10-K: Annual report pursuant to Section 13 and 15(d)
Published on March 29, 2002
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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, 2001.
[ ] 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)
9690 Deereco Rd., Suite 100
Timonium, Maryland 21093
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 410-427-1700
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 and associated
stockholder protection rights 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. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates was $100,635,439 based on the $4.10 closing price per share for
such stock on the New York Stock Exchange on February 28, 2002.
As of February 28, 2002 there were 37,127,456 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, 2002, 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
We were incorporated in the State of Maryland on March 31, 1992. We are a
self-administered real estate investment trust, or REIT, investing in
income-producing healthcare facilities, principally long-term care facilities
located in the United States. We provide lease or mortgage financing to
qualified operators of skilled nursing facilities and, to a lesser extent,
assisted living and acute care facilities. We have historically financed
investments through borrowings under our revolving credit facilities, private
placements or public offerings of debt or equity securities, the assumption of
secured indebtedness, or a combination of these methods. We also finance
acquisitions through the exchange of properties or the issuance of shares of our
capital stock when the transactions otherwise satisfy our investment criteria.
As of December 31, 2001, our portfolio of domestic investments consisted of
241 healthcare facilities, located in 28 states and operated by 35 third-party
operators. Our gross investments in these facilities, before reserve for
uncollectible loans, totaled $885.0 million at December 31, 2001. This portfolio
is made up of:
o 135 long-term healthcare facilities and two rehabilitation hospitals
owned and leased to third parties;
o fixed rate, participating and convertible participating mortgages on
71 long-term healthcare facilities; and
o 21 long-term healthcare facilities that were recovered from customers
and are currently operated through third-party management contracts
for our own account.
In addition, we have 12 facilities subject to third-party leasehold
interests. We also hold miscellaneous investments and closed healthcare
facilities held for sale of approximately $58.2 million at December 31, 2001,
including $22.3 million related to two non-healthcare facilities leased by the
United States Postal Service, a $7.4 million investment in Omega Worldwide,
Inc., Principal Healthcare Finance Limited, and Principal Healthcare Finance
Trust, and $14.3 million of notes receivable.
Approximately 72% of our real estate investments were operated by seven
public companies, including Sun Healthcare Group, Inc. (24.7%), Integrated
Health Services, Inc. (18.8%, including 10.8% as the manager for and 50% owner
of Lyric Health Care LLC), Advocat Inc. (12.2%), Mariner Post-Acute Network,
Inc. (6.7%), Alterra Healthcare Corporation (3.9%), Kindred Healthcare, Inc.
(formerly known as Vencor Operating, Inc.) (3.2%), and Genesis Health Ventures,
Inc. (2.8%). Kindred and Genesis manage facilities for our own account, which
are included in Owned and Operated Assets. The two largest private operators
represent 3.5% and 2.5%, respectively, of our investments. No other operator
represents more than 2.5% of our investments. The three states in which we have
our highest concentration of investments are Florida (16.5%), California (7.5%)
and Illinois (7.5%).
Government Healthcare Regulation, Reimbursements and Industry Concentration
Risks. Nearly all of our properties are used as healthcare facilities;
therefore, we are directly affected by the risk associated with the healthcare
industry. Our lessees and mortgagors, as well as the facilities owned and
operated for our account, derive a substantial portion of their net operating
revenues from third-party payers, including the Medicare and Medicaid programs.
These programs are highly regulated by federal, state and local laws, rules and
regulations and subject to frequent and substantial change. The Balanced Budget
Act of 1997 significantly reduced spending levels for the Medicare and Medicaid
programs. Due to the implementation of the terms of the Balanced Budget Act,
effective July 1, 1998, the majority of skilled nursing facilities shifted from
payments based on reimbursable cost to a prospective payment system for services
provided to Medicare beneficiaries. Under the prospective payment system,
skilled nursing facilities are paid on a per diem prospective case mix adjusted
payment basis for all covered services. Implementation of the prospective
payment system 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 prospective payment system
reimbursement policies.
1
Legislation adopted in 1999 and 2000 increased Medicare payments to nursing
facilities and specialty care facilities. Section 101 of the Balanced Budget
Relief Act of 1999 ("BBRA") included a 20% increase for 15 patient acuity
categories (know as Resource Utilization Groups ("RUGS")) and a 4% across the
board increase of the adjusted federal per diem payment rate. The 20% increase
was implemented in April 2000 and will remain in effect until the implementation
of refinements in the current RUG case-mix classification system to more
accurately estimate the cost of non-therapy ancillary services. The 4% increase
was implemented in April 2000 and will remain in effect until September 30,
2002.
The Benefits Improvement and Patient Protection Act of 2000 ("BIPA")
included a 16.66% increase in the nursing component of the case mix adjusted
federal periodic payment rate and a 6.7% increase in the 14 RUG payments for
rehabilitation therapy services. The 16.66% increase was implemented in April
2000 and will remain in effect until September 30, 2002. The 6.7% increase is an
adjustment to the 20% increase granted in the BBRA and spreads the funds
directed at 3 of those 15 RUGs to an additional 11 rehabilitation RUGs. The
increase was implemented in April 2001 and will remain in effect until the
implementation of refinements in the current RUG case-mix classification system.
In addition, the Medicare Payment Advisory Commission, an independent
federal body established by the Balanced Budget Act of 1997, has recommended
that the 4% increase implemented in BBRA and the 16.66% increase implemented in
BIPA be allowed to expire September 30, 2002. If the 4% and 16.66% increases are
not extended beyond their scheduled expiration, the Centers for Medicare and
Medicaid Services ("CMS") estimates that the Medicare reimbursement will
decrease by approximately 10% from the amount that would otherwise be paid in
fiscal 2003. Reimbursement could be further reduced when CMS completes its RUG
refinement due to the termination of the 20% and 6.7% increases. However, the
Medicare Payment Advisory Commission has recommended that the 20% and 6.7%
increases be folded into the base rate upon the completion of the RUG
refinement. The expiration of any BBRA and BIPA increases could have an adverse
impact on the revenues of the operators of nursing facilities and would
negatively impact their ability to satisfy their monthly lease or debt payments
to us. The Medicare Payment Advisory Commission has also recommended that the
annual update in rates for fiscal 2003 be 0% for free-standing nursing
facilities and 10% for hospital nursing facilities.
Due to the temporary nature of these payment increases, we cannot assure
you that the federal reimbursement will remain at levels comparable to present
levels and that such reimbursement will be sufficient for our lessees or
mortgagors to cover all operating and fixed costs necessary to care for Medicare
and Medicaid patients. We also cannot assure you that there will be any future
legislation to increase payment rates for skilled nursing facilities. If payment
rates for skilled nursing facilities are not increased in the future, some of
our lessees and mortgagors may have difficulty meeting their payment obligations
to us.
Each state has its own Medicaid program that is funded jointly by the state
and federal government. Federal law governs how each state manages its Medicaid
program, but there is wide latitude for states to customize Medicaid programs to
fit the needs and resources of its citizens. The Balanced Budget Act repealed
the federal payment standard, also known as the Boren Amendment, for hospitals
and nursing facilities under Medicaid, increasing states' discretion over the
administration of Medicaid programs. A number of states are considering
legislation designed to reduce their Medicaid expenditures which could result in
decreased revenues for our lessees and mortgagors.
In addition, private payors, including managed care payors, 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 the amounts we receive with
respect to our owned and operated portfolio and the revenues of our lessees and
mortgagors and thereby adversely affect those lessees' and mortgagors' abilities
to make their monthly lease or debt payments to us.
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.
Real estate investments are relatively illiquid and, therefore, tend to
limit our ability to vary our portfolio promptly in response to changes in
economic or other conditions. Thus, if the operation of any of our 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.
2
Potential Risks from Bankruptcies. Our lease arrangements with operators
who operate more than one of our facilities are generally made pursuant to a
single master lease covering all of that operator's facilities. Although each
lease or master lease provides that we may terminate the master lease upon the
bankruptcy or insolvency of the tenant, the Bankruptcy Reform Act of 1978
provides that a trustee in a bankruptcy or reorganization proceeding under the
Bankruptcy Act, or a debtor-in-possession in a reorganization, 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 to determine at this time whether or not any of
our leases or master leases contain any such provision. 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.
Generally, with respect to our mortgage loans, the imposition of an
automatic stay under the Bankruptcy Act precludes us from exercising foreclosure
or other remedies against the debtor. Pre-petition creditors generally do not
have rights to the cash flows from the properties underlying the mortgages. The
timing of the collection from mortgagors in bankruptcy depends on negotiating an
acceptable settlement with the mortgagor (and subject to approval of the
bankruptcy court) or the order of the bankruptcy court in the event a negotiated
settlement cannot be achieved. 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 ourselves 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 exceeds
the amount of the debt, interest and allowed costs may not be paid during the
bankruptcy proceeding but accrue until confirmation of a plan of reorganization
or such other time as the court orders. If the value of the collateral held by a
senior creditor is less than the secured debt, interest on the loan for the time
period between the filing of the case and confirmation may be disallowed.
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 Act.
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,
some 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 our investments, we may take possession of a property or even become
licensed as an operator, which might expose us to successor liability to
government programs or require us to indemnify subsequent operators to whom we
might transfer the operating rights and licenses. Third party payors may also
suspend payments to us following foreclosure until we receive the required
licenses to operate the facilities. Should such events occur, our income and
cash flow from operations would be adversely affected.
Risks Related to Owned and Operated Assets. As a consequence of the
financial difficulties encountered by a number of our operators, we have
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. 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
(See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations - Overview).
We are typically required to hold applicable licenses and are responsible
for the regulatory compliance at our owned and operated facilities. Our
management contracts with third party operators for these properties provide
that the third-party operator is responsible for regulatory compliance, but we
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 our owned and operated properties as compared to our
leased and mortgaged assets.
3
Summary of Financial Information
The following tables summarize our net revenues and real estate assets by
asset category for 2001, 2000 and 1999, setting forth the effect of the results
of operations of property recovered as a result of foreclosure and settlements
with troubled operators that are held for sale or operated on an interim basis
for our own account until such time as the properties are sold or re-leased.
(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 16 - Segment Information to our Consolidated Financial Statements).
Description of the Business
Investment Policies. We maintain a diversified portfolio of long-term
healthcare facilities and mortgages on healthcare facilities located in the
United States. In making investments, we generally have focused on established,
creditworthy, middle-market healthcare operators that meet our standards for
quality and experience of management. We have sought to diversify our
investments in terms of geographic locations, operators and facility types. As a
consequence of our current financial condition and upcoming debt maturities, we
have not recently made investments and do not intend to make investments unless,
and until we address, our $98.0 million of debt maturing in the first half of
2002.
