DEF 14A: Definitive proxy statements
Published on July 3, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-11316
OMEGA HEALTHCARE
INVESTORS, INC.
(Exact name of Registrant as specified in its charter)
Maryland 38-3041398
(State of Incorporation) (I.R.S. Employer Identification No.)
900 Victors Way, Suite 350, Ann Arbor, MI 48108
(Address of principal executive offices)
(734) 887-0200
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of June 30, 2000
Common Stock, $.10 par value 20,115,024
(Class) (Number of shares)
OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
June 30, 2000
INDEX
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
Note - The balance sheet at December 31, 1999, has been derived from
audited consolidated financial statements at that date but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
2
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In Thousands, Except Per Share Amounts)
See notes to condensed consolidated financial statements.
3
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
See notes to condensed consolidated financial statements.
4
Omega Healthcare Investors, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2000
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for Omega Healthcare Investors, Inc. (the "Company"), have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals and impairment provisions to adjust the carrying value of
assets held for sale to fair value less cost of disposal) considered necessary
for a fair presentation have been included. Operating results for the
three-month and six-month periods ended June 30, 2000, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000. For further information, refer to the financial statements and footnotes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1999.
Note B - Concentration of Risk and Related Issues
As a result of certain recent developments, the risks associated with
investing in long-term healthcare facilities, stemming in large part from
government legislation and regulation of operators of the facilities, have
increased. 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 implemented a prospective payment
system for skilled nursing facilities, which replaced cost-based reimbursements
with an acuity-based system. The immediate effect was to significantly reduce
payments for services provided. Additionally, certain state Medicaid programs
have implemented similar acuity-based 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 and
the ability of the operators of these facilities to service the costs associated
with capital provided by the Company. As a result, a number of the Company's
operators have filed petitions seeking reorganization under chapter 11 of the
U.S. Bankruptcy Code.
Most of the Company's nursing home investments were designed
exclusively to provide long-term healthcare services. These facilities are
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subject to detailed and complex specifications affecting 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 the physical characteristics of its
facilities, and the Company regularly monitors compliance by tenants with
healthcare facilities' regulations. Nevertheless, if tenants fail to perform
these obligations, and the Company recovers facilities through repossession, the
Company may be required to expend capital to comply with such regulations and
maintain the value of its investments.
As of June 30, 2000, 91.9% of the Company's real estate investments
($786.8 million) consist of long-term care skilled nursing facilities, 5.1% of
assisted living facilities, and 3.0% of rehabilitation hospitals. These
healthcare facilities are located in 27 states and are operated by 22
independent healthcare operating companies.
Seven public companies operate approximately 79.7% of the Company's
investments, including Sun Healthcare Group, Inc.(25.9%), Integrated Health
Services, Inc.(17.3%, including 10.3% as the manager for Lyric Health Care LLC),
Advocat, Inc. (12.0%), Vencor Operating, Inc. (7.9%), Genesis Health Ventures,
Inc. (6.6%), Mariner Post-Acute Network (6.3%) and Alterra Healthcare
Corporation (3.7%). Vencor and Genesis manage facilities for the Company's own
account, as explained more fully in Note C. The two largest private operators
represent 3.4% and 3.1%, respectively, of investments. No other operator
represents more than 1.9% of investments. The three states in which the Company
has its highest concentration of investments are Florida (15.8%), California
(7.2%) and Illinois (7.1%).
Many of the public nursing home companies operating the Company's
facilities have recently reported significant operating and impairment losses.
Each of Vencor Operating, Inc., Sun Healthcare Group, Inc., Mariner Post-Acute
Network, Integrated Health Services, Inc., RainTree Healthcare Corporation and
Genesis Health Ventures, Inc. has filed for protection under the Bankruptcy
Code, with the last four filing during the first half of 2000. These operators
collectively represent 61.8% of the Company's investments as of June 30, 2000.
As a result of its filing, Mariner has suspended interest payments to the
Company. Additionally, Advocat, Inc. has announced a restatement of certain of
its financial statements, and other operators are experiencing financial
difficulties. Advocat temporarily suspended the payment of rents during the
period, but recently reinstated partial payments under a standstill agreement
executed in April 2000. 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 proactively initiated various other actions
to protect its interests under its leases and mortgages. Given the current
challenges to its customers, the Company is actively involved with workout
negotiations and bankruptcy proceedings to preserve and protect the value of its
investments. While the earning capacity of certain properties has been reduced
and the reductions may extend to future periods, management believes that it has
recorded appropriate accounting impairment provisions based on its assessment of
current circumstances. However, upon foreclosure or lease termination, there can
be no assurance that the Company's investments in facilities would not require
further write-downs.
