8 million, a net carrying value of $28.6 million and annualized
revenue of approximately $3.4 million. As a result of this review, the Company
recorded a provision for impairment in 1999 of $19.5 million to adjust the
carrying value of assets held for sale to their fair value, less cost of
disposal.
During 1998, the Company initiated a plan to dispose of certain properties
judged to have limited long-term potential and to re-deploy the proceeds.
Following a review of the portfolio, assets identified for sale in 1998 had a
cost of $95.0 million, a net carrying value of $83.0 million, and annualized
revenues of approximately $11.4 million. In 1998, the Company recorded a
provision for impairment of $6.8 million to adjust the carrying value of those
assets judged to be impaired to their fair value, less cost of disposal. During
1998, the Company completed sales of two groups of assets, yielding sales
proceeds of $42.0 million. Gains realized in 1998 from the dispositions
approximated $2.8 million.
Funds from operations (FFO) for the year ended December 31, 1999 on a fully
diluted basis totaled $71.9 million, an increase of $2.1 million over the $69.8
million for 1998. The 1999 increase in FFO is primarily due to new additions to
investments, offset by early payment of mortgages and disposition of real estate
assets.
16
Recent Developments
In March 2001, the Company announced that it continues its discussions with
several of its lessees to resolve payment issues, including Alterra Healthcare
Corp., Lyric Healthcare, Alden Management Services Inc., and TLC Healthcare Inc.
Alterra has recently issued a press release stating that it had informed certain
of its lenders and landlords in March, 2001 that they will not be paying their
March rents and debt service and are seeking relief as to these payments. The
Company has a master lease with Alterra relating to ten assisted living
facilities representing an investment of $34.1 million which provides for annual
rental payments of $3.6 million. Alterra has not made its March rental payment
to the Company, and while discussions are ongoing the Company has sent Alterra a
notice of default.
Additionally, during the first quarter of 2001, pursuant to a forbearance
agreement between the Company and Lyric through April 30, 2001, the Company
began receiving 60% of the approximately $860,000 of monthly rent due under the
Lyric leases. Discussions are continuing with Lyric to reach a permanent
restructuring agreement. The Company's total original investment in the ten
nursing homes covered under the leases is $95.4 million, and annual rent is
$10.3 million.
Affiliates of Alden Management, Inc., Chicago, IL, are delinquent in paying
their lease, loan and escrow payments on the four facilities it leases from the
Company. These facilities represent an initial investment by the Company of
$31.3 million, with annual rent of approximately $3.2 million. Discussions with
Alden are ongoing.
TLC Healthcare of Illinois, Inc. has made only partial payments under its
master lease with the Company based on the shutdown of one of its facilities
having an annual rent payment of approximately $732,000, and has notified the
Company that it may not be able to make its April payment on its other seven
facilities or otherwise fund operations with annual rent and mortgage payments
totaling approximately $2.8 million. The Company has funded $623,000 for payroll
at the facilities to facilitate continued operations and is taking steps to
transition the operations of the facilities to qualified operators through new
lease or management structures.
In several instances the Company holds security deposits that can be applied
in the event of lease and loan defaults, subject to applicable limitations under
bankruptcy law with respect to operators seeking protection under Chapter 11 of
the Bankruptcy Code.
Liquidity and Capital Resources
At December 31, 2000 the Company had total assets of $948.5 million,
shareholders' equity of $464.3 million, and long-term debt of $451.4 million,
representing approximately 47.6% of total capitalization. The Company has
revolving credit facilities in place, providing up to $250 million of financing,
of which $185.6 million was drawn at year-end, leaving $64.4 million available
for working capital and acquisition purposes. (See Note 15 to the Company's
Consolidated Financial Statements - Subsequent Events).
On July 17, 2000, the Company replaced its $200 million unsecured revolving
credit facility with a new $175 million secured revolving credit facility that
expires on December 31, 2002. Borrowings of approximately $129 million are
outstanding at December 31, 2000. LIBOR based borrowings under this facility
bear interest at a weighted-average rate of 10.00% at December 31, 2000 and
7.30% at December 31, 1999. Investments with a gross book value of approximately
$240 million are pledged as collateral for this credit facility.
On August 16, 2000, the Company replaced its $50 million secured revolving
credit facility with a new $75 million secured revolving credit facility that
expires on March 31, 2002 as to $10 million and June 30, 2005 as to $65 million.
LIBOR based borrowings under this facility bear interest at a weighted-average
rate of 9.77% at December 31, 2000 and 8.44% at December 31, 1999. Investments
with a gross book value of approximately $90 million are pledged as collateral
for this credit facility.
As of December 31, 2000, the Company had an aggregate of $312 million of
outstanding debt which matures in 2002, including $125 million of 6.95% Notes
due June 2002 and $185 million on credit facilities expiring in 2002.
The Company has $50 million of funding available through July 1, 2001
pursuant to an Investment Agreement with Explorer Holdings, L.P. ("Explorer")
which can be used, upon satisfaction of certain conditions, to fund growth.
Following the drawing in full or expiration of this commitment, Explorer will
have the option to provide up to an additional $50 million to fund growth for an
additional twelve-month period. (See Note 10 to the Company's Consolidated
Financial Statements - Shareholders' Equity and Stock Options).
17
The Company has historically distributed to shareholders a large portion of
the cash available from operations. The Company's historical policy has been to
make distributions on Common Stock of approximately 80% of FFO. Cash dividends
paid totaled $1.00 per common share for 2000, compared with $2.80 per common
share for the year ended December 31, 1999. The dividend payout ratio, that is
the ratio of per common share amounts for dividends paid to the diluted per
common share amounts of funds from operations, was approximately 238% for 2000
and 84.3% for 1999. Excluding the provision for loss on mortgages and notes
receivable and severance and consulting agreement costs, the dividend payout
ratio for 2000 was approximately 73.0%.
In light of the maturity in February 2001 of $16.6 million of subordinated
debentures, Explorer agreed to allow the Company to defer payment until April 2,
2001 of $4.7 million of dividends on Explorer's Series C preferred declared in
October 2000. In exchange for this deferral, the Company agreed to pay Explorer
a waiver fee equal to 10% per annum of the unpaid dividend amount from November
15, 2000 until the October 2000 dividend is paid.
On March 30, 2001 in consideration of prevailing conditions in the long-term
care industry and the capital markets generally, the Company exercised its
option under the dividend deferral agreement to pay the deferred dividend and
related waiver fee by issuing 48,420 additional shares of Series C preferred
which are convertible into 774,722 shares of Omega common stock at $6.25 per
share.
On February 1, 2001, the Company announced the suspension of all common and
preferred dividends. This action together with the election by the Company to
pay the deferred Series C dividend and related waiver in additional shares of
Series C is intended to preserve cash to facilitate the Company's ability to
obtain financing to fund the 2002 debt maturities. The Company anticipates that
it will reinstate dividends on its common and preferred stock when the Company
determines that it has sufficient resources or satisfactory plans to meet its
2002 debt maturities, but the Company can give no assurance as to when the
dividends will be reinstated or the amount of the dividends if and when such
payments are recommenced. Prior to recommencing the payment of dividends on the
Company's Common stock, all accrued and unpaid dividends on the Company's Series
A, B and C preferred stock must be paid in full. The Company has made sufficient
distributions to satisfy the distribution requirements under the REIT rules to
maintain its REIT status for 2000 and intends to satisfy such requirements under
the REIT rules for 2001.
Management believes the Company's liquidity and various sources of available
capital are adequate to finance operations, meet debt service requirements and
fund future investments through the next 12 months but is taking immediate
steps, including the announced suspension of dividends and the pursuit of
capital sources for repayment or replacement of the 2002 debt maturities. As a
result of the ongoing financial challenges facing long-term care operators, the
availability of the external capital sources historically used by the Company
has become extremely limited and expensive, and, therefore, no assurance can be
given that the Company will be able to replace or extend the 2002 debt
maturities, or that any refinancing or replacement financing would be on
favorable terms to the Company. If the Company is unable to obtain refinancing
or replacement financing, it may be required to liquidate investments in
properties at times which may not permit realization of the maximum recovery on
such investments. This could also result in adverse tax consequences to the
Company (See Item 7A - Quantitative and Qualitative Disclosure About Market
Risk.)
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes,
but the Company seeks to mitigate the effects of fluctuations in interest rates
by matching the term of new investments with new long-term fixed rate borrowing
to the extent possible.