In evaluating potential investments, we consider such factors as:
o the quality and experience of management and the creditworthiness of
the operator of the facility;
o 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 us;
o the construction quality, condition and design of the facility;
4
o the geographic area and type of facility;
o the tax, growth, regulatory and reimbursement environment of the
community in which the facility is located;
o the occupancy and demand for similar healthcare facilities in the same
or nearby communities; and
o the payor mix of private, Medicare and Medicaid patients.
One of our fundamental investment strategies 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.
We prefer to invest in equity ownership of properties. Due to regulatory,
tax or other considerations, we sometimes pursue 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 us. Average annualized
yields reflect existing contractual arrangements. However, in view of the
ongoing financial challenges in the long-term care industry, we cannot assure
you that the operators of our facilities will meet their payment obligations in
full or when due. Therefore, the annualized yields as of January 1, 2002 set
forth below are not necessarily indicative of or a forecast of actual yields,
which may be lower.
Purchase/Leaseback. In a Purchase/Leaseback transaction, we purchase
the property from the operator and lease it back to the operator over
terms ranging from 8 to 17 years, plus renewal options. The leases
originated by us generally provide for minimum annual rentals which
are subject to annual formula increases based upon such factors as
increases in the consumer price index ("CPI") or increases in the
revenue streams generated by the underlying properties, with certain
fixed minimum and maximum levels. Generally, the operator holds an
option to repurchase the property at set dates at prices based on
specified formulas. The average annualized yield from leases was
11.29% at January 1, 2002.
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 the revenues generated by the underlying long-term care
facilities, with certain maximum limits. Convertible participating
mortgages afford us the option to convert our mortgage into direct
ownership of the property, generally at a point six to nine years from
inception. If we exercise our purchase option, we are obligated to
lease the property back to the operator for the balance of the
originally agreed term and for the originally agreed participations in
revenues or CPI adjustments. This allows us to capture a portion of
the potential appreciation in value of the real estate. The operator
has the right to buy out our option at prices based on specified
formulas. The average annualized yield on these mortgages was
approximately 10.40% at January 1, 2002.
Participating Mortgage. Participating mortgages are similar to
convertible participating mortgages except that we do not have a
purchase option. 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
10.78% at January 1, 2002.
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 11.08% at January 1,
2002.
5
The following table identifies the years of expiration of the payment
obligations due to us under existing contractual obligations as of January 1,
2002. This information is provided solely to indicate the scheduled expiration
of payment obligations due to us, and is not a forecast of expected revenues.
The table set forth in Item 2 - Properties, contains information regarding
our real estate properties, their geographic locations, and the types of
investment structures as of December 31, 2001.
Borrowing Policies. We may incur additional indebtedness and have
historically sought to maintain a long-term debt-to-total capitalization ratio
in the range of 40% to 50%. Total capitalization is total stockholders' equity
plus long-term debt. We intend to periodically review our policy with respect to
our debt-to-total capitalization ratio and to modify the policy as our
management deems prudent in light of prevailing market conditions. Our strategy
generally has been to match the maturity of our indebtedness with the maturity
of our 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.
We may use proceeds of any additional indebtedness to provide permanent
financing for investments in additional healthcare facilities. We 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, we
generally may invest in properties subject to existing loans, secured by
mortgages, deeds of trust or similar liens on properties.
Industry turmoil and continuing adverse economic conditions have caused the
terms on which we can obtain additional borrowings to become unfavorable. If we
need capital to repay indebtedness as it matures, we may be required to
liquidate investments in properties at times which may not permit realization of
the maximum recovery on these investments. This could also result in adverse tax
consequences to us. We may be required to issue additional equity interests in
our company, which could dilute your investment in our company. (See Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources).
Federal Income Tax Considerations. We intend to make and manage our
investments, including the sale or disposition of property or other investments,
and to operate in such a manner as to qualify as a REIT under the Internal
Revenue Code, unless, because of changes in circumstances or changes in the
Internal Revenue Code, our Board of Directors determines that it is no longer in
our best interest to qualify as a REIT. As a REIT, we generally will not pay
federal income taxes on the portion of our income which is distributed to
stockholders.
Securities Or Interest In Persons Primarily Engaged In Real Estate
Activities. In November 1997, we formed Omega Worldwide, Inc. ("Omega
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, we contributed substantially all of our assets in Principal Healthcare
Finance Limited, an Isle of Jersey (United Kingdom) company, to Omega Worldwide
in exchange for approximately 8.5 million shares of Omega Worldwide common stock
and 260,000 shares of Series B preferred stock. Of the 8.5 million shares of
Omega Worldwide common stock we received, approximately 5.2 million were
distributed on April 2, 1998 to our stockholders, and we sold 2.3 million shares
on April 3, 1998. As of December 31, 2001, the carrying value of our investment
in Omega Worldwide is $4.5 million represented by 1,163,000 shares of common
stock and 260,000 shares of preferred stock. We also have entered into a
services agreement with Omega Worldwide which provides for an allocation of the
6
indirect costs incurred by us to Omega Worldwide. (See "Affiliate Relationships
and Transactions"). We also hold a $1.6 million investment in Principal
Healthcare Finance Limited and a $1.3 million investment in the Principal
Healthcare Finance Trust, an Australian Unit Trust.
Policies With Respect To Certain Activities. If our Board of Directors
determines that additional funding is required, we may raise such funds through
additional equity offerings, debt financing, retention of cash flow (subject to
provisions in the Internal Revenue Code concerning taxability of undistributed
REIT taxable income) or a combination of these methods.
In the event that our Board of Directors determines to raise additional
equity capital, it has the authority, without stockholder approval, to issue
additional common stock or preferred stock in any manner and on such terms and
for such consideration it deems appropriate, including in exchange for property.
In July 2000, we issued shares of our Series C Convertible Preferred Stock to
Explorer Holdings, L.P. ("Explorer") in exchange for an investment of $100.0
million.
Borrowings may be in the form of bank borrowings, secured or unsecured, and
publicly or privately placed debt instruments, purchase money obligations to the
sellers of assets, long-term, tax-exempt bonds or financing from banks,
institutional investors or other lenders, securitizations, any of which
indebtedness may be unsecured or may be secured by mortgages or other interests
in the asset. Such indebtedness may be recourse to all or any part of our assets
or may be limited to the particular asset to which the indebtedness relates.
On December 21, 2001, we reached amended agreements with the bank groups
under both of our revolving credit facilities. As of the closing of the rights
offering and the private placement to Explorer on February 21, 2002, these
amendments became effective (See Note 19 to our Consolidated Financial
Statements - Subsequent Events).
As part of the amendment regarding our $75.0 million revolving credit
facility, we prepaid $10.0 million originally scheduled to mature in March 2002.
This voluntary prepayment results in a permanent reduction in the total
commitment, thereby reducing the credit facility to $65.0 million. The agreement
regarding our $175.0 million revolving credit facility includes a one-year
extension in maturity from December 31, 2002 to December 31, 2003, and a
reduction in the total commitment from $175.0 million to $160.0 million. Amounts
up to $150.0 million may be drawn upon to repay the maturing 6.95% Notes due in
June 2002.
We have authority to offer our common stock or other equity or debt
securities in exchange for property and to repurchase or otherwise reacquire our
shares or any other securities and may engage in such activities in the future.
Similarly, we may offer additional interests in our operating partnership that
are exchangeable into common shares or, at our option, cash, in exchange for
property. We also may make loans to our subsidiaries.
Subject to the percentage of ownership limitations and gross income and
asset tests necessary for REIT qualification, we may invest in securities of
other REITs, other entities engaged in real estate activities or securities of
other issuers, including for the purpose of exercising control over such
entities.
We may engage in the purchase and sale of investments. We do not underwrite
the securities of other issuers.
Our officers and directors may change any of these policies without a vote
of our stockholders.
In the opinion of our management, our properties are adequately covered by
insurance.
Competition. We compete 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.
7
Executive Officers of our Company
At the date of this report, the executive officers of our company are:
C. Taylor Pickett (40) is the Chief Executive Officer and has served in
this capacity since June 12, 2001. Prior to joining our company, Mr. Pickett
served as the Executive Vice President and Chief Financial Officer from January
1998 to June 2001 of Integrated Health Services, Inc., a public company
specializing in post-acute healthcare services. He also served as Executive Vice
President of mergers and acquisitions from May 1997 to December 1997 of
Integrated Health Services. Prior to his roles as Chief Financial Officer and
Executive Vice President of Mergers and Acquisitions, Mr. Pickett served as the
President of Symphony Health Services, Inc. from January 1996 to May 1997.
Daniel J. Booth (38) is the Chief Operating Officer and has served in this
capacity since October 15, 2001. Prior to joining our company, Mr. Booth served
as a member of Integrated Health Services, Inc.'s management team since 1993,
most recently serving as Senior Vice President, Finance. Prior to joining
Integrated Health Services, Mr. Booth was Vice President in the Healthcare
Lending Division of Maryland National Bank (now Bank of America).
R. Lee Crabill, Jr. (48) is the Senior Vice-President of Operations of our
company and has served in this capacity since July 30, 2001. Mr. Crabill served
as a Senior Vice-President of Operations at Mariner Post-Acute Network from 1997
through 2000. Prior to that, he served as an Executive Vice-President of
Operations at Beverly Enterprises.
Robert O. Stephenson (38) is the Chief Financial Officer and has served in
this capacity since August 1, 2001. Prior to joining our company, Mr. Stephenson
served for five years from 1996 to July 1, 2001 as the Senior Vice President and
Treasurer of Integrated Health Services, Inc., a public company specializing in
post-acute healthcare services. Prior to Integrated Health Services, Mr.
Stephenson served in management roles at CSX Intermodal, Martin Marietta
Corporation and Electronic Data Systems.
As of December 31, 2001, we had 34 full-time employees and five part-time
employees, including the four executive officers listed above. On October 9,
2001, we announced that we were relocating our corporate offices effective as of
January 1, 2002 to Timonium, Maryland, a suburb of Baltimore. All of our
employees as of the date of the announcement either had an employment agreement
or were otherwise entitled to incentives if they remained employed with us
during the transitional period, which was completed by January 31, 2002.
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Item 2 - Properties
At December 31, 2001, our real estate investments included 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 our account, including facilities subject to leasehold
interests. The facilities are located in 28 states and are operated by 35
unaffiliated operators. The following table summarizes our property investments
as of December 31, 2001:
(1) Generally represents data for the twelve-month period ending December 31,
2001.
9
The following table presents the concentration of our facilities by state
as of December 31, 2001:
Our core portfolio consists of long-term lease and mortgage agreements. Our
leased real estate properties are leased under provisions of master leases with
initial terms typically ranging from 10 to 16 years, plus renewal options.