6
During the period ended March 31, 2000, Mariner Post-Acute Network,
Advocat, Inc. and Integrated Health Services, Inc. discontinued payments to the
Company. Payments from Advocat, Inc. (on a reduced basis pursuant to a
standstill agreement) were resumed in April 2000. Payments from Integrated were
resumed in June. Mariner continues to be in a non-payment status. There can be
no assurance that these customers will be able to continue those payments or
that other customers will continue to make their payments as scheduled.
Note C - Portfolio Valuation Matters
In the ordinary course of its business activities, the Company
periodically evaluates investment opportunities and extends credit to customers.
It also regularly engages in lease and loan extensions and modifications.
Additionally, the Company actively monitors and manages its investment portfolio
with the objectives of improving credit quality and increasing returns. In
connection with portfolio management, the Company engages in various collection
and foreclosure activities, and it believes management has the skills, knowledge
and experience to deal with such issues as may arise from time to time.
When the Company acquires real estate pursuant to a foreclosure or
bankruptcy proceeding and does not immediately re-lease the properties to new
operators, the re-acquired assets are classified on the balance sheet as "Other
Real Estate" and the value of such assets is reported at the lower of cost or
fair value. Additionally, when a 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 fair value, less cost of disposal. Based on
management's current review of the portfolio, provisions for collection losses
of $1.5 million and $2.9 million were recorded for the three-month and six-month
periods ended June 30, 2000, respectively.
Second Quarter Real Estate Dispositions
The Company recognized a gain on disposition of assets during the
quarter of $10.5 million. The gain was comprised of an $11.1 million gain on the
sale of four facilities previously leased to Tenet Healthsystem Philadelphia,
Inc., offset by a loss of $0.6 million on the sale of a 57 bed facility in
Colorado.
Assets Held For Sale
During 1998, management initiated a plan to dispose of certain
properties judged to have limited long-term potential and to redeploy the
proceeds. Following a review of the portfolio, assets identified for sale 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 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
$42,036,000. Gains realized in 1998 from the dispositions approximated $2.8
million. During 1999, the Company completed asset sales yielding net proceeds of
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$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 of $19.5 million to adjust the carrying
value of assets held for sale to their fair value, less cost of disposal. As of
June 30, 2000, the carrying value of assets held for sale totals $40.7 million.
Of the 35 facilities held for sale, 32 are operated for the Company's own
account. During the three-month and six-month periods ended June 30, 2000, the
Company realized disposition proceeds of $0.9 million and $1.1 million,
respectively. An additional $4.5 million provision for impairment on assets held
for sale was recognized during the first quarter of 2000. The Company intends to
sell the remaining facilities as soon as practicable. However, a number of other
companies are actively marketing portfolios of similar assets and, in light of
the existing conditions in the long-term care industry generally, it has become
more difficult to sell such properties and for potential buyers to obtain
financing for such acquisitions. Thus, there can be no assurance if or when such
sales will be completed or whether such sales will be completed on terms that
allow the Company to realize the fair value of the assets.
Other Real Estate
The Company owns 42 facilities that were recovered from customers and
are operated for the Company's own account. These facilities have 4,100 beds or
assisted living units and are located in eight states. The investment in this
real estate is classified under Other Real Estate as of June 30, 2000. It
includes 10 nursing homes located in Massachusetts and Connecticut with 1,052
licensed beds. The Company acquired these facilities on July 14, 1999 in lieu of
foreclosure. Genesis Health Ventures, Inc. currently manages them for the
Company's account. At June 30, 2000, the Company had invested approximately
$71.1 million in these facilities. The Company presently is considering various
alternatives with respect to the facilities, including negotiating a lease with
one or more new operators or selling one or more of the facilities. Income from
these facilities approximated $283,000 and $743,000 for the three-month and
six-month periods ended June 30, 2000, respectively.