The market value of the Company's long-term fixed rate borrowings and
mortgages are subject to interest rate risk. Generally, the market value of
fixed rate financial instruments will decrease as interest rates rise and
increase as interest rates fall. The estimated fair value of the Company's total
long-term borrowings at December 31, 2000 was $415 million. A one percent
increase in interest rates would result in a decrease in the fair value of
long-term borrowings by approximately $5.7 million. The estimated fair value of
the Company's total mortgages portfolio at December 31, 2000 was $231 million. A
one percent increase in interest rates would result in a decrease in fair value
of the mortgage portfolio by approximately $8.0 million.
The Company is subject to risks associated with debt or preferred equity
financing, including the risk that existing indebtedness may not be refinanced
or that the terms of such refinancing may not be as favorable as the terms of
current indebtedness. If the Company were unable to refinance its 2002 debt
maturities or other indebtedness on acceptable terms, it might be forced to
dispose of properties on disadvantageous terms, which might result in losses to
18
the Company and might adversely affect the cash available for distribution to
shareholders, or to pursue dilutive equity financing. If interest rates or other
factors at the time of the refinancing result in higher interest rates upon
refinancing, the Company's interest expense would increase, which might affect
the Company's ability to make distributions to its shareholders.
The Company utilizes interest rate swaps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. At
December 31, 2000, the Company had interest rate swaps with notional amounts of
$100 million and $32 million, based on 30-day London Interbank Offered Rates
(LIBOR). Under the $100 million agreement, the Company's LIBOR base rate cannot
exceed 7.5%. This agreement expires in March, 2001. Under the $32 million
agreement, the Company receives payments when LIBOR interest rates exceed 6.35%
and pays the counterparties when LIBOR rates are under 6.35%. The amounts
exchanged are based on the notional amounts. The $32 million agreement expires
on December 17, 2001 but may be extended for an additional year by the
counterparty. The combined fair value of the interest rate swaps at December 31,
2000 was a deficit of $351,344.
Item 8 -- Financial Statements and Supplementary Data
The consolidated financial statements and report of independent auditors
are filed as part of this report beginning on page F-1. The summary of unaudited
quarterly results of operations for the years ended December 31, 2000 and 1999
is included in Note 16 to the financial statements which is incorporated herein
by reference in response to Item 302 of Regulation S-K.
Item 9 -- Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10 -- Directors and Executive Officers of the Registrant
The information regarding directors required by this item is incorporated
herein by reference to the Company's definitive proxy statement for the 2001
Annual Meeting of Shareholders, which will be filed on or before April 30, 2001
with the Securities and Exchange Commission pursuant to Regulation 14A. For
information regarding Executive Officers of the Company, See Item 1 - Business -
Executive Officers of the Company.
Item 11 -- Executive Compensation
The information required by this item is incorporated herein by reference to
the Company's definitive proxy statement for the 2001 Annual Meeting of
Shareholders, which will be filed on or before April 30, 2001 with the
Securities and Exchange Commission pursuant to Regulation 14A.
Item 12 -- Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference to
the Company's definitive proxy statement for the 2001 Annual Meeting of
Shareholders, which will be filed on or before April 30, 2001 with the
Securities and Exchange Commission pursuant to Regulation 14A.
Item 13 -- Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference to
the Company's definitive proxy statement for the 2001 Annual Meeting of
Shareholders, which will be filed on or before April 30, 2001 with the
Securities and Exchange Commission pursuant to Regulation 14A.
19
PART IV
Item 14 -- Exhibits, Financial Statements, Financial Statement Schedules and
Reports on Form 8-K
(a)(1) Listing of Consolidated Financial Statements
Page
Title of Document Number
----------------- -------
Report of Independent Auditors ........................................ F-1
Consolidated Balance Sheets as of December 31, 2000 and 1999 .......... F-2
Consolidated Statements of Operations for the years ended
December 31, 2000, 1999 and 1998 .................................... F-3
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 2000, 1999 and 1998 .............................. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998 .................................... F-5
Notes to Consolidated Financial Statements ............................ F-6
(a)(2) Listing of Financial Statement Schedules. The following consolidated
financial statement schedules are included herein:
Schedule III -- Real Estate and Accumulated Depreciation
Schedule IV -- Mortgage Loans on Real Estate
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable or sufficient information has
been included in the notes to the financial statements and therefore have been
omitted.
(a)(3) Listing of Exhibits -- See Index to Exhibits beginning on Page I-1 of
this report.
(b) Reports on Form 8-K. There were no 8-K filings in the fourth quarter of
2000.
(c) Exhibits -- See Index to Exhibits beginning on Page I-1 of this report.
(d) Financial Statement Schedules -- The following consolidated financial
statement schedules are included herein:
Schedule III Real Estate and Accumulated Depreciation
Schedule IV Mortgage Loans on Real Estate
20
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Omega Healthcare Investors, Inc.
We have audited the accompanying consolidated balance sheets of Omega
Healthcare Investors, Inc. and subsidiaries as of December 31, 2000 and 1999,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
Our audit also included the financial statement schedules listed in the Index at
Item 14(a). These financial statements and schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Omega
Healthcare Investors, Inc. and subsidiaries at December 31, 2000 and 1999, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
/s/ Ernst & Young LLP
Chicago, Illinois
March 16, 2001, except
for the third and seventh
paragraphs at Note 15, as
to which the date is
March 30, 2001.
F-1
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
F-2
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
See accompanying notes.
F-3
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except per share amounts)
F-4
See accompanying notes.
F-5
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Omega Healthcare Investors, Inc., a Maryland corporation ("the Company"), is
a self-administered real estate investment trust (REIT). From the date the
Company commenced operations in 1992, it has invested primarily in long-term
care facilities, which include nursing homes, assisted living facilities and
rehabilitation hospitals. The Company currently has investments in 264
healthcare facilities located in the United States.
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all material intercompany
accounts and transactions. Due to changes in the market conditions affecting the
long-term care industry, the Company has begun to operate a portfolio of its
foreclosure assets for its own account until such time as these facilities'
operations are stabilized and are re-leasable or saleable at lease rates or
sales prices that maximize the value of these assets to the Company. As a
result, these facilities and their respective operations are presented on a
consolidated basis in the Company's financial statements. Certain
reclassifications have been made to the 1999 and 1998 financial statements for
consistency with the presentation adopted for 2000. Such reclassifications have
no effect on previously reported earnings or equity.
Real Estate Investments
Investments in leased real estate properties and mortgage notes are recorded
at cost and original mortgage amount, respectively. The cost of the properties
acquired is allocated between land and buildings based generally upon
independent appraisals. Depreciation for buildings is recorded on the
straight-line basis, using estimated useful lives ranging from 20 to 39 years.
Leasehold interests are amortized over the initial term of the lease, with lives
ranging from four to seven years.
Owned & Operated Assets and Assets Held for Sale
In the ordinary course of its business activities, the Company periodically
evaluates investment opportunities and extends credit to customers. It also is
regularly engaged in lease and loan extensions and modifications. Additionally,
the Company monitors and manages its investment portfolio with the objectives of
improving credit quality and increasing returns. In connection with portfolio
management, it engages in various collection and foreclosure activities. When
the Company acquires real estate pursuant to a foreclosure proceeding, it is
designated as "owned and operated assets" and is recorded at the lower of cost
or fair value. Such amounts are included in real estate properties on the
Company's Consolidated Balance Sheet. Operating assets and operating liabilities
for the owned and operated properties are shown separately on the face of the
Company's Consolidated Balance Sheet and are detailed in Note 18 - Segment
Information.
When a formal plan to sell real estate is adopted, the real estate is
classified as "assets held for sale," with the net carrying amount adjusted to
the lower of cost or estimated fair value, less cost of disposal. Depreciation
of the facilities is excluded from operations after management has committed to
a plan to sell the asset.
Impairment of Assets
Provisions for impairment losses related to long-lived assets are recognized
when expected future cash flows are less than the carrying values of the assets.
If indicators of impairment are present, the Company evaluates the carrying
value of the related real estate investments in relationship to the future
undiscounted cash flows of the underlying facilities and, if impaired, the
Company then adjusts the net carrying value of leased properties and other
long-lived assets to the lower of discounted present value of its expected
future cash flows or fair value, if the sum of the expected future cash flow or
sales proceeds is less than carrying value.
Cash Equivalents
Cash equivalents consist of highly liquid investments with a maturity date
of three months or less when purchased. These investments are stated at cost,
which approximates fair value.