Substantially all of the master leases provide for minimum annual rentals that
are subject to annual increases based upon increases in the CPI or increases in
revenues of the underlying properties, with certain limits. Under the terms of
the leases, the lessee is responsible for all maintenance, repairs, taxes and
insurance on the leased properties.
Our owned and operated facilities, like those of our lessees and
mortgagees, are subject to government regulation and derive a substantial
portion of their net operating revenues from third-party payors, including the
Medicare and Medicaid programs.
Our owned and operated facilities are managed by independent third parties
under management contracts. These managers are responsible for the day-to-day
operation of the facilities, including, among other things, patient care,
staffing, billing and collection of patient accounts and facility-level
financial reporting. For their services, the managers are paid a management fee,
typically based on a percentage of nursing home revenues. As of December 31,
2001, we had 33 properties classified as owned and operated. Due to re-leasing
and sales, as of the date of this filing, we have 19 properties classified as
owned and operated. (See Note 19 - Subsequent Events to our audited Consolidated
Financial Statements).
10
As a consequence of the financial difficulties encountered by a number of
our operators, we have 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, we would seek to re-lease or otherwise
dispose of such assets as promptly as practicable. When we adopt a plan to sell
a property, the property is classified as Assets Held for Sale. 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 of December 31, 2001, there are eight properties in assets held for
sale, representing a total investment, net of impairment of $7.4 million. Of
these eight properties, three are under contract for sale. However, no assurance
can be given that the sales will be realized, as there are financing and other
contingencies on these contracts.
Item 3 - Legal Proceedings
We are 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, we believe 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 our consolidated financial
position or results of operations.
On June 21, 2000, we were named as a defendant in certain litigation
brought against us by Madison/OHI Liquidity Investors, LLC ("Madison"), a
customer that claims that we have breached and/or anticipatorily breached a
commercial contract. Ronald M. Dickerman and Bryan Gordon are partners in
Madison and limited guarantors of Madison's obligations to us. 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 an amount
ranging from $15 - $28 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 our company. We contend that Madison is in
default under the contract in question. We believe that the litigation is
meritless. We continue to vigorously defend the case and have filed
counterclaims against Madison and the guarantors seeking repayment of
approximately $10.2 million, including default interest, that Madison owes us,
as well as damages resulting from the conversion of the collateral securing our
loan. The trial in this matter is currently set for July, 2002. The financial
statements do not contain any adjustments relating to the ultimate outcome of
this uncertainty.
On December 29, 1998, Karrington Health, Inc. brought suit against us in
the Franklin County, Ohio, Common Pleas Court (subsequently removed to the U.S.
District Court for the Southern District of Ohio, Eastern Division) alleging
that we repudiated and ultimately breached a financing contract to provide $95
million of financing for the development of 13 assisted living facilities.
Karrington was seeking recovery of approximately $34 million in damages it
alleged to have incurred as a result of the breach. On August 13, 2001, we paid
Karrington $10 million to settle all claims arising from the suit, but without
our admission of any liability or fault, which liability is expressly denied.
Based on the settlement, the suit has been dismissed with prejudice. The
settlement was recorded in the quarter ended June 30, 2001.
Item 4 -- Submission of Matters to a Vote of Security Holders
No matters were submitted to stockholders during the fourth quarter of the
year covered by this report.
11
PART II
Item 5 -- Market for Registrants' Common Equity and Related Stockholder Matters
Our 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 prices as reported on the New York Stock Exchange
Composite for the periods indicated and cash dividends per share:
The closing price on December 31, 2001 was $6.02 per share. As of December
31, 2001, there were 19,998,896 shares of common stock outstanding with
approximately 2,050 registered holders and approximately 15,700 beneficial
owners.
We do not know when or if we will resume dividend payments on our common
stock or, if resumed, what the amount or timing of any dividend will be. We do
not anticipate paying dividends on any class of capital stock at least until our
$98 million of debt maturing in the first half of 2002 has been repaid and, in
any event, all accrued and unpaid dividends on our Series A, B and C preferred
stock must be paid in full before dividends on our common stock can be resumed.
12
Item 6 -- Selected Financial Data
The following selected financial data with respect to our company should be
read in conjunction with our Consolidated Financial Statements which are listed
herein under Item 14 and are included on pages F-1 through F-30.
- ----------
(1) Dividends per share are those declared and paid during such period.
(2) Dividends per share are those declared during such period, based on the
number of shares of common stock issuable upon conversion of the
outstanding Series C.
13
Item 7-- Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements. These
statements relate to our expectations, beliefs, intentions, plans, objectives,
goals, strategies, future events, performance and underlying assumptions and
other statements other than statements of historical facts. In some cases, you
can identify forward-looking statements by the use of forward-looking
terminology including "may," "will," "anticipates," "expects," "believes,"
"intends," "should" or comparable terms or the negative thereof. These
statements are based on information available on the date of this prospectus and
only speak as of the date hereof and no obligation to update such
forward-looking statements should be assumed. Our actual results may differ
materially from those reflected in the forward-looking statements contained
herein as a result of a variety of factors, including those discussed under
"Risk Factors" in Item 1 above.
Overview
The long-term care industry has experienced unprecedented financial
challenges in the recent past that have had an adverse impact on us during 2000
and 2001. These challenges are due principally to the Balanced Budget Act of
1997, which introduced the prospective payment system for the reimbursement of
Medicare patients in skilled nursing facilities, implementing an acuity-based
reimbursement system in lieu of the cost-based reimbursement system historically
used. The prospective payment system significantly reduced payments to nursing
home operators. That reduction, in turn, has negatively affected the revenues of
our nursing home facilities and the ability of our nursing home operators to
service their capital costs to us. Many nursing home operators, including a
number of our large nursing home operators, have sought protection under Chapter
11 of the Bankruptcy Act.
In response to the adverse impact of the prospective payment system
reimbursement cuts, the Federal government passed the Balanced Budget Refinement
Act of 1999 and the Benefits Improvement and Protection Act of 2000, both of
which increase payments to nursing home operators. These increases have
positively affected the revenues of our nursing home facilities and the ability
of our nursing home operators to service their capital costs to us. In addition,
the facilities that we own and currently operate for our own account have been
likewise positively affected by the Balanced Budget Refinement Act and Benefits
Improvement and Protection Act. However, certain of the increases in Medicare
reimbursement for skilled nursing facilities provided for under the Balanced
Budget Refinement Act and the Benefits Improvement and Protection Act will
sunset in October 2002. Unless Congress enacts additional legislation, the loss
of revenues associated with this occurrence could have a material adverse effect
on our operators, and on us. We cannot presently predict what impact these
proposals may have, if any.
The initial impact of the prospective payment system negatively affected
our financial results and our access to capital sources to fund growth and
refinance existing indebtedness. To obtain sufficient liquidity to enable us to
address the maturity in July 2000 and February 2001 of indebtedness totaling
$129.8 million, we issued $100.0 million of Series C preferred stock to Explorer
Holdings, L.P. ("Explorer") in July 2000 as described in more detail in Note 10
to our audited Consolidated Financial Statements.
As a consequence of the financial difficulties encountered by a number of
our nursing home operators, we have 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, we 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 were actively
marketing portfolios of similar assets and, in light of the market conditions in
the long-term care industry generally, it had become more difficult both to sell
these properties and for potential buyers to obtain financing to acquire them.
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.
At December 31, 2000, we owned 69 long-term healthcare facilities that had
been recovered from customers and are currently operated for our own account.
Due to re-leasing and asset sales, we owned 33 such facilities at December 31,
2001. During 1999, 2000 and 2001, we 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 these assets, we often fund
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. Our management intends to
sell or re-lease these assets as promptly as possible, consistent with achieving
valuations that reflect our management's estimate of fair realizable value of
the assets. We do not know, however, if or when the dispositions will be
completed or whether the dispositions will be completed on terms that will
enable us to realize the fair value of such assets.
14
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
stock. We requested this deferral in light of the maturity in February 2001 of
$16.6 million of subordinated debentures. In February 2001, we suspended payment
of all dividends on all common and preferred stock. This action was intended to
preserve cash to facilitate our ability to obtain financing to fund debt
maturing in 2002. Additionally, on March 30, 2001, we exercised our option to
pay the deferred Series C preferred stock dividend and associated deferral fee
by issuing 48,420 additional shares of Series C preferred stock to Explorer.
These shares are convertible into 774,722 shares of our common stock at $6.25
per share. We do not know when or if we will resume dividend payments on our
common stock or, if resumed, what the amount or timing of any dividend will be.
We do not anticipate paying dividends on any class of capital stock at least
until our $98 million of debt maturing in the first half of 2002 has been
repaid, and in any event, all accrued and unpaid dividends on our Series A, B
and C preferred stock must be paid in full before dividends on our common stock
can be resumed. We have made sufficient distributions to satisfy the
distribution requirements under the REIT rules of the Internal Revenue Code of
1986 to maintain our REIT status.
On October 9, 2001, we announced that we were relocating our corporate
offices effective as of January 1, 2002 to Timonium, Maryland, a suburb of
Baltimore. All of our current employees as of the date of the announcement
either had employment agreements or were otherwise entitled to incentives if
they remained employed with us in their current positions during the
transitional period, which was completed by January 31, 2002.
In August 2001, we paid $10 million to settle a lawsuit brought against us
by Karrington Health, Inc. The recognition of this non-recurring expense
associated with the settlement has resulted in violations of certain financial
covenants in the loan agreements relating to our revolving credit facilities. On
December 21, 2001, we reached amended agreements with the bank groups under both
of our revolving credit facilities which included waivers of the covenant
violations. As of the closing of the rights offering and private placement to
Explorer on February 21, 2002 these amendments became effective (See Note 19 -
Subsequent Events to our audited Consolidated Financial Statements).
Critical Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") 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.
Owned and Operated Assets and Assets Held for Sale. In the ordinary course
of our business activities, we periodically evaluate investment opportunities
and extend credit to customers. We regularly engage in lease and loan extensions
and modifications. Additionally, we monitor and manage our investment portfolio
with the objectives of improving credit quality and increasing returns. In
connection with portfolio management, we engage in various collection and
foreclosure activities. When we acquire 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 our Consolidated Balance Sheet. Operating assets and operating
liabilities for the owned and operated properties are shown separately on the
face of our Consolidated Balance Sheet and are detailed in Note 16--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, we
evaluate the carrying value of the related real estate investments in
relationship to the future undiscounted cash flows of the underlying facilities.
If the sum of the expected future cash flow, including sales proceeds, is less
than carrying value, we then adjust the net carrying value of leased properties
and other long-lived assets to the present value of expected future cash flows.