At June 30, 2000, Other Real Estate also includes 18 facilities
formerly leased to RainTree Healthcare Corporation ("RainTree"). The Company
assumed operation of these facilities on February 29, 2000, when RainTree filed
for bankruptcy. In connection with the bankruptcy proceeding, the Company bid
$3.1 million for the leasehold interests in 12 other RainTree facilities, all of
which are now operated for the account of the Company under a management
agreement with Vencor Operating, Inc. The carrying amount of the Company's
investment in all 30 facilities is $87.6 million. Appraisals are being sought to
determine if fair market value is lower than the current carrying amount. There
can be no assurance that the cost of the facilities will be less than the value
based on appraisals. The facilities lost approximately $1.1 million for the
three-month period ended June 30, 2000.
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Note D - Preferred Stock
During the six-month periods ended June 30, 2000 and June 30, 1999, the
Company paid dividends of $2.7 million and $2.2 million, respectively, on its
9.25% Series A Cumulative Preferred Stock and 8.625% Series B Cumulative
Preferred Stock. Dividends on the preferred stock are payable quarterly.
Note E - Net Earnings Per Share
Net earnings per share is computed based on the weighted average number
of common shares outstanding during the respective periods. Diluted earnings per
share reflect the dilutive effect, if any, of stock options (12,587 shares for
the six-month period in 1999). Assumed conversion of the Company's 1996
convertible debentures is anti-dilutive.
Note F - Omega Worldwide, Inc.
As of June 30, 2000 the Company holds a $6,816,000 investment in Omega
Worldwide, Inc. ("Worldwide"), represented by 1,163,000 shares of common stock
and 260,000 shares of preferred stock. The Company has guaranteed repayment of
borrowings pursuant to a revolving credit facility in exchange for a 1% annual
fee and a facility fee of 25 basis points. The Company has been advised that at
June 30, 2000 borrowings of $8,850,000 are outstanding under Worldwide's
revolving credit facility. The agreement has been modified and calls for
quarterly repayments of $2 million until the full amount is repaid in June 2001.
The first $2 million repayment was made July 7, 2000. No further borrowings may
be made under this agreement. The Company is required to provide collateral in
the amount of $8.8 million related to the guarantee of Worldwide's obligations.
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 is based on the relationship of
assets under the Company's management to the combined total of those assets and
assets under Worldwide's management. Indirect costs allocated to Worldwide for
the three-month and six-month periods ending June 30, 2000 were $185,000 and
$389,000, respectively, compared with $196,000 and $394,000 for the same periods
in 1999. The Services Agreement has expired and currently is being renegotiated.
Note G - Litigation
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
9
complaint to assert his claims on behalf of an unnamed class of plaintiffs. The
Company has reported the litigation to its directors and officers liability
insurer. The Company believes that the litigation is without merit and intends
to defend vigorously. On July 28, 2000, a New York law firm issued a press
release announcing that it had commenced a class action lawsuit reportedly
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, reportedly making similar allegations. The Company has not yet been served
with that lawsuit.
On June 21, 2000, the Company was named as a defendant in certain
litigation brought against it by a Madison/OHI Liquidity Investors, LLC
("Madison"), customer that claims that the Company has breached or
anticipatorily breached a commercial contract. Mr. Dickerman is a partner of
Madison and is a guarantor of Madison's obligations to the Company. The Company
contends that Madison is in default under the contract in question; accordingly,
the Company believes that the litigation is meritless. The Company will defend
vigorously and pursue whatever rights and remedies against Madison and the
guarantors as it determines to be appropriate.
Note H - Subsequent Events
On July 14, 2000 the Company's shareholders approved the issuance of
Series C preferred stock to Explorer Holdings, L.P. All closing conditions with
respect to the initial equity investment were satisfied, and funding of $100
million of Series C preferred stock was completed on July 17, 2000. A portion of
the proceeds from the $100 million initial equity investment was used to repay
$81 million of the Company's 10% and 7.4% Senior Notes in accordance with terms
of the Notes. (See Liquidity and Capital Resources).
The shares of Series C Preferred will 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
Series C Preferred accrue from the date of issuance and, for any dividend period
ending prior to February 1, 2001, may be paid in cash or additional shares of
Series C Preferred. Thereafter, all dividends must be paid in cash.
On July 17, 2000, Mr. Essel W. Bailey, Jr., retired as Chairman, CEO,
President and a member of the Company's Board of Directors. On that same date,
the Company appointed Thomas W. Erickson, Daniel A. Decker, Kurt C. Read,
Christopher W. Mahowald and Stephen D. Plavin to the Board of Directors.