F-6
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accounts Receivable - Owned and Operated Assets
Accounts Receivable from Owned and Operated Assets consist primarily of
amounts due from Medicare and Medicaid programs, other government programs,
managed care health plans, commercial insurance companies and individual
patients. Amounts recorded include estimated provisions for loss related to
uncollectible accounts and disputed items.
Investments in Equity Securities
Marketable securities held as available-for-sale are stated at fair value
with unrealized gains and losses for the securities reported in accumulated
other comprehensive income. Realized gains and losses and declines in value
judged to be other-than-temporary on securities held as available-for-sale are
included in investment income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities
available-for-sale are included in investment income.
Deferred Financing Costs
Deferred financing costs are amortized on a straight-line basis over the
terms of the related borrowings. Amortization of financing costs totaling
$1,930,000, $1,342,000 and $1,042,000 in 2000, 1999 and 1998, respectively, is
classified as interest expense in the Consolidated Statements of Operations.
Unamortized deferred financing costs applicable to debt which is converted to
common stock are charged to paid-in capital at the date of conversion.
Non-Compete Agreements and Goodwill
Non-compete agreements and the excess of the purchase price over the value
of tangible net assets acquired (i.e., goodwill) are amortized on a
straight-line basis over periods ranging from five to ten years. Non-compete
agreements, which have cost of $4,982,000 became fully amortized and were
eliminated in 1999 by a charge to accumulated amortization. Due to the
diminished value of the related real estate assets, management has determined
that the goodwill is entirely impaired and has written off the balance of
$2,356,000 in 2000. Accumulated amortization was $-0- and $3,363,000 at December
31, 2000 and 1999, respectively.
Revenue Recognition
Rental income and mortgage interest income is recognized as earned over the
terms of the related master leases and mortgage notes, respectively. Such income
includes periodic increases based on pre-determined formulas as defined in the
master leases and mortgage loan agreements. Reserves are taken against earned
revenues from leases and mortgages when collection of amounts due become
questionable or when negotiations for restructurings of troubled operators lead
to lower expectations of expected ultimate collection amounts. Nursing home
revenues from these owned and operated assets are recognized as services are
provided.
Federal and State Income Taxes
As a qualified real estate investment trust, the Company will not be subject
to Federal income taxes on its income, and no provisions for Federal income
taxes have been made. The reported amounts of the Company's assets and
liabilities as of December 31, 2000 are less than the tax basis of assets by
approximately $21 million.
Stock Based Compensation
The Company grants stock options to employees and directors with an exercise
price equal to the fair value of the shares at the date of the grant. In
accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, compensation expense is not recognized for these stock
option grants.
Expense related to Dividend Equivalent Rights is recognized as dividends are
declared, based on anticipated vesting.
Accounting Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-7
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Risks and Uncertainties
The Company is subject to certain risks and uncertainties affecting the
healthcare industry as a result of healthcare legislation and growing regulation
by federal, state and local governments. Additionally, the Company is subject to
risks and uncertainties as a result of changes affecting operators of nursing
home facilities due to the actions of governmental agencies and insurers to
limit the growth in cost of healthcare services. (See Note 5 - Concentration of
Risk).
NOTE 2 -- PROPERTIES
Leased Property
The Company's leased real estate properties, represented by 130 long-term
care facilities and 2 rehabilitation hospitals at December 31, 2000, are leased
under provisions of master leases with initial terms ranging from 10 to 16
years, plus renewal options. Substantially all of the master leases provide for
minimum annual rentals which are subject to annual increases based upon
increases in the Consumer Price Index or increases in revenues of the underlying
properties, with certain maximum limits. Under the terms of the leases, the
lessee is responsible for all maintenance, repairs, taxes and insurance on the
leased properties.
A summary of the Company's investment in leased real estate properties is as
follows:
December 31,
------------
2000 1999
---- ----
(In thousands)
Buildings .......................... $ 553,183 $ 655,588
Land ............................... 26,758 30,517
------ ------
579,941 686,105
Less accumulated depreciation ...... (72,190) (67,115)
------- -------
Total ........................... $ 507,751 $ 618,990
========= =========
The future minimum contractual rentals for the remainder of the initial
terms of the leases are as follows:
(In thousands)
2001 ............... $ 65,212
2002 ............... 65,194
2003 ............... 64,186
2004 ............... 62,816
2005 ............... 62,405
Thereafter ......... 310,569
-------
$ 630,382
=========
Owned and Operated Property
The Company's owned and operated real estate properties include 69 long-term
care facilities at December 31, 2000, of which 57 are owned directly by the
Company and 12 are subject to third-party leases. An impairment charge of $41.3
million was taken on these assets during the year ended December 31, 2000.
A summary of the Company's investment in the 57 owned and operated real
estate properties is as follows:
December 31,
------------
2000 1999
---- ----
(In thousands)
Buildings .......................... $ 124,452 $ 57,637
Land ............................... 6,149 3,173
----- -----
130,601 60,810
Less accumulated depreciation ...... (17,680) (814)
------- ----
Total ........................... $ 112,921 $ 59,996
========= ========
F-8
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
A summary of the Company's investment in the 12 facilities subject to
third-party leases is as follows:
December 31, 2000
-----------------
Leasehold interest ........................... $ 1,771
Less accumulated amortization ................ (92)
------
Total ...................................... $ 1,679
======
Future minimum operating lease payments on the 12 facilities are as follows:
2001 .................. $ 4,318
2002 .................. 4,318
2003 .................. 4,318
2004 .................. 3,335
2005 .................. 2,221
Thereafter ............ 855
-----
$ 19,365
========
Assets Sold or Held For Sale
During 1998, management initiated a plan to dispose of certain properties
judged to have limited long-term potential and to re-deploy the proceeds.
Following a review of the portfolio, assets identified for sale in 1998 had a
cost of $95 million, a net carrying value of $83 million, and annualized
revenues of approximately $11.4 million. In 1998, the Company recorded a
provision for impairment of $6.8 million to adjust the carrying value of certain
assets to their fair value, less cost of disposal. During 1998, the Company
completed sales of two groups of assets, yielding sales proceeds of $42.0
million. Gains realized in 1998 from the dispositions approximated $2.8 million.
During 1999, the Company completed sales yielding net proceeds of $18.2
million, realizing losses of $10.5 million. In addition, management initiated a
plan for additional asset sales to be completed in 2000. The additional assets
identified as assets held for sale had a cost of $33.8 million, a net carrying
amount of $28.6 million and annualized revenue of approximately $3.4 million. As
a result of this review, the Company recorded a provision for impairment of
$19.5 million to adjust the carrying value of assets held for sale to their fair
value, less cost of disposal.
During 2000, the Company recorded a $14.4 million provision for impairment
related to assets held for sale and reclassified $24.3 million of assets held
for sale to "owned and operated assets" as the timing and strategy for sale or,
alternatively, re-leasing were revised in light of prevailing marketing
conditions. During 2000, the Company realized disposition proceeds of $1.1
million on assets held for sale. Additionally, the Company received proceeds of
$34.7 million from sales of certain of its core and other assets, resulting in a
gain of $9.9 million.
Following is a summary of the impairment reserve:
Beginning Impairment at January 1, 1998............ $0
Provision charged ................................. 6,800
Provision applied ................................. -
-----
Impairment Balance at December 31, 1998............ 6,800
Provision charged ................................. 19,500
Provision applied ................................. (4,567)
------
Impairment Balance at December 31, 1999............ 21,733
Provision charged ................................. 14,415
Converted to Owned and Operated ................... (17,339)
Provision applied ................................. (10,060)
-------
Impairment Balance at December 31, 2000............ $8,749
=======
F-9
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 3 -- MORTGAGE NOTES RECEIVABLE
The following table summarizes the mortgage notes balances for the years
ended December 31, 2000 and 1999:
2000 1999
---- ----
(In thousands)
Gross mortgage notes ..................... $211,581 $213,617
Reserve for uncollectable loans .......... (4,871) -
------ -------
Net mortgage notes at December 31 ...... $206,710 $213,617
======== ========
Mortgage notes receivable relate to 63 long-term care facilities. The
mortgage notes are secured by first mortgage liens on the borrowers' underlying
real estate and personal property. The mortgage notes receivable relate to
facilities located in 13 states, operated by 12 independent healthcare operating
companies.
The Company monitors compliance with mortgages and when necessary has
initiated collection, foreclosure and other proceedings with respect to certain
outstanding loans.