Loan Impairment Policy. When management identifies an indication of
potential loan impairment, such as non-payment under the loan documents or
impairment of the underlying collateral, the loan is written down to the present
value of the expected future cash flows. In cases where expected future cash
flows cannot be estimated, the loan is written down to the fair value of that
collateral.
15
Accounts Receivable. Accounts Receivable consist primarily of lease and
mortgage interest payments. Amounts recorded include estimated provisions for
loss related to uncollectible accounts and disputed items.
Accounts Receivable--Owned and Operated Assets. Accounts Receivable from
Owned and Operated Assets consist 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 uncollectable accounts and disputed items.
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 (i.e., such as increases in the Consumer Price Index) 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 regarding ultimate collection. When
collection is uncertain, lease revenues are recorded as received, after taking
into account application of security deposits. Interest income on impaired
mortgage loans is recognized as received after taking into account application
of security deposits.
Nursing home revenues from owned and operated assets (primarily Medicare,
Medicaid and other third party insurance) are recognized as patient services are
provided.
Results of Operations
The following is our discussion of the consolidated results of operations,
financial position and liquidity and capital resources, which should be read in
conjunction with our consolidated financial statements and accompanying notes.
Year Ended December 31, 2001 compared to Year Ended December 31, 2000
Our revenues for the year ended December 31, 2001 totaled $257.6 million, a
decrease of $18.2 million over 2000 revenues. Excluding nursing home revenues of
owned and operated assets, revenues were $89.5 million for the year ended
December 31, 2001, a decrease of $10.8 million from the comparable prior year
period.
Our rental income for the year ended December 31, 2001 totaled $61.2
million, a decrease of $6.1 million over 2000 rental income. The decrease is due
to $6.3 million from reductions in lease revenue due to foreclosures,
bankruptcies, restructurings and reserve for non-payment of certain leases, and
$1.8 million from reduced investments caused by 2000 and 2001 asset sales. These
decreases are offset by $1.3 million relating to contractual increases in rents
that became effective in 2001 as defined under the related agreements and $0.7
million relating to assets previously classified as owned and operated.
Our mortgage interest income for the year ended December 31, 2001 totaled
$20.8 million, decreasing $3.3 million over 2000 mortgage interest income. The
decrease is due to $1.6 million from reductions due to foreclosures,
bankruptcies, restructurings and reserve for non-payment of certain mortgages
and $2.0 million from reduced investments caused by the payoffs of mortgages.
These decreases are partially offset by $0.2 million relating to contractual
increases in interest income that became effective in 2001 as defined under the
related agreements and $0.1 million relating to assets previously classified as
owned and operated.
Our nursing home revenues of owned and operated assets for the year ended
December 31, 2001 totaled $168.1 million, decreasing $7.4 million over 2000
nursing home revenues. The decrease is due to the sale and re-leasing of certain
owned and operated assets during the year.
Our expenses for the year ended December 31, 2001 totaled $276.7 million,
decreasing approximately $58.7 million over expenses of $335.3 million for 2000.
Our nursing home expenses for owned and operated assets decreased to $176.2
million from $179.0 million in 2000 due to the sale and re-leasing of certain
owned and operated assets during the year.
The 2001 provision for depreciation and amortization of real estate totaled
$22.1 million, decreasing $1.2 million over 2000. The decrease primarily
consists of $0.9 million depreciation expense for properties sold or held for
sale and a reduction in amortization of non-compete agreements of $0.7 million
16
offset by $0.3 million additional depreciation expense from properties
previously classified as mortgages and new investments placed in service in 2000
and 2001.
Our interest expense for the year ended December 31, 2001 was approximately
$36.3 million, compared with $42.4 million for 2000. The decrease in 2001 is due
to both lower average interest rates during the 2001 period and lower average
borrowings.
Our general and administrative expenses for 2001 totaled $10.4 million as
compared to $6.4 million for 2000, an increase of $4.0 million. The increase is
due primarily to increased consulting costs related to the foreclosures and
lease restructures.
Our legal expenses for 2001 totaled $4.3 million as compared to $2.5
million in 2000. The increase is largely attributable to legal costs associated
with operator bankruptcy filings and negotiations with our troubled operators.
We recorded a $10 million litigation settlement expense in 2001 to settle a
suit brought by Karrington Health, Inc. in 1998. This settled all claims arising
from the suit, but without our admission of any liability or fault, which
liability is expressly denied. Based on the settlement, the suit was dismissed
with prejudice.
A provision for impairment of $9.6 million is included in expenses for
2001. This provision included $8.3 million for facilities recovered from
operators and now held as held for sale assets to fair value, and $1.2 million
related to other real estate assets our management has determined is impaired.
We recognized a provision for loss on uncollectible accounts of $0.7
million in 2001, adjusting the carrying value of accounts receivable to net
realizable value. In 2000, we recognized a provision for loss on mortgages and
notes receivable of $15.3 million, adjusting the carrying value of mortgages and
notes receivable to their net realizable value.
In 2001, we recorded a $5.1 million charge for severance, moving and
consulting agreement costs. This charge was comprised of $4.6 million for
relocation of our corporate headquarters and $0.5 million for consulting and
severance payments to our former Senior Vice President and General Counsel. In
2000, we recognized a $4.7 million charge for severance and consulting payments
to our former Chief Executive Officer and former Chief Financial Officer.
We recorded a non-cash charge of $1.3 million for 2001 related to the
adoption of FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which was required to be adopted in years beginning after
June 15, 2000. No such charge was recorded in 2000, as we adopted this new
statement effective January 1, 2001.
During 2001, we sold certain of our core and other assets realizing
proceeds of $3.9 million, resulting in a loss of $0.7 million. During 2000, we
completed asset sales yielding net proceeds of $34.7 million, resulting in a
gain of $10.0 million.
During 2001, we repurchased $27.5 million of our 6.95% Notes maturing in
June 2002, recognizing a gain on early extinguishment of debt of $3.1 million.
Our funds from operations for the year ended December 31, 2001 on a fully
diluted basis totaled $4.3 million, a decrease of $14.9 million as compared to
the $19.2 million for 2000 due to factors mentioned above. After adjusting for
the non-recurring provision for loss on mortgages and notes receivable and
severance and consulting costs, funds from operations for the year was $26.7
million, a decrease of $12.6 million from the year ended December 31, 2000.
Funds from operations is net earnings available to common stockholders,
excluding any gains or losses from debt restructuring and the effects of asset
dispositions, plus depreciation and amortization associated with real estate
investments. Diluted funds from operations is the lower of funds from operations
and funds from operations adjusted for the assumed conversion of Series C
Preferred Stock and Subordinated Convertible Debentures and the exercise of
in-the-money stock options. We consider funds from operations 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 an understanding of our ability
to incur and service debt and to make expenditures. Funds from operations in and
of itself does not represent cash generated from operating activities in
accordance with generally accepted accounting principles 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
generally accepted accounting principles in the United States, as a measure of
liquidity and is not necessarily indicative of cash available to fund cash
needs.
17
No provision for federal income taxes has been made since we continue to
qualify as a REIT under the provisions of Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. Accordingly, we have not been subject
to federal income taxes on amounts distributed to stockholders, as we have
distributed at least 95% of our REIT taxable income for taxable years before
2001 and have met certain other conditions. In 2001, and future taxable years,
we are required to distribute at least 90% of our REIT taxable income.
Year Ended December 31, 2000 compared to Year Ended December 31, 1999
Our 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 our 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 $100.2 million for the
twelve-month period ended December 31, 2000, a decrease of $21.7 million from
the comparable prior year period.
Our 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.
Our 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.
Our 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.
Our 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.
Our 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 our account.
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.
Our 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.
Our 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.
Our 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 our troubled
operators.
18
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, our
management has determined is impaired.
We 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.
We recognized a $4.7 million charge for severance payments in 2000. The
charges are comprised of severance and consulting payments to our former Chief
Executive Officer and former Chief Financial Officer.
During 2000, we sold certain of our core and other assets realizing
proceeds of $34.7 million, resulting in a gain of $10.0 million. During 1999, we
completed asset sales yielding net proceeds of $18.2 million, realizing losses
of $10.5 million.
Our funds from operations 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, funds from operations for the year was $39.3
million, a decrease of $32.6 million from the year ended December 31, 1999.
Funds from operations is net earnings available to common stockholders,
excluding any gains or losses from debt restructuring and the effects of asset
dispositions, plus depreciation and amortization associated with real estate
investments. Diluted funds from operations is the lower of funds from operations
and funds from operations adjusted for the assumed conversion of Series C
Preferred Stock and Subordinated Convertible Debentures and the exercise of
in-the-money stock options. We consider funds from operations 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 an understanding of our ability
to incur and service debt and to make expenditures. Funds from operations in and
of itself does not represent cash generated from operating activities in
accordance with generally accepted accounting principles 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
generally accepted accounting principles in the United States, as a measure of
liquidity and is not necessarily indicative of cash available to fund cash
needs.
No provision for federal income taxes has been made since we continue to
qualify as a REIT under the provisions of Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. Accordingly, we have not been subject
to federal income taxes on amounts distributed to stockholders, as we have
distributed at least 95% of our REIT taxable income for taxable years before
2001 and have met certain other conditions. In 2001, and future taxable years,
we are required to distribute at least 90% of our REIT taxable income.
Portfolio Developments
Mariner and Professional Healthcare Settlement. We have entered into a
comprehensive settlement with Mariner Post-Acute Network, Inc. resolving all
outstanding issues relating to our loan to Professional Healthcare Management
Inc., a subsidiary of Mariner. Pursuant to the settlement, the Professional
Healthcare loan is secured by a first mortgage on 12 skilled nursing facilities
owned by Professional Healthcare with 1,679 operating beds. Professional
Healthcare will remain obligated on the total outstanding loan balance as of
January 18, 2000, the date Mariner filed for protection under Chapter 11 of the
Bankruptcy Act, and paid us our accrued interest at a rate of approximately 11%
for the period from the filing date until September 1, 2001. Monthly payments
with interest at the rate of 11.57% per annum resumed October 1, 2001. The
settlement agreement was approved by the United States Bankruptcy Court in
Wilmington, Delaware on August 22, 2001, and became effective as of September 1,
2001.
On February 1, 2001, four Michigan facilities, previously operated by
Professional Healthcare and subject to our pre-petition mortgage, were
transferred by Professional Healthcare to a new operator who paid for the
facilities by execution of a promissory note that has been assigned to us.
Professional Healthcare was given a $4.5 million credit on February 1, 2001 and
an additional $3.5 million credit as of September 1, 2001, both against the
Professional Healthcare loan balance in exchange for the assignment of the
promissory note to us. The promissory note is secured by a first mortgage on the
four facilities.