Pursuant to the investment agreement with Explorer, Messrs. Erickson, Decker,
Read and Mahowald were designated by Explorer. Mr. Plavin is the new independent
director. In addition, at its board meeting on July 27, 2000, the Company
appointed Mr. Decker as Chairman of the Board of Directors. Mr. Decker and
Bernard J. Korman were also appointed members of the Company's newly
reconstituted Executive Committee of the Board. As reconstituted, the Executive
Committee conforms with certain Bylaw requirements adopted in connection with
the equity investment by Explorer Holdings, L.P.
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Mr. Erickson is President and Chief Executive Officer of CareSelect
Group, a physician-centered, quality-driven physician practice management
company. He also is President and Chief Executive Officer of Erickson Capital
Group, a healthcare venture capital company.
Mr. Decker and Mr. Read are partners of The Hampstead Group, a
private equity firm based in Dallas, Texas, that is affiliated with Explorer.
Mr. Decker and Mr. Read engage in a wide variety of activities related to
Hampstead's investment activities.
Mr. Mahowald is President of EFO Realty, where he is responsible for
the origination, analysis, structuring and execution of new investment activity
and asset management relating to EFO Realty's existing real estate assets.
Mr. Plavin is Chief Operating Officer of Capital Trust, a New York
City-based specialty finance and investment management company. Mr. Plavin is
responsible for all of the lending, investing and portfolio management
activities of Capital Trust.
On July 27, 2000, Mr. Richard FitzPatrick was named Acting Chief
Financial Officer, replacing Mr. David A. Stover who resigned from the Company
on June 15, 2000. Mr. Fitzpatrick has been Chief Financial Officer for The
Hampstead Group since 1989 and holds an MBA from DePaul University.
On July 13, 2000, the Company signed an amendment to its loan agreement
with The Provident Bank. The amendment calls for certain new collateral to be
substituted for existing collateral. Borrowings under the facility will bear
interest at 2.5% to 3.25% over LIBOR, based on the Company's leverage ratio.
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 in December 2002. (See Liquidity and Capital Resources).
The Company has an interest rate cap for $100 million of its variable
rate debt, capping LIBOR at 7.50% through March 15, 2001. The 30-day LIBOR rate
on June 30, 2000 was approximately 6.64%.
On July 26, 2000, the Board of Directors declared its regular quarterly
dividends of $.578 per share and $.539 per share, respectively, to be paid on
August 15, 2000 to Series A and Series B Cumulative Preferred shareholders of
record on August 7, 2000. The Board of Directors also declared a common stock
dividend of $.25 per share payable on August 15, 2000 to common shareholders of
record on August 7, 2000.
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Item 2 - 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. Statements contained in this document that are
not based on historical fact are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include statements regarding the Company's future development
activities, the future condition and expansion of the Company's markets, the
sale of certain assets that have been identified for disposition, dividend
policy, the Company's ability to meet its liquidity requirements and the
Company's growth strategies, as well as other statements which may be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"estimate," "anticipate," or similar terms, variations of those terms or the
negative of those terms. These forward-looking statements involve risks and
uncertainties that could cause actual results to differ from projected results.
Some of the factors that could cause actual results to differ materially
include: the financial strength of the Company's facilities as it affects the
operators' continuing ability to meet their obligations to the Company under the
terms of the Company's agreements with such operators; the Company's ability to
complete the contemplated asset sales and, if completed, the ability to do so on
terms contemplated as favorable to the Company; changes in the reimbursement
levels under the Medicare and Medicaid programs; operators' continued
eligibility to participate in the Medicare and Medicaid programs; changes in
reimbursement by other third party payors; occupancy levels at the Company's
facilities; the limited availability and cost of capital to fund or carry
healthcare investments; the strength and financial resources of the Company's
competitors; the Company's ability to make additional real estate investments at
attractive yields; changes in tax laws and regulations affecting real estate
investment trusts; and the risks identified in Item 1, Note C above.
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. See also, Item 1, Note B, regarding Concentration of Risk
and Related Issues and Note C, regarding portfolio valuation matters above.