During 2000, the Company determined that a certain mortgage was impaired and
accordingly wrote down the mortgage to its net realizable value resulting in a
provision for loan loss of $4.9 million. Income recognized on the mortgage was
$745,000, $966,000, and $951,000 for the years ended December 31, 2000, 1999 and
1998, respectively.
The following are the three primary mortgage structures currently used by
the Company:
Convertible Participating Mortgages are secured by first mortgage liens on
the underlying real estate and personal property of the mortgagor. Interest
rates are usually subject to annual increases based upon increases in the CPI or
increases in revenues of the underlying long-term care facilities, with certain
maximum limits. Convertible Participating Mortgages afford the Company an option
to convert its mortgage into direct ownership of the property, generally at a
point six to nine years from inception; they are then subject to a leaseback to
the operator for the balance of the original agreed term and for the original
agreed participation in revenues or CPI adjustments. This allows the Company to
capture a portion of the potential appreciation in value of the real estate.
The operator has the right to buy out the Company's option at formula prices.
Participating Mortgages are secured by first mortgage liens on the
underlying real estate and personal property of the mortgagor. Interest rates
are usually subject to annual increases based upon increases in the CPI or
increases in revenues of the underlying long-term care facilities, with certain
maximum limits.
Fixed-Rate Mortgages, with a fixed interest rate for the mortgage term, are
also secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor.
F-10
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The outstanding principal amount of mortgage notes receivable, net of
allowances, are as follows:
Mortgage notes are shown net of allowances of $4,871,000 in 2000. There
were no provisions recorded prior to 2000.
On December 30, 1999, the Company provided notice as to an Event of Default
and acceleration of the due date to the mortgagor of the $58.8 million
participating mortgage note. The total obligation outstanding at that time,
including deferred interest, was $63.3 million. At that date the mortgagor was
current with respect to principal and interest payments due on the loan but had
failed to fully comply with certain covenants and to pay certain property taxes.
On January 13, 2000, the Company offset security deposits of $2.4 million
against unpaid current and deferred interest. On January 18, 2000 the mortgagor
filed with the Bankruptcy Court of Wilmington, Delaware for protection under
Chapter 11 of the Bankruptcy Code. While the Company's collection actions have
been stayed as a result of the bankruptcy filing by the mortgagor, the Company
believes the security for its loan will be adequate for collection of amounts
due. During 2000, the Company recorded interest on this mortgage note at a rate
equal to the results expected from negotiations with the operator, and continues
to accrue interest at this reduced rate. On February 1, 2001, four facilities
that were collateral for this mortgage were sold to a third-party, and the
Company received a separate mortgage note in the amount of $4.5 million, which
is secured by liens on the underlying real estate. The Company reduced the
amount of the participating mortgage note by $4.5 million.
The estimated fair value of the Company's mortgage loans at December 31,
2000 is approximately $230.6 million. Fair value is based on the estimates by
management using rates currently prevailing for comparable loans.
NOTE 4 - OTHER INVESTMENTS
A summary of the Company's other investments is as follows:
F-11
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 5 -- CONCENTRATION OF RISK
As of December 31, 2000, 92% of the Company's real estate investments are
related to long-term care facilities. The Company's facilities are located in 29
states and are operated by 27 independent healthcare operating companies.
Investing in long-term healthcare facilities involves certain risks
stemming from government legislation and regulation of operators of the
facilities. The Company's tenants/mortgagors depend on reimbursement legislation
which will provide them adequate payments for services because a significant
portion of their revenue is derived from government programs funded under
Medicare and Medicaid. The Medicare program recently implemented a Prospective
Payment System for skilled nursing facilities, which replaced cost-based
reimbursements and significantly reduced payments for services provided.
Additionally, certain State Medicaid programs have implemented similar
prospective payment systems. The reduction in payments to nursing home operators
pursuant to the Medicare and Medicaid payment changes has negatively affected
the revenues of the Company's nursing home facilities.
Most of the Company's nursing home investments were designed exclusively to
provide long-term healthcare services. These facilities are also subject to
detailed and complex specifications for the physical characteristics as mandated
by various governmental authorities. If the facilities cannot be operated as
long-term care facilities, finding alternative uses may be difficult. The
Company's triple-net leases require its tenants to comply with regulations
affecting its facilities, and the Company regularly monitors compliance by
tenants with healthcare facilities' regulations. Nevertheless, if tenants fail
to perform their obligations, the Company may be required to do so in order to
maintain the value of its investments.
Approximately 77% of the Company's real estate investments are operated by
7 public companies, including Sun Healthcare Group, Inc. (26.1%), Integrated
Health Services, Inc. (17.5%), Advocat, Inc. (11.6 %), Vencor Operating, Inc.
(5.8%), Mariner Post-Acute Network (6.4%), Genesis Health Ventures, Inc. (5.3%)
and Alterra Healthcare Corporation (formerly Alternative Living Services)
(3.7%). Of the remaining 20 operators, none operate investments in facilities
representing more than 3.4% of the total real estate investments.
Many of the nursing home companies operating the Company's facilities have
reported significant operating losses in the last two years. The Company has
initiated discussions with all operators who are experiencing financial
difficulties, as well as state officials who regulate its properties. It also
has initiated various other actions to protect its interest under its leases and
mortgages.
NOTE 6 - LEASE AND MORTGAGE DEPOSITS
The Company obtains liquidity deposits and letters of credit from most
operators pursuant to its leases and mortgages. These generally represent the
monthly rental and mortgage interest income for periods ranging from three to
six months with respect to certain of its investments. At December 31, 2000, the
Company held $7.6 million in such liquidity deposits and $9.6 million in letters
of credit. Additional security for rental and mortgage interest revenue from
operators is provided by covenants regarding minimum working capital and net
worth, liens on accounts receivable and other operating assets of the operators,
provisions for cross default, provisions for cross-collateralization and by
corporate / personal guarantees.
NOTE 7 -- BORROWING ARRANGEMENTS
On July 17, 2000, the Company replaced its $200 million unsecured revolving
line of credit facility with a new $175 million secured revolving line of credit
facility that expires on December 31, 2002. Borrowings bear interest at 2.5% to
3.25% over LIBOR, based on the Company's leverage ratio. Borrowings of
approximately $129 million are outstanding at December 31, 2000. LIBOR based
borrowings under this facility bear interest at a weighted-average rate of
10.00% at December 31, 2000 and 7.30% at December 31, 1999. Investments with a
gross book value of approximately $240 million are pledged as collateral for
this revolving line of credit facility.
On August 16, 2000, the Company replaced its $50 million secured revolving
line of credit facility with a new $75 million secured revolving line of credit
facility that expires on March 31, 2002 as to $10 million and June 30, 2005 as
to $65 million. Borrowings under the facility bear interest at 2.5% to 3.75%
over LIBOR, based on the Company's leverage ratio and collateral assigned. LIBOR
based borrowings under this facility bear interest at a weighted-average rate of
9.77% at December 31, 2000 and 8.44% at December 31, 1999. Investments with a
gross book value of approximately $90 million are currently pledged as
collateral for this revolving line of credit facility.
F-12
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company is required to meet certain financial covenants, including
prescribed leverage and interest coverage ratios on its long-term borrowings.
The following is a summary of the Company's long-term borrowings:
The Subordinated Convertible Debentures ("Debentures") are convertible at
any time into shares of Common Stock at a conversion price of $26.962 per share.
The Debentures are unsecured obligations of the Company and are subordinate in
right and payment to the Company's senior unsecured indebtedness. The balance of
the Debentures was repaid in full on February 1, 2001 principally utilizing
borrowings under the Company's revolving lines of credit. (See Note 15 -
Subsequent Events).
On July 15, 2000 the Company repaid the 10% and 7.4% Unsecured Notes issued
in 1995. The effective interest rate for the unsecured notes was 8.8%, with
interest-only payments due semi-annually through July 2000.
Real estate investments with a gross book value of approximately $41 million
are pledged as collateral for outstanding secured borrowings. Long-term secured
borrowings are payable in aggregate monthly installments of approximately
$282,300, including interest at rates ranging from 7.0% to 10.0%.