Following the closing under the settlement agreement, the outstanding
principal balance on the Professional Healthcare loan is approximately $59.7
million. The Professional Healthcare loan term will be ten years with
Professional Healthcare having the option to extend for an additional ten years.
19
Professional Healthcare will also have the option to prepay the Professional
Healthcare loan between February 1, 2005 and July 31, 2005.
Other Operators. In Note 15 to our Form 10-K for the year ended December
31, 2000, we announced continuing discussions with several of our lessees to
resolve payment issues, including Alterra Healthcare Corp. ("Alterra"), Lyric
Healthcare LLC ("Lyric"), Alden Management Services, Inc. ("Alden") and TLC
Healthcare, Inc. ("TLC").
Alterra Healthcare Corp. made reduced payments of their monthly rent since
March 2001. Monthly rent payments of $306,138 were not paid for March through
June; $100,000 was paid in each of the July and August months; and $185,097 was
paid each month from September through December. All shortfalls were funded from
Alterra's security deposit. Accordingly, revenues were recognized on the full
contractual rent of $306,138 per month. In February, 2002 we completed a
renegotiated transaction with Alterra whereby we will take back two facilities
in June 2002, and Alterra agreed to pay us a fee of approximately $0.7 million
and monthly rent payments of $187,000 in 2002, increasing to $268,000 per month
in 2003. The total gross investment in the properties leased to Alterra is $34.1
million, including $6.2 million for the two facilities that are to be taken
back. We currently expect these two facilities to be leased to a new operator or
marketed for sale.
Integrated Health Services, Inc. ("IHS") filed for Chapter 11 bankruptcy
protection in February 2000. With the exception of a small portion of
prepetition interest (approximately $63,000), IHS paid its contractual mortgage
interest from its bankruptcy filing in February 2000 until October 2001. In
November 2001, IHS informed us that it did not intend to pay future rent and
mortgage interest due. In January, 2002, IHS resumed making payments to us.
Revenue is being recorded as payments are received. We hold three mortgages on
properties owned by IHS: a $37.5 million mortgage collateralized by seven
facilities located in Florida and Texas; a $12 million mortgage collateralized
by two facilities located in Georgia; and a $4.9 million mortgage collateralized
by one facility located in Florida. Annual contractual interest income on each
of the mortgages is approximately $3.96 million, $1.25 million and $0.55
million, respectively. We also have a lease with IHS for one property in the
state of Washington, representing an investment of $10 million and annualized
contractual revenue of $1.45 million. IHS rejected this lease on November 9,
2001.
We are currently negotiating with IHS to reach a permanent restructuring
agreement or to transition the facilities to a new operator or operators. Rent
under the lease was paid through March, 15, 2002 under a stipulation agreement
currently being negotiated. No payments were made on the October to December
mortgage interest. Accordingly, no revenue was recorded for the mortgages for
October to December. In 2002, revenue is being recorded as received. Current
appraisals of the properties underlying the mortgage loans indicate collateral
value in excess of the mortgage loan balances. Accordingly, we do not expect to
record any reserves relative to these loans at this time.
We entered into a forbearance agreement with Lyric Healthcare LLC through
August 31, 2001, whereby we received $541,266 of the $860,000 monthly rent due
under the Lyric leases through November 2001. On November 7, we were notified by
Lyric that we would no longer be receiving payments. In January, 2002, Lyric
resumed making payments to us. Revenue has been recorded as received. We will
continue to record revenue in this manner until a resolution with Lyric is
finalized. Discussions are continuing with Lyric to reach a permanent
restructuring agreement or to transition the facilities to a new operator or
operators. Our original investment in the ten facilities covered under the lease
is $95.4 million, with annual contractual rent of $10.3 million.
On March 30, 2001, we announced that affiliates of Alden Management, Inc.
were delinquent in paying their lease and escrow payments on the four facilities
they lease from us. During the month of April, Alden resumed regularly scheduled
lease payments to us, and began making payments on a schedule designed to bring
their past due amounts current by August 2001. Alden adhered to the schedule and
is now current with their rental payments to us.
In April 2001, we were informed by TLC Healthcare, Inc. that it could no
longer meet its payroll and other operating obligations. We had leases and
mortgages with TLC representing eight properties with 1,049 beds and an initial
investment of $27.5 million. As a result of this action, one facility in Texas
with an initial investment of $2.5 million was leased to a new operator, Lamar
Healthcare, Inc. and four properties in Illinois, Indiana and Ohio, with an
initial investment of $13.5 million, were taken back and placed under management
agreements with Atrium Living Centers and Nexion Health Management, Inc. and are
now operated for our own account and classified as Owned and Operated Assets.
The remaining three properties, located in Texas, were closed and are being
marketed for sale. These three facilities are classified as Assets Held for Sale
and have been reduced to their fair value, less cost of disposal. Amounts due
from TLC that were not collected were written off as bad debt expense during
2001.
20
In several instances we hold 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 Act.
Liquidity and Capital Resources
At December 31, 2001, we had total assets of $890.8 million, stockholders'
equity of $450.7 million, and long-term debt of $413.2 million, representing
approximately 47.8% of total capitalization. In addition, as of December 31,
2001, we had an aggregate of $99.4 million of outstanding debt which matures in
2002, including $97.5 million of 6.95% Notes due June 2002.
Modification of Bank Credit Agreements
On December 21, 2001, we reached amended agreements with the bank groups
under both of our revolving credit facilities. As of the closing of the rights
offering and the private placement to Explorer on February 21, 2002 these
amendments became effective (See Note 19 - Subsequent Events to our audited
Consolidated Financial Statements).
As part of the amendment regarding our $75 million revolving credit
facility we prepaid $10 million originally scheduled to mature in March 2002.
This voluntary prepayment results in a permanent reduction in the total
commitment, thereby reducing the credit facility to $65 million. The agreement
regarding our $175 million revolving credit facility includes a one-year
extension in maturity from December 31, 2002 to December 31, 2003, and a
reduction in the total commitment from $175 million to $160 million. Amounts up
to $150 million may be drawn upon to repay the maturing 6.95% Notes due in June
2002.
Our $160 million secured revolving line of credit facility expires on
December 31, 2003. Borrowings bear interest at 2.5% to 3.25% over LIBOR through
December 31, 2002 and 3.00% to 3.25% over LIBOR after December 31, 2002, based
on our leverage ratio. Borrowings of approximately $129 million are outstanding
at December 31, 2001. Additionally, $13.4 million of letters of credit are
outstanding against this credit facility at December 31, 2001. These letters of
credit are collateral for certain long-term borrowings and Owned and Operated
insurance programs. LIBOR based borrowings under this facility bear interest at
a weighted-average rate of 5.49% at December 31, 2001 and 10.00% at December 31,
1999. Cost for the letters of credit range from 2.5% to 3.25%, based on our
leverage ratio. Real estate investments with a gross book value of approximately
$227.9 million are pledged as collateral for this revolving line of credit
facility at December 31, 2001. Some substitution of collateral under this
facility was completed in 2002, bringing the total collateral to $239.8 million
currently.
Our $65 million line of credit facility expires on June 30, 2005.
Borrowings under the facility bear interest at 2.5% to 3.75% over LIBOR, based
on our leverage ratio and collateral assigned. Borrowings of approximately $64.7
million are outstanding at December 31, 2001. LIBOR based borrowings under this
facility bear interest at a weighted-average rate of 5.65% at December 31, 2001
and 9.77% at December 31, 2000. Real estate investments with a gross book value
of approximately $94.9 million are pledged as collateral for this revolving line
of credit facility at December 31, 2001. Additional collateral for this facility
was added in 2002, bringing the total collateral currently to $117.1 million.
We are required to meet certain financial covenants, including prescribed
leverage and interest coverage ratios on our long-term borrowings. We are also
required to fix a certain portion of our interest rate. We utilize interest rate
swaps to fix interest rates on variable rate debt and reduce certain exposures
to interest rate fluctuations (See Note 8 - Financial Instruments to our audited
Consolidated Financial Statements).
Dividends. In order to qualify as a REIT, we are required to distribute
dividends (other than capital gain dividends) to our stockholders in an amount
at least equal to (A) the sum of (i) 90% of our "REIT taxable income" (computed
without regard to the dividends paid deduction and our net capital gain) and
(ii) 90% of the net income (after tax), if any, from foreclosure property, minus
(B) the sum of certain items of noncash income. In addition, if we dispose of
any built-in gain asset during a recognition period, we will be required to
distribute at least 90% of the built-in gain (after tax), if any, recognized on
the disposition of such asset. Such distributions must be paid in the taxable
year to which they relate, or in the following taxable year if declared before
we timely file our tax return for such year and paid on or before the first
regular dividend payment after such declaration. In addition, such distributions
are required to be made pro rata, with no preference to any share of stock as
compared with other shares of the same class, and with no preference to one
class of stock as compared with another class except to the extent that such
class is entitled to such a preference. To the extent that we do not distribute
all of our net capital gain or do distribute at least 90%, but less than 100% of
our "REIT taxable income," as adjusted, we will be subject to tax thereon at
regular ordinary and capital gain corporate tax rates.
21
On February 1, 2001, we announced the suspension of all common and
preferred dividends. This action is intended to preserve cash to facilitate our
ability to obtain financing to fund the 2002 debt maturities. Prior to
recommencing the payment of dividends on our common stock, all accrued and
unpaid dividends on our Series A, B and C preferred stock must be paid in full.
We have made sufficient distributions to satisfy the distribution requirements
under the REIT rules to maintain our REIT status for 2000.
No common dividends were paid during 2001. 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%.
On March 30, 2001, we exercised our option to pay the accrued $4,666,667
Series C dividend from November 15, 2000 and the associated deferral fee by
issuing 48,420 Series C preferred shares to Explorer on April 2, 2001, which are
convertible into 774,722 shares of our common stock at $6.25 per share. Such
election resulted in an increase in the aggregate liquidation preference of
Series C Preferred Stock as of April 2, 2001 to $104,842,000, including accrued
dividends through that date. Dividends paid in stock to a specific class of
stockholders, such as our payment of our Series C preferred stock in April 2001,
constitute dividends eligible for the 2001 dividends paid deduction.
The table below sets forth information regarding arrearages in payment of
preferred stock dividends:
Annual
Dividend Per Arrearage as of
Title of Class Share December 31, 2001
-------------- ------------ -----------------
9.25% Series A Cumulative
Preferred Stock..................... $ 2.3125 $ 5,318,750
8.625% Series B Cumulative
Preferred Stock..................... $ 2.1563 4,312,500
Series C Convertible Preferred Stock... $10.0000 10,281,543
-----------
Total............................ $19,912,793
===========
Liquidity. In October, 2001 we announced a rights offering and private
placement to Explorer. These transactions were completed in February, 2002,
raising gross proceeds of $50 million. We expect to use the proceeds from the
rights offering and private placement to repay outstanding indebtedness and for
working capital and general corporate purposes.