Results of Operations
Revenues for the three-month and six-month periods ending June 30, 2000
totaled $23.4 million and $49.5 million, a decrease of $7.4 million and $11.3
million, respectively, over the periods ended June 30, 1999. The decrease in
2000 revenue is due in part to approximately $7.3 million from reductions in
earning investments due to foreclosure and bankruptcy, $4.6 million from reduced
investments caused by 1999 and 2000 asset sales and the prepayment of mortgages,
and a $2.9 million provision for collection losses. These decreases are offset
by $2.4 million in additional revenue from 1999 investments and $1.2 million of
revenue growth from participating incremental net revenues that became effective
in 2000. As of June 30, 2000, gross real estate investments of $786.8 million
have an average annualized yield of approximately 11.6%.Expenses for the
three-month and six-month periods ended June 30, 2000 totaled $18.8 million and
$37.4 million, an increase of $1.0 million and $2.4 million, respectively, over
expenses for 1999.
12
The provision for depreciation and amortization for the three-month and
six-month periods ended June 30, 2000 totaled $5,818,000 and $11,728,000,
respectively, decreasing $47,000 and increasing $268,000, respectively, over the
same periods in 1999. The increase for the six-month period primarily consists
of $1,668,000 additional depreciation expense from properties previously
classified as mortgages and new 1999 investments placed in service in June of
1999 offset by $840,000 depreciation expense for properties sold or held for
sale and a reduction in amortization of non-compete agreements of $498,000.
Interest expense for the three-month and six-month periods ended June
30, 2000 was $11.2 million and $22.1 million, respectively, compared with $10.4
million and $20.5 million, respectively, for the same periods in 1999. The
increase in 2000 is primarily due to higher rates during the 2000 period than
the same period in the prior year.
General and administrative expenses for the three-month and six-month
periods ended June 30, 2000 totaled $1.8 million and $3.5 million, respectively.
These expenses for the three-month and six-month periods were approximately 7.7%
and 7.1% of revenues, respectively, as compared to 4.8% and 4.9%, respectively,
for the 1999 periods. The increase in 2000 is due in part to greater payments of
legal fees, largely attributable to the bankruptcy filings and financial
difficulties of the Company's operators.
The Company recognized a gain on disposition of assets during the
second quarter of $10.5 million. The gain was composed of an $11.1 million gain
on sale of four facilities previously leased to Tenet Healthsystem Philadelphia,
Inc., offset by a loss of $0.6 million on the sale of a 57 bed facility in
Colorado. During the first quarter of 2000, the Company recorded a $4.5 million
provision for impairment on assets held for sale.
Net earnings available to common shareholders (excluding the gain of
$10.5 million on assets sold in the second quarter and the non-recurring charge
for the first quarter of $4.5 million) were $2,229,000 and $7,339,000 for the
three-month and six-month periods ended June 30, 2000, respectively, decreasing
approximately $8,373,000 and $13,680,000 from the 1999 periods. This decrease is
largely the result of the decrease in revenues and the provision for collection
losses. Higher depreciation, interest and general and administrative costs also
contributed to the reduction in net earnings. Net earnings per diluted common
share (excluding gains on asset dispositions and non-recurring charges)
decreased from $0.53 and $1.06 for the three-month and six-month periods ended
June 30, 1999, respectively, to $0.11 and $0.37 for the same periods in the year
2000.
Funds from Operations ("FFO") totaled $8,047,000 and $19,067,000 for
the three-month and six-month periods ending June 30, 2000, representing a
decrease of approximately $9,188,000 and $14,953,000, respectively, over the
same periods in 1999 due to factors mentioned above. 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. Properties recovered by
the Company required funding of $17.4 million and $28.8 million for working
capital during the three-month and six-month periods ending June 30, 2000.
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No provision for Federal income taxes has been made since the Company
intends to continue 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 will not be subject to Federal income taxes on
amounts distributed to shareholders, provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other conditions.
Although the Company has suspended dividends on its common stock pending
completion of the Equity Investment discussed below, the Company fully intends
to meet the 95% distribution test with dividends to be declared later in 2000.
Profits from operations of recovered properties are subject to federal tax of up
to 34%, and the Company intends to hold and operate recovered properties only
long enough to stabilize and then re-lease or sell them.
Liquidity and Capital Resources
Overview
At June 30, 2000, the Company had total assets of $1.0 billion,
shareholders' equity of $460.2 million, and long-term debt of $375.2 million,
representing approximately 37% of total capitalization. Long-term debt excludes
funds borrowed under its acquisition credit agreements. The Company has $177.0
million drawn on its credit facilities at June 30, 2000.
At June 30, 2000, the Company had $81.3 million of indebtedness with a
maturity date of July 15, 2000, and $48.4 million of convertible debentures that
mature in February 2001.