Assuming none of the Company's borrowing arrangements are refinanced,
converted or prepaid prior to maturity, required principal payments for each of
the five years following December 31, 2000 and the aggregate due thereafter are
set forth below:
2001 ..................................... $ 18,882
2002 ..................................... 263,429
2003 ..................................... 2,026
2004 ..................................... 2,176
2005 ..................................... 50,036
Thereafter ............................... 114,843
-------
$ 451,392
=========
The estimated fair values of the Company's long-term borrowings is
approximately $415.0 million at December 31, 2000 and $508.5 million at December
31, 1999. Fair values are based on the estimates by management using rates
currently prevailing for comparable loans.
F-13
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 8 -- FINANCIAL INSTRUMENTS
At December 31, 2000 and 1999, the carrying amounts and fair values of the
Company's financial instruments are as follows:
Fair value estimates are subjective in nature and are dependent on a number
of important assumptions, including estimates of future cash flows, risks,
discount rates and relevant comparable market information associated with each
financial instrument (See Note 1 - Risks and Uncertainties). The use of
different market assumptions and estimation methodologies may have a material
effect on the reported estimated fair value amounts. Accordingly, the estimates
presented above are not necessarily indicative of the amounts the Company would
realize in a current market exchange.
The Company utilizes interest rate swaps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. At
December 31, 2000, the Company had an interest rate cap with a notional amount
of $100 million and an interest rate swap with a notional amount of $32 million,
based on 30-day London Interbank Offered Rates (LIBOR). Under the $100 million
agreement, the Company's LIBOR base interest rate cannot exceed 7.5%. This
agreement expires in March, 2001. Under the $32 million agreement, the Company
receives payments when LIBOR interest rates exceed 6.35% and pays the
counterparties when LIBOR rates are under 6.35%. The amounts exchanged are based
on the notional amounts. The $32 million agreement expires on December 17, 2001.
The combined fair value of the interest rate swaps at December 31, 2000 was a
deficit of $351,344.
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 2000. The Company
expects to adopt the new Statement effective January 1, 2001. The Statement will
require the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedge
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings.
Based on the Company's derivative positions at December 31, 2000, the
Company estimates that upon adoption it will record a loss from the cumulative
effect of an accounting change of approximately $400,000 in the consolidated
statement of operations.
NOTE 9 -- RETIREMENT ARRANGEMENTS
The Company has a 401(k) Profit Sharing Plan covering all eligible
employees. Under the Plan, employees are eligible to make contributions, and the
Company, at its discretion, may match contributions and make a profit sharing
contribution.
In 1993, the Company adopted the 1993 Deferred Compensation Plan, which
covered all eligible employees and members of the Board of Directors.
Participation by the directors in the Deferred Compensation Plan was terminated
effective December 31, 1997, and accumulated benefits to the Directors under the
plan were settled and paid in 1998.
F-14
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Deferred Compensation Plan is an unfunded plan under which the Company
may award units that result in participation in the dividends and future growth
in the value of the Company's common stock. The total number of units permitted
by the plan is 200,000, of which 90,850 units have been awarded and 20,050 are
outstanding at December 31, 2000. Units awarded to eligible participants vest
over a period of five years based on the participant's initial service date.
Provisions charged to operations with respect to these retirement
arrangements totaled $181,000, $123,000 and $346,000, in 2000, 1999, and 1998,
respectively.
NOTE 10 -- SHAREHOLDERS' EQUITY AND STOCK OPTIONS
Series C Preferred Stock
On July 14, 2000, Explorer Holdings, L.P. ("Explorer"), an affiliate of
Hampstead Investment Partners III, L.P. ("Hampstead"), a private equity
investor, completed an investment (the "Equity Investment") of $100.0 million in
the Company in exchange for 1,000,000 shares of the Company's Series C Preferred
Stock. The Company used a portion of the proceeds from the Equity Investment to
repay $81 million of maturing debt on July 17, 2000.
Shares of the Series C Preferred are convertible into Common Stock at any
time by the holder at an initial conversion price of $6.25 per share of Common
Stock. The shares of Series C Preferred are entitled to receive dividends at the
greater of 10% per annum or the dividend payable on shares of Common Stock, with
the Series C Preferred participating on an "as converted" basis. Dividends on
the Series C Preferred Stock are cumulative from the date of original issue and
are payable quarterly commencing on November 15, 2000. Explorer agreed to defer
until April 2, 2001, the accrued dividend of $4,666,667 payable on November 15,
2000 with respect to the Series C Preferred Stock. (See Note 15 - Subsequent
Events).
The Series C preferred will vote (on an "as converted" basis) together with
the Common Stock on all matters submitted to stockholders. However, without the
consent of the Company's Board of Directors, no holder of Series C preferred may
vote or convert shares of Series C preferred if the effect thereof would be to
cause such holder to beneficially own more than 49.9% of the Company's Voting
Securities. If dividends on the Series C preferred are in arrears for four
quarters, the holders of the Series C preferred, voting separately as a class
(and together with the holder of Series A and Series B preferred if and when
dividends on such series are in arrears for six or more quarters and special
class voting rights are in effect with respect to the Series A and Series B
preferred), will be entitled to elect directors who, together with the other
directors designated by the holders of Series C preferred, would constitute a
majority of the Company's Board of Directors.
The general terms of the Equity Investment are set forth in the Investment
Agreement. In addition to setting forth the terms on which Explorer has acquired
the initial $100.0 million of Series C preferred, the Investment Agreement also
contains provisions pursuant to which Explorer will make available, upon
satisfaction of certain conditions up to $50.0 million to fund growth (the
"Growth Equity Commitment"). Draws under the Growth Equity Commitment will be
evidenced by Common Stock issued at the then fair market value less a discount
agreed to by Explorer and the Company representing the customary discount
applied in rights offerings to an Issuer's existing security holders, or, if not
agreed, 6%. Following the drawing in full of the Growth Equity Commitment or
upon expiration of the Initial Growth Equity Commitment, Explorer will have the
option to provide up to an additional $50.0 million to fund growth for an
additional twelve month period (the "Increased Growth Equity Commitment"). Draws
under the Increased Growth Equity Commitment will be subject to the same
conditions as applied to the Growth Equity Commitment and the Common Stock so
issued will be priced in the same manner described above.
If Explorer exercises its option to fund the Increased Growth Equity
Commitment, the Company will have the option to engage in a Rights Offering to
all common stockholders other than Explorer and its affiliates. In the Rights
Offering, stockholders will be entitled to acquire their proper share of the
Common Stock issued in connection with the Growth Equity Commitment at the same
price paid by Explorer. Proceeds received from the Rights Offering will be used
to repurchase Common Stock issued to Explorer under the Growth Commitment.
Upon the first to occur of the drawing in full of the Increased Growth
Equity Commitment or the expiration of the Increased Growth Equity Commitment,
the Company again will have the option to engage in a second Rights Offering,
Stockholders (other than Explorer and its affiliates) will be entitled to
acquire their proportionate share of the Common Stock issued in connection with
the Increased Growth Equity Commitment at the same price paid by Explorer.
Proceeds received in connection with the second Rights Offering will be used to
repurchase Common Stock issued to Explorer under the increased Growth
Commitment.
F-15
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In connection with Explorer's Equity Investment, the Company entered into a
Shareholders Agreement with Explorer dated July 14, 2000 (the "Shareholders'
Agreement") pursuant to which Explorer is entitled to designate up to four
members of the Company's Board of Directors depending on the percentage of total
voting securities (consisting of Common Stock and Series C Preferred) acquired
from time to time by Explorer pursuant to the documentation entered into by
Explorer in connection with the Equity Investment. Explorer is entitled to
designate at least one director of the Company's Board of Directors as long as
it owns at least five percent (5%) of the total voting power of the Company and
to approve one "independent director" as long as it owns at least twenty-five
percent (25%) of the shares it acquired at the time it completed the Equity
Investment (or Common Stock issued upon the conversion of the Series C Preferred
acquired by Explorer at such time). Explorer's director designations terminate
upon the tenth anniversary of the Shareholders' Agreement.
The Company has amended its Stockholders' Right Plan to exempt Explorer and
any of its transferees that become parties to the standstill as Acquiring
Persons under such plan. Subsequent acquisitions of voting securities by a
transferee of more than 9.9% of voting securities from Explorer are limited to
not more than 2% of the total amount of outstanding voting securities in any
twelve-month period.