Management believes our liquidity and various sources of available capital,
including funds from operations and expected proceeds from planned asset sales
and refinancings, are adequate to finance operations, meet recurring debt
service requirements including our 2002 debt maturities and fund future
investments through the next 12 months. (See Note 19 - Subsequent Events to our
audited Consolidated Financial Statements). From time to time, we explore
alternative financing arrangements and opportunities and may continue to do so
in the future.
Item 7A - Quantitative and Qualitative Disclosure About Market Risk
We are exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. We do not enter into derivatives
or other financial instruments for trading or speculative purposes, but we seek
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 our long-term fixed rate borrowings and mortgages are
subject to interest rate risks. 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 our total long-term borrowings
at December 31, 2001 was $396.4 million. A one percent increase in interest
rates would result in a decrease in the fair value of long-term borrowings by
approximately $4.1 million.
22
We are 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 we were unable to refinance our debt maturities on acceptable
terms, we might be forced to dispose of properties on disadvantageous terms,
which might result in losses to us and might adversely affect the cash available
for distribution to stockholders, 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, our interest expense would increase, which
might affect our ability to make distributions to our stockholders.
We utilize interest rate swaps to fix interest rates on variable rate debt
and reduce certain exposures to interest rate fluctuations. At December 31,
2001, we had two interest rate swaps with notional amounts of $32 million each,
based on 30-day LIBOR. Under the first $32 million agreement, we receive
payments when LIBOR interest rates exceed 6.35% and pay the counterparties when
LIBOR rates are under 6.35%. The amounts exchanged are based on the notional
amounts. Under the terms of the second agreement, we receive payments when LIBOR
rates exceed 4.89% and pay the counterparties when LIBOR rates are under 4.89%.
Both agreements mature in December, 2002. The combined fair value of the
interest rate swaps at December 31, 2001 was a deficit of $2.17 million.
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, 2001 and 2000
is included in Note 17 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.
23
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 our company's definitive proxy statement for the 2002
Annual Meeting of Stockholders, which will be filed on or before April 30, 2002
with the Securities and Exchange Commission pursuant to Regulation 14A.
For information regarding Executive Officers of our company, See Item 1 -
Business - Executive Officers of our Company.
Item 11 -- Executive Compensation
The information required by this item is incorporated herein by reference
to our company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders, which will be filed on or before April 30, 2002 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 our company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders, which will be filed on or before April 30, 2002 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 our company's definitive proxy statement for the 2002 Annual Meeting of
Stockholders, which will be filed on or before April 30, 2002 with the
Securities and Exchange Commission pursuant to Regulation 14A.
24
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, 2001 and 2000.... F-2
Consolidated Statements of Operations for the years ended
December 31, 2001, 2000 and 1999.............................. F-3
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2001, 2000 and 1999........................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2000 and 1999.............................. 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.
The following reports on Form 8-K were filed during the fourth quarter of
2001:
Form 8-K dated October 30, 2001: Report with the following exhibits: Press
release issued by Omega Healthcare Investors, Inc. on October 30,
2001.
(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
25
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, 2001 and 2000,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2001.
Our audit also included the financial statement schedules listed in the Index
under 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, 2001 and 2000, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2001, 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 15, 2002, except
for the eighth paragraph
of Note 19, as to which the
date is March 27, 2002.
F-1
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
See accompanying notes.
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 STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
See accompanying notes.
F-4
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share amounts)
See accompanying notes.
F-4
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
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, is a
self-administered real estate investment trust ("REIT"). From the date that we
commenced operations in 1992, we have invested primarily in long-term care
facilities, which include nursing homes, assisted living facilities and
rehabilitation hospitals. Our company currently has investments in 241
healthcare facilities located in the United States.
Consolidation
The consolidated financial statements include the accounts of our company
and our 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, we have begun to operate a portfolio of our foreclosure
assets for our 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 us. As a result, these facilities and
their respective operations are presented on a consolidated basis in our
financial statements.
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 and Operated Assets and Assets Held for Sale
In the ordinary course of our business activities, we periodically evaluate
investment opportunities and extend credit to customers. We also are regularly
engaged in lease and loan extensions and modifications. Additionally, we monitor
and manage our investment portfolio with the objectives of improving credit
quality and increasing returns. In connection with portfolio management, we
engage in various collection and foreclosure activities. When we acquire 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 our Consolidated Balance
Sheet. Operating assets and operating liabilities for the owned and operated
properties are shown separately on the face of our Consolidated Balance Sheet
and are detailed in Note 16--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, we evaluate the carrying
value of the related real estate investments in relationship to the future
undiscounted cash flows of the underlying facilities. If the sum of the expected
future cash flow, including sales proceeds, is less than carrying value, we then
adjust the net carrying value of leased properties and other long-lived assets
to the present value of expected future cash flows.
The Financial Accounting Standards Board recently issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which is
applicable to financial statements issued for fiscal years beginning after
December 15, 2001. We expect to adopt the new pronouncement effective January 1,
2002. This pronouncement supersedes FASB Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed. We do
not expect the adoption of this pronouncement to have a material effect on our
financial condition or results of operations.
Loan Impairment Policy
When management identifies an indication of potential loan impairment, such
as non-payment under the loan documents or impairment of the underlying
collateral, the loan is written down to the present value of the expected future
cash flows. In cases where expected future cash flows cannot be estimated, the
loan is written down to the fair value of that collateral.
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.
Derivative Instruments
Effective January 1, 2001, we adopted the Financial Accounting Standards
Board Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, which requires that all derivatives are recognized 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.
Accounts Receivable
Accounts Receivable consist primarily of lease and mortgage interest
payments. Amounts recorded include estimated provisions for loss related to
uncollectible accounts and disputed items. A provision of $0.7 million was
recorded in 2001. No other activity has occurred during the periods presented.
Accounts Receivable--Owned and Operated Assets
Accounts Receivable from Owned and Operated Assets consist 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 uncollectable accounts
and disputed items. A provision of $7.3 million and $1.0 million was recorded in
2001 and 2000, respectively.
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 $2.48
million, $1.93 million and $1.34 million in 2001, 2000 and 1999, respectively,
is classified as interest expense in the Consolidated Statements of Operations.
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 had a cost of $4.98 million 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 determined that
the goodwill was entirely impaired and wrote off the balance of $2.36 million in
2000.
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 (i.e., such as
increases in the Consumer Price Index) 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
regarding ultimate collection. When collection is uncertain, lease revenues are
recorded as received, after taking into account application of security
deposits. Interest income on impaired mortgage loans is recognized as received
after taking into account application of security deposits.
Nursing home revenues from owned and operated assets (primarily Medicare,
Medicaid and other third party insurance) are recognized as patient services are
provided.
Federal and State Income Taxes
As a qualified real estate investment trust, we will not be subject to
Federal income taxes on our income, and no provisions for Federal income taxes
have been made. To the extent that we have foreclosure income from our owned and
operated assets, we will incur federal tax at a rate of 35%. To date our owned
and operated assets have generated losses, and therefore, no provision for
federal income tax is necessary. The reported amounts of our assets as of
December 31, 2001 are less than the tax basis of assets by approximately $12.1
million.
Stock Based Compensation
Our 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 generally
accepted accounting principles ("GAAP") 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.
Risks and Uncertainties
Our 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, we are 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
Our leased real estate properties, represented by 135 long-term care
facilities and 2 rehabilitation hospitals at December 31, 2001, 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 our investment in leased real estate properties is as follows:
December 31,
2001 2000
---- ----
(In thousands)
Buildings............................. $576,897 $553,183
Land.................................. 27,880 26,758
----------------------
604,777 579,941
Less accumulated depreciation......... (91,391) (72,190)
----------------------
Total.............................. $513,386 $507,751
======================
The future minimum contractual rentals for the remainder of the initial
terms of the leases are as follows:
(In thousands)
2002.................................. $ 68,302
2003.................................. 67,794
2004.................................. 66,623
2005.................................. 66,036
2006.................................. 61,423
Thereafter............................ 271,658
--------
$601,836
========
Owned and Operated Property
Our owned and operated real estate properties include 33 long-term care
facilities at December 31, 2001, of which 21 are owned directly by us and 12 are
subject to third-party leases. Impairment charges of $1.3 million and $41.3
million were taken on these assets during the years ended December 31, 2001 and
2000, respectively.
A summary of our investment in the 21 and 57 owned and operated real estate
properties at December 31, 2001 and 2000, respectively, is as follows:
December 31,
2001 2000
---- ----
(In thousands)
Buildings............................. $76,220 $124,452
Land.................................. 3,851 6,149
----------------------
80,071 130,601
Less accumulated depreciation......... (8,647) (17,680)
----------------------
Total.............................. $71,424 $112,921
======================
A summary of our investment in the 12 facilities subject to third-party
leases at December 31, 2001 and 2000 is as follows:
December 31,
2001 2000
---- ----
(In thousands)
Leasehold interest.................... $1,215 $1,771
Less accumulated amortization......... (554) (92)
--------------------
Total.............................. $ 661 $1,679
====================
Future minimum operating lease payments on the 12 facilities are as
follows:
2002.................................. $ 4,404
2003.................................. 4,404
2004.................................. 3,421
2005.................................. 2,283
2006.................................. 862
-------
$15,374
=======
Assets Sold or Held For Sale
Management initiated a plan to dispose of certain properties judged to have
limited long-term potential and to re-deploy the proceeds. During 1999, we
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. In 1999, we 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, we 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, we realized disposition proceeds of $1.1 million on
assets held for sale. Additionally, we received proceeds of $34.7 million from
sales of certain core and other assets, resulting in a gain of $9.9 million.
During 2001, we recorded a provision of $8.3 million for impairment of
assets transferred to assets held for sale. We realized disposition proceeds of
$1.4 million during 2001.
Following is a summary of the impairment reserve:
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
Provision charged.......................................... 8,344
Provision applied.......................................... (6,515)
--------
Impairment Balance at December 31, 2001.................... $ 10,578
========
NOTE 3--MORTGAGE NOTES RECEIVABLE
The following table summarizes the mortgage notes balances for the years
ended December 31, 2001 and 2000:
2001 2000
---- ----
(In thousands)
Gross mortgage notes--unimpaired......... $194,030 $204,550
Gross mortgage notes--impaired........... 4,903 7,031
Reserve for uncollectable loans.......... (3,740) (4,871)
----------------------
Net mortgage notes at December 31........ $195,193 $206,710
======================
Mortgage notes receivable relate to 71 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 11 states, operated by 15 independent healthcare operating
companies.