In order to meet the Company's upcoming debt maturities, finance
operations and fund future investments, the Company agreed to issue $100.0
million of Series C Preferred Stock (the "Equity Investment") to a private
equity investor, with up to an additional $100.0 million investment available
for future liquidity needs or growth opportunities on certain conditions. See
"Equity Investment" below. The Company used a portion of the proceeds from the
first $100.0 million of the Equity Investment to repay the $81M on July 17, 2000
and believes that the remaining proceeds together with the proceeds of certain
asset dispositions, will provide the Company sufficient liquidity to meet its
debt maturity in February 2001 and working capital needs as well as the
opportunity to take advantage of certain growth opportunities.
Dividend Policy
The Company distributes a large portion of the cash available from
operations. The Company has historically made distributions on common stock of
approximately 80% of FFO. Cash dividends paid totaled $0.50 per share for the
six-month period ending June 30, 2000, compared with $1.40 per share for the
same period in 1999. The dividend payout ratio, that is the ratio of per share
amounts for dividends paid to the per share amounts of funds from operations,
was approximately 52.6% for the six-month period ending June 30, 2000 compared
with 83.8% for the same period in 1999.
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No common stock dividend was paid in the second quarter of 2000. On
July 26, 2000, the Board of Directors declared its regular quarterly dividends
of $.578 per share and $.539 per share, respectively, to be paid on August 15,
2000 to Series A and Series B Cumulative Preferred shareholders of record on
August 7, 2000. The Board of Directors also declared a common stock dividend of
$.25 per share payable on August 15, 2000 to common shareholders of record on
August 7, 2000. The Company has the ability, at the Company's option, to pay
dividends on shares owned by Explorer Holdings, L.P. ("Explorer") in additional
shares of Series C Preferred rather than cash through the dividend periods
ending prior to February 1, 2001. See "Equity Investment - Terms of Series C
Preferred."
Equity Investment
On May 11, 2000, the Company announced the execution of definitive
documentation with Explorer Holdings, L.P. ("Explorer"), a private equity
investor, pursuant to which the Company agreed to issue and sell up to $200.0
million of its capital stock to Explorer (the "Equity Investment"). On July 17,
2000, 1.0 million shares of a new series of convertible preferred stock ("Series
C Preferred") were issued for an aggregate purchase price of $100.0 million. The
descriptions of the transaction documents set forth herein do not purport to be
complete and are qualified in their entirety by the forms of such documents
filed as exhibits to this report.
Terms of Series C Preferred: The shares of Series C Preferred were
issued and sold for $100.00 per share and will be convertible into Common Stock
at any time by the holder at an initial conversion price of $6.25 per share of
Common Stock. The conversion price is subject to possible future adjustment in
accordance with customary antidilution provisions, including, in certain
circumstances, the issuance of Common Stock at an effective price less than the
then fair market value of the Common Stock. The Series C Preferred ranks on a
parity with the Company's outstanding shares of Series A and Series B preferred
stock as to priority with respect to dividends and upon liquidation. The shares
of Series C Preferred will 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 Series C Preferred accrue
from the date of issuance and, for dividend periods ending prior to February 1,
2001, may be paid at the option of the Company in cash or additional shares of
Series C Preferred. Thereafter, dividends must be paid in cash. 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.
15
Investment Agreement: 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 be used to pay indebtedness maturing on or before February 1, 2001
(the "Liquidity Commitment"). Any amounts drawn under the Liquidity Commitment
will be evidenced by the issuance of additional shares of Series C Preferred at
a conversion price equal to the lower of $6.25 or the then fair market value of
the Company's Common Stock.
Any amounts of the Liquidity Commitment not utilized by the Company are
available to the Company through July 1, 2001, upon satisfaction of certain
conditions, 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%. Draws under the Growth Equity
Commitment will reduce the amounts available under the Liquidity Commitment.
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 proportionate 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 Equity
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 Equity
Commitment.
Stockholders Agreement: In connection with the Equity Investment,
the Company entered into a Stockholders Agreement with Explorer pursuant to
which Explorer is entitled to designate up to four members of the Company's
Board of Directors depending on the percentage of either Series C Preferred or
total Voting Securities acquired from time to time by Explorer pursuant to the
Investment Agreement. The director designation rights will terminate upon the
first to occur of the tenth anniversary of the Stockholders Agreement or when
Explorer beneficially owns less than 5% of the total Voting Securities of the
16
Company. Pursuant to the Stockholders Agreement, Explorer designated Daniel A.