The Company has agreed to indemnify Explorer, its affiliates and the
individuals that will serve as directors of the Company against any losses and
expenses that may be incurred as a result of the assertion of certain claims,
provided that the conduct of the indemnified parties meets certain required
standards. In addition, the Company has agreed to pay Explorer an advisory fee
if Explorer provides assistance to the Company in connection with evaluating
growth opportunities or other financing matters. The amount of the advisory fee
will be mutually determined by the Company and Explorer at the time the services
are rendered based upon the nature and extent of the services provided. The
Company will also reimburse Explorer for Explorer's out-of-pocket expenses, up
to a maximum of $2.5 million, incurred in connection with the Equity Investment.
To date, the Company has reimbursed Explorer approximately $964,000 of such
expenses.
Series A and Series B Cumulative Preferred Stock
On April 28, 1998, the Company received gross proceeds of $50 million from
the issuance of 2 million shares of 8.625% Series B Cumulative Preferred Stock
("Series B Preferred Stock") at $25 per share. Dividends on the Series B
Preferred Stock are cumulative from the date of original issue and are payable
quarterly commencing on August 15, 1998. On April 7, 1997, the Company received
gross proceeds of $57.5 million from the issuance of 2.3 million shares of 9.25%
Series A Cumulative Preferred Stock ("Series A Preferred Stock") at $25 per
share. Dividends on the Series A Preferred Stock are cumulative from the date of
original issue and are payable quarterly. At December 31, 2000, the aggregate
liquidation preference of Series A and Series B preferred stock issued is
$107,500,000.
Shareholder Rights Plan
On May 12, 1999, the Company's Board of Directors authorized the adoption of
a shareholder rights plan. The plan is designed to require a person or group
seeking to gain control of the Company to offer a fair price to all the
Company's shareholders. The rights plan will not interfere with any merger,
acquisition or business combination that the Company's Board of Directors finds
is in the best interest of the Company and its shareholders.
In connection with the adoption of the rights plan, the board declared a
dividend distribution of one right for each common share outstanding on May 24,
1999. The rights will not become exercisable unless a person acquires 10% or
more of the Company's common stock, or begins a tender offer that would result
in the person owning 10% or more of the Company's common stock. At that time,
each right would entitle each shareholder other than the person who triggered
the rights plan to purchase either the Company's common stock or stock of an
acquiring entity at a discount to the then market price. The plan was not
adopted in response to any specific attempt to acquire control of the Company.
The Company amended its Stockholders' Right Plan to exempt Explorer and any
of its transferees that become parties to the standstill as Acquiring Persons
under such plan. Subsequent acquisitions of voting securities by a transferee of
more than 9.9% of voting securities from Explorer are limited to not more than
2% of the total amount of outstanding voting securities in any 12 month period.
F-16
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Stock Options and Stock Purchase Assistance Plan
In January 1998, the Company adopted a stock purchase assistance plan,
whereby the Company extended credit to directors and employees to purchase the
Company's stock through the exercise of stock options. During 2000, the Company
terminated this borrowing program and forgave the outstanding stock option loans
in exchange for the surrender of the underlying stock certificates and payment
of all outstanding interest on the loans. The Company recorded a charge of $1.9
million related to these loans, which is included in the provision for loss on
mortgages and notes receivable in the Company's Consolidated Statements of
Operations.
Under the terms of the 2000 Stock Incentive Plan, the Company reserved
3,500,000 shares of common stock for grants to be issued during a period of up
to 10 years. Options are exercisable at the market price at the date of grant,
expire five years after date of grant for over 10% owners and 10 years from the
date of grant for less than 10% owners. Directors' shares vest over three years
while other grants vest over five years. Directors, officers and employees are
eligible to participate in the Plan. Options for 1,346,953 shares have been
granted to 22 eligible participants. Additionally, 275,052 shares of restricted
stock have been granted under the provisions of the Plan. The market value of
the restricted shares on the date of the award was recorded as unearned
compensation-restricted stock, with the unamortized balance shown as a separate
component of shareholders' equity. Unearned compensation is amortized to expense
generally over the vesting period, with charges to operations of $535,000,
$635,000, and $612,000 in 2000, 1999, and 1998, respectively.
During 2000, 1,005,000 Dividend Equivalent Rights were granted to eligible
employees. A Dividend Equivalent Right entitles the participant to receive
payments from the Company in an amount determined by reference to any cash
dividends paid on a specified number of shares of stock to the Company
stockholders of record during the period such rights are effective. The Company
recorded $502,500 of expense related to the Dividend Equivalent Rights in 2000.
At December 31, 2000, options currently exercisable (49,562) have a weighted
average exercise price of $25.677, with exercise prices ranging from $24.45 to
$37.20. There are 1,877,995 shares available for future grants as of December
31, 2000.
The following is a summary of activity under the plan. Exercise prices and
all other option data for grants prior to April 2, 1998 have been adjusted based
on a formula reflecting the per share value of the distribution of Omega
Worldwide, Inc.
During 1999, the Company offered holders of options the opportunity to
accelerate the expiration date of options in consideration of a cash payment.
Twenty-two employees who were holders of options for 431,830 shares accepted the
offer and were paid a total of $38,000. Options for 157,000 shares granted in
1999 and canceled in 1999 under this arrangement are excluded from the above
table for 1999 and from the calculation for the weighted average fair value of
options granted in 1999.
F-17
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In 1995, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This standard prescribes a fair value-based method of accounting
for employee stock options or similar equity instruments and requires certain
pro forma disclosures. For purposes of the pro forma disclosures required under
Statement 123, the estimated fair value of the options is amortized to expense
over the option's vesting period. Based on the Company's option activity, net
earnings would have increased in 2000 and 1999 by approximately $1,064,000 and
$618,000, respectively and decreased in 1998 by approximately $2.2 million. Net
earnings per basic and diluted common share on a pro forma basis would have
increased in 2000 and 1999 by approximately $.06 and $.03, respectively, and
decreased in 1998 by $.11 under APB 25. The estimated weighted average fair
value of options granted in 2000, 1999, and 1998 was $407,000, $168,000 and
$220,000, respectively. In determining the estimated fair value of the Company's
stock options as of the date of grant, a Black-Scholes option pricing model was
used with the following weighted-average assumptions: risk-free interest rates
of 5.2% in 2000, 6.5% in 1999 and 6% in 1998; a dividend yield of 10% in 2000
and 1999 and 6.75% in 1998; volatility factors of the expected market price of
the Company's common stock based on 30.0% volatility in 2000, 22.7% in 1999 and
15.0% in 1998; and a weighted-average expected life of the options of eight
years for each of the three years.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
NOTE 11 -- RELATED PARTY TRANSACTIONS
The Company has agreed to pay Explorer an advisory fee if Explorer provides
assistance to the Company in connection with the evaluating growth opportunities
or other financing matters. The amount of the advisory fee will be mutually
determined by the Company and Explorer, based upon the nature and the extent of
the services provided and the results achieved. The Company will also reimburse
Explorer for Explorer's out-of-pocket expenses, up to a maximum of $2.5 million,
incurred in connection with the Equity Investment. To date, the Company has
reimbursed Explorer for approximately $964,000 of such expenses.
Explorer agreed to defer until April 2, 2001, the accrued dividend of
$4,666,667 payable on November 15, 2000 with respect to the Series C preferred
stock. In exchange for this deferral, the Company agreed to pay Explorer a
waiver fee equal to 10% per annum of the unpaid dividend from November 15, 2000
until the October dividend is paid. (See note 15 - Subsequent Events)
In 1995, the Company sponsored the organization of Principal Healthcare
Finance Limited ("Principal"), an Isle of Jersey company, whose purpose is to
invest in nursing homes and long-term care facilities in the United Kingdom.
Prior to the April 2, 1998 contribution to Omega Worldwide, Inc. ("Worldwide")
as explained below, the Company had invested $30.7 million in Principal, of
which $23.8 million was represented by a (pound)15 million subordinated note due
December 31, 2000, and $6.9 million was represented by an equity investment. The
Company had also provided investment advisory and management services to
Principal and had advanced temporary loans to Principal from time to time.