We monitor compliance with mortgages and when necessary have initiated
collection, foreclosure and other proceedings with respect to certain
outstanding loans.
During 2000, we determined that a certain mortgage loan was impaired and
accordingly recorded an impairment provision of $4.9 million to reduce the
carrying value of the mortgage loan to its net realizable value. The impaired
mortgage was collateralized by three skilled nursing facilities, one of which
was to be returned to us and included in a master lease with the same operator.
The other two properties were to be sold, with the proceeds applied to the
mortgage loan. The loan was written down to the sum of the value of the facility
to be leased plus the estimated proceeds, net of cost to dispose, from the sale
of the other two facilities. Income recognized on the mortgage was $0.75 million
and $0.97 million for the years ended December 31, 2000 and 1999, respectively.
No income was recognized after the mortgage loan was impaired.
In 2001, the two facilities which were to be sold were instead given back
to us and re-leased. Based on provisions of the new lease, $3.7 million of the
original impairment provision was reversed. Additionally, we determined that
another mortgage loan was impaired, and recorded an impairment provision of $3.7
million to reduce the carrying value of the mortgage loan to its net realizable
value. Income recognized on the loan was $0.46 million, $0.55 million and $0.55
million in 2001, 2000, and 1999, respectively. No other activity has been
reflected in such reserve during the three-year period ended December 31, 2001.
The following are the three primary mortgage structures that we currently
use:
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 us an option to
convert the 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 us to capture a
portion of the potential appreciation in value of the real estate. The operator
has the right to buy out our 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.
The outstanding principal amount of mortgage notes receivable, net of
allowances, are as follows:
Mortgage notes are shown net of allowances of $3.74 million and $4.87
million in 2001 and 2000, respectively.
During 2001, we entered into a comprehensive settlement with Mariner
Post-Acute Network, Inc. ("Mariner"), resolving all outstanding issues relating
to our loan to Professional Healthcare Management, Inc. ("PHCM"), a subsidiary
of Mariner. Pursuant to the settlement, the PHCM loan is secured by a first
mortgage on 12 skilled nursing facilities owned by PHCM with 1,668 operating
beds. PHCM will remain obligated on the total outstanding loan balance as of
January 18, 2000, the date Mariner filed for protection under Chapter 11 of the
Bankruptcy Act, and is to pay us accrued interest at a rate of approximately 11%
for the period from the filing date until September 1, 2001. Monthly payments
with interest at the rate of 11.57% per annum resumed October 1, 2001. The
settlement agreement was approved by the United States Bankruptcy Court in
Wilmington, Delaware on August 22, 2001, and became effective as of September 1,
2001.
On February 1, 2001, four Michigan facilities, previously operated by PHCM
and subject to our pre-petition mortgage, were transferred by PHCM to a new
operator who paid for the facilities by execution of a promissory note that has
been assigned to us. PHCM was given a $4.5 million credit on February 1, 2001
and an additional $3.5 million credit as of September 1, 2001, both against the
PHCM loan balance in exchange for the assignment of the promissory note to us.
The promissory note is secured by a first mortgage on the four facilities.
Following the closing of the settlement agreement, the outstanding
principal balance on the PHCM loan is approximately $59.7 million. The PHCM loan
term is nine years, with PHCM having the option to extend for an additional
eleven years. PHCM will also have the option to prepay the PHCM loan between
February 1, 2005 and July 31, 2005.
The estimated fair value of our mortgage loans at December 31, 2001 is
approximately $203.2 million. Fair value is based on the estimates by management
using rates currently prevailing for comparable loans.
NOTE 4--OTHER INVESTMENTS
A summary of our other investments is as follows:
NOTE 5--CONCENTRATION OF RISK
As of December 31, 2001, our portfolio of domestic investments consisted of
241 healthcare facilities, located in 28 states and operated by 35 third-party
operators. Our gross investment in these facilities, before reserve for
uncollectible loans, totaled $885.0 million at December 31, 2001, with 92% of
our real estate investments related to long-term care facilities. This portfolio
is made up of 135 long-term healthcare facilities and 2 rehabilitation hospitals
owned and leased to third parties, fixed rate, participating and convertible
participating mortgages on 71 long-term healthcare facilities and 21 long-term
healthcare facilities that were recovered from customers and are currently
operated through third-party management contracts for our own account. In
addition, 12 facilities subject to third-party leasehold interests are included
in Other Investments. We also hold miscellaneous investments and closed
healthcare facilities held for sale of approximately $58.2 million at December
31, 2001, including $22.3 million related to two non-healthcare facilities
leased by the United States Postal Service, a $7.4 million investment in Omega
Worldwide, Inc., Principal Healthcare Finance Limited, an Isle of Jersey (United
Kingdom) company and Principal Healthcare Finance Trust, an Australian Unit
Trust, and $14.3 million of notes receivable, net of allowance.
Approximately 72% of our real estate investments are operated by seven
public companies, including Sun Healthcare Group, Inc. (24.7%), Integrated
Health Services, Inc. (18.1%, including 10.8% as the manager for and 50% owner
of Lyric Health Care LLC), Advocat, Inc. (12.2%), Mariner Post-Acute Network
(6.7%), Alterra Healthcare Corporation (3.9%), Kindred Healthcare, Inc.
(formerly known as Vencor Operating, Inc.) (3.2%), and Genesis Health Ventures,
Inc. (2.8%). Kindred and Genesis manage facilities for our own account, which
are included in Owned and Operated Assets. The two largest private operators
represent 3.5% and 2.5%, respectively, of investments. No other operator
represents more than 2.5% of investments. The three states in which we have our
highest concentration of investments are Florida (16.5%), California (7.5%) and
Illinois (7.5%).
NOTE 6--LEASE AND MORTGAGE DEPOSITS
Our 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. The liquidity deposits
may be applied in the event of lease and loan defaults, subject to applicable
limitations under bankruptcy law with respect to operators filing under Chapter
11 of the United States Bankruptcy Code. At December 31, 2001, we held $2.9
million in such liquidity deposits and $6.7 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 December 21, 2001, we reached amended agreements with the bank groups
under both of our revolving credit facilities. As of the closing of the rights
offering and the private placement to Explorer Holdings, L.P. ("Explorer") on
February 21, 2002 these amendments became effective (See Note 19 - Subsequent
Events).
As part of the amendment regarding our $75.0 million revolving credit
facility, we prepaid $10.0 million originally scheduled to mature in March 2002.
This voluntary prepayment results in a permanent reduction in the total
commitment, thereby reducing the credit facility to $65.0 million. The agreement
regarding our $175.0 million revolving credit facility includes a one-year
extension in maturity from December 31, 2002 to December 31, 2003, and a
reduction in the total commitment from $175.0 million to $160.0 million. Amounts
up to $150.0 million may be drawn upon to repay the maturing 6.95% Notes due in
June 2002.
Our $160.0 million secured revolving line of credit facility expires on
December 31, 2003. Borrowings bear interest at 2.5% to 3.25% over LIBOR through
December 31, 2002 and 3.00% to 3.25% over LIBOR after December 31, 2002, based
on our leverage ratio. Borrowings of approximately $129.0 million are
outstanding at December 31, 2001. Additionally, $13.4 million of letters of
credit are outstanding against this credit facility at December 31, 2001. These
letters of credit are collateral for certain long-term borrowings and Owned and
Operated insurance programs. LIBOR based borrowings under this facility bear
interest at a weighted-average rate of 5.49% at December 31, 2001 and 10.00% at
December 31, 1999. Cost for the letters of credit range from 2.5% to 3.25%,
based on our leverage ratio. Real estate investments with a gross book value of
approximately $227.9 million are pledged as collateral for this revolving line
of credit facility at December 31, 2001. Some substitution of collateral under
this facility was completed in 2002, bringing the total collateral to $239.8
million currently.
Our $65.0 million line of credit facility expires on June 30, 2005.
Borrowings under the facility bear interest at 2.5% to 3.75% over LIBOR, based
on our leverage ratio and collateral assigned. Borrowings of approximately $64.7
million are outstanding at December 31, 2001. LIBOR based borrowings under this
facility bear interest at a weighted-average rate of 5.65% at December 31, 2001
and 9.77% at December 31, 2000. Real estate investments with a gross book value
of approximately $94.9 million are pledged as collateral for this revolving line
of credit facility at December 31, 2001. Additional collateral for this facility
was added in 2002, bringing the total collateral currently to $117.1 million.
Our company is required to meet certain financial covenants, including
prescribed leverage and interest coverage ratios on its long-term borrowings. We
are also required to fix a certain portion of our interest rate. We utilize
interest rate swaps to fix interest rates on variable rate debt and reduce
certain exposures to interest rate fluctuations (See Note 8 - Financial
Instruments).
The following is a summary of our long-term borrowings:
December 31,
2001 2000
---- ----
(In thousands)
Unsecured borrowings:
6.95% Notes due June 2002........................ $ 97,526 $125,000
6.95% Notes due August 2007...................... 100,000 100,000
Subordinated Convertible Debentures due 2001..... -- 16,590
Other long-term borrowings....................... 4,160 4,455
----------------------
201,686 246,045
----------------------
Secured borrowings:
Revolving lines of credit........................ 193,689 185,641
Industrial Development Revenue Bonds............. 8,130 8,375
Mortgage notes payable to banks.................. 4,464 6,112
HUD loans........................................ 5,203 5,219
----------------------
211,486 205,347
----------------------
$413,172 $451,392
======================
During 2001, we repurchased $27.5 million of our 6.95% Notes due June 2002,
resulting in a gain on early extinguishment of debt of $3.1 million.
The Subordinated Convertible Debentures ("Debentures") were convertible at
any time into shares of Common Stock at a conversion price of $26.962 per share.
The Debentures were unsecured obligations of our company and were subordinate in
right and payment to our senior unsecured indebtedness. The balance of the
Debentures was repaid in full on February 1, 2001 principally utilizing
borrowings under our revolving lines of credit.
On July 15, 2000, we repaid $81.4 million of 10.0% 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 $362.0
million are pledged as collateral for outstanding secured borrowings at December
31, 2001, including $322.8 million for our revolving lines of credit and $39.2
million for other long-term borrowings. Long-term secured borrowings are payable
in aggregate monthly installments of approximately $0.28 million, including
interest at rates ranging from 7.0% to 10.0%.