Decker, Kurt C. Read, Thomas W. Erickson and Christopher Mahowald as members of
the Company's Board. (See Note H - Subsequent Events).
In addition, Explorer has agreed not to transfer any shares of Series C
Preferred (or the Common Stock issuable upon conversion of the Series C
Preferred) without board approval until the first anniversary of Explorer's
initial investment. Thereafter, Explorer may transfer shares in accordance with
certain exemptions from the registration requirements imposed by the Securities
Act of 1933, as amended, or upon exercise of certain registration rights granted
to Explorer by the Company and set forth in a Registration Rights Agreement (a
"Public Sale"). After July 1, 2001, Explorer may transfer its voting securities
to a Qualified Institutional Buyer ("QIB") if either (i) the total amount of
voting securities does not exceed 9.9% of the Company's total voting securities
or (ii) the QIB transferee becomes a party to the standstill agreement contained
in the Stockholders Agreement. Any transfer of Voting Securities by Explorer or
its affiliates (other than in connection with a Public Sale) is subject to a
right of first offer that can be exercised by the Company or any other purchaser
that the Company may designate. These transfer restrictions will terminate on
the fifth anniversary of Explorer's initial investment.
Pursuant to the standstill provisions in the Stockholders Agreement,
Explorer has agreed that until the fifth anniversary of the consummation of
Explorer's initial investment, it will not acquire, without the prior approval
of the Company's Board of Directors, beneficial ownership of any Voting
Securities (other than pursuant to the Liquidity Commitment, the Growth Equity
Commitment and the Increased Growth Equity Commitment and additional
acquisitions of up to 5% of the Company's voting securities). If Explorer or its
affiliates beneficially own voting securities representing more than 49.9% of
the total voting power of the Company, the terms of the Series C Preferred and
the Stockholders Agreement provide that no holder of Series C Preferred shall be
entitled to vote any shares of Series C Preferred that would result in such
holder, together with its affiliates, voting in excess of 49.9% of the then
outstanding voting power of the Company. In addition, shares of Series C
Preferred cannot be converted to the extent that such conversion would cause the
converting stockholder to beneficially own in excess of 49.9% of the then
outstanding voting power of the Company.
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 12
month period.
Miscellaneous: 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
17
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 for approximately $970,000 of such expenses.
Credit Facilities
Depending on the availability and cost of external capital, the Company
anticipates making additional investments in healthcare facilities. New
investments generally are funded from temporary borrowings under the Company's
acquisition credit line agreements. Interest cost incurred by the Company on
borrowings under the revolving credit line facilities will vary depending upon
fluctuations in prime and/or LIBOR rates. On July 17, 2000, the Company replaced
its $200.0 million unsecured revolving credit facility with a new $175.0 million
secured revolving credit facility that expires in December 2002. Borrowings
under the new facility will bear interest at 3.25% over LIBOR until March 31,
2001. (See Note H - Subsequent Events)
On July 13, 2000, the Company signed an amendment to its loan agreement
with The Provident Bank. The amendment calls for certain new collateral to be
substituted for existing collateral. Borrowings under the facility will bear
interest at 2.5% to 3.25% over LIBOR, based on the Company's leverage ratio.
(See Note H - Subsequent Events)
The Company has an interest rate cap for $100 million of its variable
rate debt, capping LIBOR at 7.50% through March 15, 2001. The 30-day LIBOR rate
on June 30, 2000 was approximately 6.64%.
The Company historically has replaced funds drawn on the revolving
credit facilities through fixed-rate long-term borrowings, the placement of
convertible debentures, or the issuance of additional shares of common and/or
preferred stock. Industry turmoil and continuing adverse economic conditions
affecting the long-term care industry cause 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 properties at times when it may be unable to maximize its recovery on
such investments. In recent periods, the Company's ability to execute this
strategy has been severely limited by conditions in the credit and capital
markets and the long-term care industry. The Company may also draw upon
Explorer's Liquidity Commitment to repay indebtedness maturing on or before
February 2, 2001 as described under "Equity Investment - Investment Agreement"
above.
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Item 3 - 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.