In November 1997, the Company formed Worldwide, a company which provides
asset management services and management advisory services, as well as equity
and debt capital to the healthcare industry, particularly residential healthcare
services to the elderly. On April 2, 1998, the Company contributed substantially
all of its Principal assets to Worldwide in exchange for approximately 8.5
million shares of Worldwide common stock and 260,000 shares of Series B
preferred stock. Of the 8,500,000 shares of Worldwide received by the Company,
approximately 5,200,000 were distributed on April 2, 1998 to the Company's
shareholders on the basis of one Worldwide share for every 3.77 common shares of
the Company held by shareholders of the Company on the record date of February
1, 1998. Of the remaining 3,300,000 shares of Worldwide received by the Company,
2,300,000 shares were sold by the Company on April 3, 1998 for net proceeds of
approximately $16,250,000 in a secondary offering pursuant to a registration
statement of Worldwide. The market value of the distribution to shareholders
approximated $39 million or $1.99 per share. The Company recorded a
non-recurring gain of $30.2 million on the distribution and secondary offerings
of Worldwide common shares during 1998. In April 1999, in conjunction with a
similar acquisition by Worldwide, the Company acquired an interest in Principal
Healthcare Finance Trust ("the Trust"), an Australian Unit Trust, which owns 44
nursing home facilities and 483 assisted living units in Australia and New
Zealand.
F-18
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
As of December 31, 2000, the Company holds 1,163,000 shares of Worldwide
common stock and 260,000 shares of its preferred stock. The carrying value of
the Company's investment in Worldwide is $5,435,000, including the market value
of its common stock and its cost basis in its preferred stock. The Company also
holds a $1,615,000 investment in Principal, represented by 990,000 ordinary
shares of Principal, and a $1,266,000 investment in the Trust.
The Company has guaranteed repayment of Worldwide borrowings pursuant to a
revolving credit facility in exchange for an initial 1% fee and an annual
facility fee of 25 basis points. At December 31, 2000 borrowings of $2,850,000
were outstanding under Worldwide's revolving credit facility. Worldwide's credit
agreement calls for scheduled payments to be made until fully repaid in June
2001. Under this agreement, no further borrowings may be made by Worldwide under
its revolving credit facility. The Company is required to provide collateral in
the amount of $8.8 million related to the guarantee of Worldwide's obligations.
Upon repayment by Worldwide of the remaining outstanding balance under its
revolving credit facility, the subject collateral will be released in connection
with the termination of the Company's guarantee.
Additionally, the Company had a Services Agreement with Worldwide that
provided for the allocation of indirect costs incurred by the Company to
Worldwide. The allocation of indirect costs has been based on the relationship
of assets under the Company's management to the combined total of those assets
and assets under Worldwide's management. Upon expiration of this agreement on
June 30, 2000, the Company entered into a new agreement requiring quarterly
payments from Worldwide of $37,500 for the use of offices and certain
administrative and financial services provided by the Company. Upon the
reduction of the Company's accounting staff, the Service Agreement was
renegotiated again on November 1, requiring quarterly payments from Worldwide of
$32,500. Costs allocated to Worldwide for 2000 and 1999 were $404,000 and
$754,000, respectively.
NOTE 12 -- DIVIDENDS
In order to qualify as a real estate investment trust, the Company must,
among other requirements, distribute at least 95% of its real estate investment
trust taxable income to its shareholders. Per share distributions by the Company
were characterized in the following manner for income tax purposes:
Common 2000 1999 1998
------ ---- ---- ----
Ordinary income ..................... $ - $ 2.100 $ 2.275
Return of capital ................... 1.000 0.700 0.191
Long-term capital gain - - 0.214
------ ------ ------
Total dividends paid .............. $ 1.000 $ 2.800 $ 2.680
======== ======== ========
Common Non-Cash
---------------
Return of capital ................... $ - $ - $ 0.461
Long-term capital gain .............. - - 1.529
------- ------- --------
Total non-cash distribution ....... $ - $ - $ 1.990
======== ======= ========
Series A Preferred
------------------
Ordinary income ..................... $ 2.313 $ 2.313 $ 2.313
======== ======== ========
Series B Preferred
------------------
Ordinary income ..................... $ 2.156 $ 2.156 $ 1.078
======= ======== =======
F-19
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Following are details of changes in operating assets and liabilities (excluding
the effects of non-cash expenses), and other non-cash transactions:
NOTE 14 - LITIGATION
The Company is subject to various legal proceedings, claims and other
actions arising out of the normal course of business. While any legal proceeding
or claim has an element of uncertainty, management believes that the outcome of
each lawsuit claim or legal proceeding that is pending or threatened, or all of
them combined, will not have a material adverse effect on its consolidated
financial position or results of operations.
On June 20, 2000, the Company and its chief executive officer, chief
financial officer and chief operating officer were named as defendants in
certain litigation brought by Ronald M. Dickerman, in his individual capacity,
in the United States District Court for the Southern District of New York. In
the complaint, Mr. Dickerman contends that the Company and the named executive
officers violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder. Mr. Dickerman subsequently amended the
complaint to assert his claims on behalf of an unnamed class of plaintiffs. On
July 28, 2000, Benjamin LeBorys commenced a class action lawsuit making similar
allegations against the Company and certain of its officers and directors in the
United States District Court for the Southern District of New York. The cases
have been consolidated, and Mr. LeBorys has been named lead plaintiff. The
plaintiffs seek unspecified damages. The Company has reported the litigation to
its directors and officers liability insurer. The Company believes that the
litigation is without merit and is defending vigorously. The Company's Motion to
Dismiss was filed with the Court on February 16, 2001.
On June 21, 2000, the Company was named as a defendant in certain
litigation brought against it by Madison/OHI Liquidity Investors, LLC
("Madison"), a customer that claims that the Company has breached and/or
anticipatorily breached a commercial contract. Mr. Dickerman is a partner of
Madison and is a guarantor of Madison's obligations to the Company. Madison
claims damages as a result of the alleged breach of approximately $700,000.
Madison seeks damages as a result of the claimed anticipatory breach in the
amount of $15 million or, in the alternative, Madison seeks specific performance
of the contract as modified by a course of conduct that Madison alleges
developed between Omega and the Company. The Company contends that Madison is in
default under the contract in question. The Company believes that the litigation
is meritless. The Company is defending vigorously and on December 5, 2000, filed
counterclaims against Madison and the guarantors, including Mr. Dickerman,
seeking repayment of approximately $8.5 million that Madison owes the Company.
F-20
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Karrington Health, Inc. brought suit against the Company alleging that the
Company repudiated and ultimately breached a financing contract to provide
$95,000,000 of financing for the development of 13 assisted living facilities.
Karrington seeks recovery of approximately $20,000,000 in damages it alleges to
have incurred as a result of the breach. The Company denies that it entered into
a valid and binding contract with Karrington and is vigorously defending the
litigation.
NOTE 15 -- SUBSEQUENT EVENTS
On February 1, 2001, the Company repaid the outstanding balance of its 8.5%
Subordinated Convertible Debentures due February 1, 2001 from cash and revolving
credit line availability.
On February 1, 2001, the Company also announced suspension of payments of
common and preferred dividends to strengthen the Company's Balance Sheet while
it pursues alternatives for extending or repaying its 2002 debt maturities. The
Company can give no assurance as to when the dividends will be reinstated or the
amount of the dividends, if and when such payments are recommenced. All accrued
and unpaid dividends on the Company's outstanding shares of Series A, B and C
Preferred Stock must be paid in full before dividends on the Common Stock can be
resumed.
On March 30, 2001, the Company exercised its option to pay the accrued
$4,666,667 Series C dividend from November 15, 2000 and the associated waiver
fee by issuing 48,420 Series C preferred shares to Explorer, which are
convertible into 774,722 shares of the Company's common stock at $6.25 per
share. (See "Note 11 - Related Party Transactions" for information regarding the
dividend deferral).
In March 2001, the Company announced that it continues its discussions with
several of its lessees to resolve payment issues, including Alterra Healthcare
Corp., Lyric Healthcare, Alden Management Services Inc., and TLC Healthcare Inc.
Alterra has recently issued a press release stating that it had informed certain
of its lenders and landlords in March, 2001 that they will not be paying their
March rents and debt service and are seeking relief as to these payments. The
Company has a master lease with Alterra relating to ten assisted living
facilities representing an investment of $34.1 million which provides for annual
rental payments of $3.6 million. Alterra has not made its March rental payment
to the Company, and while discussions are ongoing the Company has sent Alterra a
notice of default.
Additionally, during the first quarter of 2001, pursuant to a forbearance
agreement between the Company and Lyric through April 30, 2001, the Company
began receiving 60% of the approximately $860,000 of monthly rent due under the
Lyric leases. Discussions are continuing with Lyric to reach a permanent
restructuring agreement. The Company's total original investment in the ten
nursing homes covered under the leases is $95.4 million, and annual rent is
$10.3 million.
Affiliates of Alden Management, Inc., Chicago, IL, are delinquent in paying
their lease, loan and escrow payments on the four facilities it leases from the
Company. These facilities represent an initial investment by the Company of
$31.3 million, with annual rent of approximately $3.2 million. Discussions with
Alden are ongoing.
TLC Healthcare of Illinois, Inc. has made only partial payments under its
master lease with the Company based on the shutdown of one of its facilities
having an annual rent payment of approximately $732,000, and has notified the
Company that it may not be able to make its April payment on its other seven
facilities or otherwise fund operations with annual rent and mortgage payments
totaling approximately $2.8 million. The Company has funded $623,000 for payroll
at the facilities to facilitate continued operations and is taking steps to
transition the operations of the facilities to qualified operators through new
lease or management structures.
In several instances the Company holds security deposits that can be applied
in the event of lease and loan defaults, subject to applicable limitations under
bankruptcy law with respect to operators seeking protection under Chapter 11 of
the Bankruptcy Code.
F-21
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 16 -- SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes quarterly results of operations for the years ended
December 31, 2000 and 1999.
Note: During the three-month periods ended March 31, 2000, September 30, 2000
and December 31, 2000, the Company recognized a provision for impairment of
assets of $4,500, $49,849 and $7,341 respectively. Additionally, during the
three-month period ended June 30, 2000, the Company recognized a gain of $10,451
related to assets sold during the period. During the three-month period ended
December 31, 1999, the Company recognized a loss of $30,000 related to assets
sold during the period and a provision for impairment of assets held for sale
(See Note 2 - Properties).
NOTE 17 - CONSULTING AND SEVERANCE AGREEMENTS
On July 18, 2000, the Company entered into a Consulting and Severance
Agreement with Essel W. Bailey, Jr. (The "Bailey Severance Agreement"), pursuant
to which Mr. Bailey resigned as an officer of the Company. Mr. Bailey's
resignation and the Bailey Severance Agreement became effective on July 14,
2000.
Pursuant to the Bailey Severance Agreement, Mr. Bailey received payment of
his regular salary through the effective date of his resignation and a lump-sum
severance payment equal to $1,555,000. The Bailey Severance Agreement provides
that Mr. Bailey is fully vested in his deferred compensation plan and in 59,708
shares of his restricted stock. Pursuant to the Bailey Severance Agreement, Mr.
Bailey will provide consulting services to the Company for twelve months
following his resignation. In exchange for consulting services and his agreement
not to compete with the Company or solicit its customers or employees, Mr.
Bailey will receive compensation equal to $147,500 per month for twelve months.
The costs incurred related to the Bailey Severance Agreement, along with
costs incurred in connection with a similar agreement with the Company's former
Chief Financial Officer, total approximately $4.7 million and have been included
in the Company's Consolidated Statements of Operations in 2000.
F-22
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 18 - SEGMENT INFORMATION
The following tables set forth the reconciliation of operating results and total
assets for the Company's reportable segments for the years ended December 31,
2000, 1999 and 1998.
F-23
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The revenues, expenses, assets and liabilities in the Company's consolidated
financial statements which related to owned and operated assets are as follows:
(In Thousands)
Year Ended December 31,
2000 1999
---- ----
Revenues (1)
Medicaid .................................. $ 108,082 $ 16,636
Medicare .................................. 31,459 4,861
Private & Other ........................... 36,018 4,726
------ -----
Total Revenues ............................ 175,559 26,223
Expenses
Administration ............................ 34,264 4,925
Property & Related ........................ 11,701 1,675
Patient Care Expenses ..................... 120,444 17,393
------- ------
Total Expenses ............................ 166,409 23,993
Contribution Margin ....................... 9,150 2,230
Management Fees ........................... 8,778 1,180
Rent ...................................... 3,788 -
----- -----
EBITDA (2) ................................ $ (3,416) $ 1,050
======== =======
(1) Nursing home revenues from these owned and operated assets are recognized as
services are provided.
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization It is considered by the Company to be a meaningful measure of
performance of its Owned and Operated Assets. EBITDA in and of itself does not
represent cash generated from operating activities in accordance with GAAP and
therefore should not be considered an alternative to net earnings as an
indication of operating performance or to net cash flow from operating
activities as determined by GAAP as a measure of liquidity and is not
necessarily indicative of cash available to fund cash needs.
F-24
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(In Thousands)
December 31,
------------
2000 1999
---- ----
ASSETS
Cash ...................................... $ 5,364 $ -
Accounts Receivable - Net ................. 30,030 9,588
Other Current Assets ...................... 5,098 60
----- -----
Total Current Assets .................... 40,492 9,648
Investment in leasehold ................... 1,679 -
Land and Buildings ........................ 130,601 60,810
Less Accumulated Depreciation ............. (17,680) (814)
------- ----
Land and Buildings - Net .................. 112,921 59,996
------- ------
TOTAL ASSETS .............................. $ 155,092 $ 69,644
========= ========
LIABILITIES
Accounts Payable .......................... $ 8,636 $ 3,962
Other Current Liabilities ................. 6,108 8,101
----- -----
Total Current Liabilities ............... 14,744 12,063
------ ------
TOTAL LIABILITIES ......................... $ 14,744 $ 12,063
========= ========
Accounts receivable for owned and operated assets is net of an allowance
for doubtful accounts of approximately $7 million in 2000 and $0.2 million
in 1999.
F-25
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
NOTE 19 - EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share:
F-26
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
OMEGA HEALTHCARE INVESTORS, INC.
December 31, 2000
(1) All of the real estate included in this schedule are being used in either
the operation of long-term care facilities (LTC), assisted living facilities
(AL), or rehabilitation hospitals (RH) located in the states indicated.
(2) Certain of the real estate indicated are security for Industrial Development
Revenue bonds totaling $8,375,000 at December 31, 2000.
(3) Certain of the real estate indicated are security for HUD loans totaling
$5,218,497 at December 31, 2000.
(4) Certain of the real estate indicated are security for the Provident line of
credit borrowings totaling $56,641,232 at December 31, 2000.
(5) Certain of the real estate indicated are security for the Fleet line of
credit borrowings totaling $129,000,000 at December 31, 2000.
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
OMEGA HEALTHCARE INVESTORS, INC.
December 31, 2000
(4) On January 18, 2000, the mortgagor filed for protection under Chapter 11 of
the Bankruptcy Code. On February 1 2001, four facilities that were
collateral for this mortgage were taken back in exchange for a reduction in
principal of $4.5 million.
(5) A mortgagor with a mortgage on two facilities in Florida declared
bankruptcy on July 8, 1999. The bankruptcy court has ordered that all
amounts owed to the Company (including default rate interest, late charges,
attorney's fees and court costs), bear interest at an annual rate of 10%
and that the mortgagor make monthly payments of $40,000 on a timely basis.
As of December 31, 2000, the mortgagor had complied with the court order.
F-29
I-2
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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.
OMEGA HEALTHCARE INVESTORS, INC.
By: /s/ Richard M. FitzPatrick
-----------------------------
Richard M. FitzPatrick
Acting Chief Financial Officer
Dated: April 2, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities on the date indicated.
Signatures Title Date
---------- ----- ----
PRINCIPAL EXECUTIVE OFFICER
/s/ THOMAS W. ERICKSON. Interim Chief April 2, 2001
----------------------- Executive Officer
Thomas W. Erickson and Director
PRINCIPAL FINANCIAL OFFICER and
PRINCIPAL ACCOUNTING OFFICER
/s/ RICHARD M. FITZPATRICK Acting Chief Financial April 2, 2001
-------------------------- Officer and Chief
Richard M. FitzPatrick Accounting Officer
DIRECTORS
/s/ DANIEL A. DECKER Chairman of the Board April 2, 2001
--------------------
Daniel A. Decker
/s/ THOMAS F. FRANKE Director April 2, 2001
--------------------
Thomas F. Franke
/s/ HAROLD J. KLOOSTERMAN Director April 2, 2001
-------------------------
Harold J. Kloosterman
/s/ BERNARD J. KORMAN Director April 2, 2001
---------------------
Bernard J. Korman
/s/ EDWARD LOWENTHAL Director April 2, 2001
---------------------
Edward Lowenthal
/s/ CHRISTOPHER W. MAHOWALD Director April 2, 2001
---------------------------
Christopher W. Mahowald
/s/ DONALD J. MCNAMARA Director April 2, 2001
----------------------
Donald J. McNamara
/s/ STEPHEN D. PLAVIN Director April 2, 2001
---------------------
Stephen D. Plavin