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 June 30, 2000 was $299 million. A 1% increase in
interest rates would result in a decrease in fair value of long-term borrowings
by approximately $6.5 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 indebtedness
on acceptable terms, it might be forced to dispose of properties on
disadvantageous terms, which might result in losses to the Company and adversely
affect the cash available for distribution to shareholders. 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 on its Common Stock.
The majority of the Company's borrowings were completed pursuant to
indentures that limit the amount of indebtedness the Company may incur.
Accordingly, if the Company is unable to raise additional equity or borrow money
because of these limitations, the Company's ability to acquire additional
properties may be limited. If the Company is unable to acquire additional
properties, its ability to increase the distributions with respect to common
shares will be limited to management's ability to increase funds from
operations, and thereby cash available for distribution, from the existing
properties in the Company's portfolio.
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 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. If 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
19
debtor-lessee in reorganization were required to perform certain provisions of a
lease that the court determined to be unduly burdensome. It is not possible to
determine at this time whether or not 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 three years. If any lease
is rejected, the Company retains ownership of the real estate, but may lose the
benefit of any participation interest or conversion right.
Generally, with respect to the Company's mortgage loans, the imposition of
an automatic stay under the Bankruptcy Code precludes lenders 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
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 indemnity of subsequent operators to
whom it might transfer the operating rights and licenses. Additionally, changes
in federal and state regulatory environments could cause an increase in the
costs of operating such investments, including the cost of professional
liability insurance coverage. Should such events occur, the Company's income and
cash flows from operations would be adversely affected.
20
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On July 17, 2000, the Company issued 1,000,000 shares of Series C
Preferred of the Company to Explorer for $100 million pursuant to the Investment
Agreement. The shares of Series C Preferred are governed by the Articles
Supplementary for Series A Convertible Preferred Stock (the "Articles
Supplementary") filed with the State Department of Assessments and Taxation of
Maryland on July 14, 2000, and the shares of Series C Preferred are convertible
into 16,000,000 shares of Common Stock of the Company. The stockholders of the
Company approved the transaction on July 14, 2000. The shares of Series C
Preferred were issued without registration under the Securities Act of 1933, as
amended (the "Securities Act"), in reliance upon the private placement exemption
provided by Section 4(2) of the Securities Act. (See Liquidity and Capital
Resources, Equity Investment.)
21
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on June 1, 2000.
(b) The following directors were re-elected at the meeting for a three-year term
(See Note H - Subsequent Events):
James E. Eden*
Thomas F. Franke
Bernard J. Korman
The following directors were not elected at the meeting but their term
of office continued after the meeting (See Note H Subsequent Events):
Essel W. Bailey, Jr.*
Martha A. Darling*
Henry H. Greer*
Harold J. Kloosterman
Edward Lowenthal
Robert L. Parker*
---------------------------
*subsequently resigned
(c) The results of the vote were as follows:
(d) Not applicable.
22
(a) The Company's Special Meeting of Shareholders was held on July 14, 2000.
(b) Stockholders were requested to vote on the approval of the issuance of
shares of the Company's Series C Preferred and Common Stock pursuant to
an investment agreement with Explorer Holdings, L.P. and also to
approve the Company's 2000 Stock Incentive Plan.
(c) The results of the vote were as follows:
Manner of Issuance of 2000 Stock
Vote Cast Shares Incentive Plan
--------- ------ --------------
For 11,574,327 9,971,567
Withheld 0 0
Against 661,517 2,166,092
Abstentions and broker 139,913 238,098
nonvotes
(d) Not applicable.
23
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following Exhibits are filed herewith:
(b) Reports on Form 8-K
The following reports on Form 8-K were filed since March 31, 2000:
Form 8-K dated March 14, 2000: Report with the following exhibits:
Press release issued by Omega Healthcare Investors, Inc. on
March 14, 2000
Press release issued by Omega Healthcare Investors, Inc. on
March 31, 2000
Form 8-K dated June 30, 2000: Report with the following exhibits:
Press release issued by Omega Healthcare Investors, Inc.
on June 29, 2000
Form 8-K dated July 12, 2000: Report with the following exhibits:
Press release issued by Omega Healthcare Investors, Inc.
on July 12, 2000
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
Registrant
Date: August 14, 2000 By: /s/ Daniel A. Decker
-------------------------------
Daniel A. Decker
Chairman
Date: August 14, 2000 By: /s/ Richard M. FitzPatrick
-------------------------------
Richard M. FitzPatrick
Acting Chief Financial
Officer
25