Assuming none of our borrowing arrangements are refinanced, converted or
prepaid prior to maturity, required principal payments for each of the five
years following December 31, 2001 and the aggregate due thereafter are set forth
below:
2002........................... $ 99,403
2003........................... 131,026
2004........................... 2,176
2005........................... 65,739
2006........................... 805
Thereafter..................... 114,023
--------
$413,172
========
The estimated fair values of our long-term borrowings is approximately
$396.4 million at December 31, 2001 and $415.0 million at December 31, 2000.
Fair values are based on the estimates by management using rates currently
prevailing for comparable loans.
NOTE 8--FINANCIAL INSTRUMENTS
At December 31, 2001 and 2000, the carrying amounts and fair values of our
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 we would realize in a
current market exchange.
We utilize interest rate swaps to fix interest rates on variable rate debt
and reduce certain exposures to interest rate fluctuations. In June 1998, the
Financial Accounting Standards Board issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was required to be adopted
in years beginning after June 15, 2000. We adopted the new Statement effective
January 1, 2001. The Statement requires us 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.
At December 31, 2001, we had two interest rate swaps with notional amounts
of $32.0 million each, based on 30-day LIBOR. Under the terms of the first
agreement, which expires in December 2002, we receive payments when LIBOR
exceeds 6.35% and pay the counterparty when LIBOR is less than 6.35%. At
December 31, 2001, 30-day LIBOR was 1.88%. This interest rate swap was extended
to December 2002 at the option of the counterparty and therefore does not
qualify for hedge accounting under FASB No. 133. The fair value of this swap at
January 1, and December 31, 2001 was a liability of $351,344 and $1,316,566,
respectively. The liability at January 1 was recorded as a transition adjustment
in other comprehensive income and was recognized over the initial term of the
swap ending December 31, 2001. Such amortization for the twelve-month period
ended December 31, 2001 of $351,344, together with the change in fair value of
the extended swap of $965,222, is included in charges for derivative accounting
in the our Consolidated Statement of Operations.
Under the second agreement, which expires December 31, 2002, we receive
payments when LIBOR exceeds 4.89% and pay the counterparty when LIBOR is less
than 4.89%. The fair value of this interest rate swap at December 31, 2001 was a
liability of $849,122, which is included in other comprehensive income as
required under FASB No. 133 for fully effective cash flow hedges.
The fair values of these interest rate swaps are included in accrued
expenses and other liabilities in our Consolidated Balance Sheet at December 31,
2001.
NOTE 9--RETIREMENT ARRANGEMENTS
Our company has a 401(k) Profit Sharing Plan covering all eligible
employees. Under the Plan, employees are eligible to make contributions, and we,
at our discretion, may match contributions and make a profit sharing
contribution.
The Deferred Compensation Plan is an unfunded plan under which we may award
units that result in participation in the dividends and future growth in the
value of our common stock. The total number of units permitted by the plan is
200,000, of which 90,850 units have been awarded and 9,250 are outstanding at
December 31, 2001. 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 $33,500, $181,000 and $123,000 in 2001, 2000 and 1999,
respectively.
NOTE 10--STOCKHOLDERS' EQUITY AND STOCK OPTIONS
Series C Preferred Stock
On July 14, 2000, Explorer Holdings, L.P., 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 our
company in exchange for 1,000,000 shares of our Series C Preferred Stock. We
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 Stock 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 Stock 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 Stock 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.
The Series C Preferred Stock votes (on an "as converted" basis) together
with our common stock on all matters submitted to stockholders. If dividends on
the Series C Preferred Stock are in arrears for four quarters, the holders of
the Series C Preferred Stock, 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 Stock, would constitute a majority of our
Board of Directors. The general terms of the Equity Investment are set forth in
the Investment Agreement.
By letter dated January 31, 2001, Explorer waived its right to elect
additional directors resulting from dividend arrearages through December 31,
2002 provided that the dividends on any shares of Series C Preferred Stock would
not be in arrears for six or more dividend periods from January 31, 2001 through
and including December 31, 2002.
In connection with Explorer's Equity Investment, we entered into a
Stockholders' Agreement with Explorer dated July 14, 2000 (the "Stockholders'
Agreement") pursuant to which Explorer was entitled to designate up to four
members of our Board of Directors depending on the percentage of total voting
securities (consisting of Common Stock and Series C Preferred Stock) 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 our Board of Directors as long as it owns at
least five percent (5%) of the total voting power of our 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 Stock acquired
by Explorer at such time). Explorer's director designations terminate upon the
tenth anniversary of the Stockholders' Agreement.
We agreed to indemnify Explorer, its affiliates and the individuals that
will serve as directors of our 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, we agreed to pay Explorer an advisory fee of up to $3.1 million for
Explorer's assistance in connection with financing matters. We 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. As of December
31, 2001, we have reimbursed Explorer approximately $1.57 million of such
expenses.
The terms of the Stockholders' Agreement and the Series C Preferred Stock
were amended in connection with Explorer's February 2002 investment in our
company (See Note 19 -- Subsequent Events).
Series A and Series B Cumulative Preferred Stock
On April 28, 1998, we received gross proceeds of $50.0 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, we 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, 2001, the aggregate
liquidation preference of Series A and Series B preferred stock issued is $107.5
million.
Stockholder Rights Plan
On May 12, 1999, our Board of Directors authorized the adoption of a
stockholder rights plan. The plan is designed to require a person or group
seeking to gain control of our company to offer a fair price to all our
stockholders. The rights plan will not interfere with any merger, acquisition or
business combination that our Board of Directors finds is in the best interest
of our company and its stockholders.
In connection with the adoption of the rights plan, the Board of Directors
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 our common stock, or begins a tender offer that would result in
the person owning 10% or more of our common stock. At that time, each right
would entitle each stockholder other than the person who triggered the rights
plan to purchase either our 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 our company.
We amended our Stockholders' Rights Plan in 2000 to exempt Explorer and any
of its transferees that become parties to the standstill as Acquiring Persons
under such plan. In October, 2001, we further amended our Stockholders' Rights
Plan to exempt Explorer and its affiliates and transferees generally.
February 2002 Rights Offering and Concurrent Private Placement
On October 30, 2001, we announced a plan to raise $50.0 million in new
equity capital from our current stockholders, in the form of a private placement
with Explorer and a rights offering to our common stockholders. The private
placement and rights offering were completed in February, 2002 (See Note 19 -
Subsequent Events).
Stock Options and Stock Purchase Assistance Plan
In January 1998, our company adopted a stock purchase assistance plan,
whereby we extended credit to directors and employees to purchase our company's
common stock through the exercise of stock options. During 2000, we 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. We 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 our Consolidated Statements of Operations for 2000.
Under the terms of the 2000 Stock Incentive Plan ("Incentive Plan"), we
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 or as defined in an
employee's contract. Directors, officers and employees are eligible to
participate in the Incentive Plan. Options for 2,579,120 shares have been
granted to 24 eligible participants. Additionally, 309,580 shares of restricted
stock have been granted under the provisions of the Incentive 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 stockholders' equity. Unearned compensation is amortized to expense
generally over the vesting period, with charges to operations of $0.37 million,
$0.54 million and $0.64 million in 2001, 2000 and 1999, respectively.
During 2000, 1,040,000 Dividend Equivalent Rights were granted to eligible
employees. A Dividend Equivalent Right entitles the participant to receive
payments from us in an amount determined by reference to any cash dividends paid
on a specified number of shares of stock to our stockholders of record during
the period such rights are effective. We recorded $9,000 and $502,500 of expense
related to the Dividend Equivalent Rights in 2001 and 2000, respectively. During
2001, payments of $502,500 were made in settlement of Dividend Equivalent Rights
in connection with cancellation of options on 1,005,000 shares.
At December 31, 2001, options currently exercisable (96,724) have a
weighted-average exercise price of $15.88, with exercise prices ranging from
$5.69 to $37.20. There are 611,300 shares available for future grants as of
December 31, 2001.
The following is a summary of activity under the plan.
During 1999, we 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.
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 our company's option activity, net
earnings would have increased in 2001, 2000 and 1999 by approximately $16,000,
$1,064,000 and $618,000, respectively. Net earnings per basic and diluted common
share on a pro forma basis would have been unchanged in 2001, and would have
increased in 2000 and 1999 by approximately $.06 and $.03, respectively, under
SFAS No. 123. The estimated weighted-average fair value of options granted in
2001, 2000 and 1999 was $998,000, $407,000 and $168,000, respectively. In
determining the estimated fair value of our stock options as of the date of
grant, a Black-Scholes option pricing model was used with the following
assumptions: risk-free interest rates of 2.5% in 2001, 5.2% in 2000 and 6.5% in
1999; a dividend yield of 5% in 2001, 10% in 2000 and 1999; volatility factors
of the expected market price of our common stock based on 30% volatility in 2001
and 2000, and 22.7% in 1999; and a weighted-average expected life of the options
of 4.0 years in 2001 and 8.0 years for 2000 and 1999.
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 our 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
Explorer Holdings, L.P.
Hampstead, through its affiliate Explorer, indirectly owned 1,048,722
shares of Series C preferred stock and 553,850 shares of our common stock,
representing 47.1% of our outstanding voting power as of December 31, 2001.
Daniel A. Decker, our Chairman of the Board, is a partner of Hampstead. Donald
J. McNamara, the Chairman of Hampstead, is one of our directors. Christopher W.
Mahowald is one of our directors and holds an equity investment in Explorer.
Additional common equity was issued to Explorer pursuant to a private placement
in February, 2002. (See Note 19 - Subsequent Events).
Series C Investment Agreement. Under the terms of an investment agreement
dated May 11, 2000 between us and Explorer in connection with Explorer's
purchase of Series C preferred stock, we agreed to reimburse Explorer for its
out-of-pocket expenses, up to a maximum amount of $2.5 million, incurred in
connection with the Series C investment. As of December 31, 2001, we have
reimbursed Explorer for approximately $1.57 million of these expenses.
Advisory Agreement. Under the terms of an amended and restated advisory
agreement dated October 4, 2000 between us and Hampstead, we have agreed to pay
Explorer an advisory fee if Hampstead provides assistance to us in connection
with the evaluation of growth opportunities or other financing matters. On June
1, 2001, in connection with Hampstead's agreement to provide certain specified
financial advisory, consulting and operational services, including but not
limited to assistance in our efforts to refinance, repay or extend certain
indebtedness and assist in efforts to manage our capitalization and liquidity,
we agreed to pay Hampstead a fee equal to 1% of the aggregate amount of our
indebtedness that is refinanced, repaid or extended, based on the maximum amount
available to be drawn in the case of revolving credit facilities, up to a
maximum fee of $3.1 million. The advisory fee is payable five business days
following the completion of the refinancing, repayment or extension of any of
our indebtedness, but as amended no fee will be payable prior to December 31,
2001. Upon the closing of the rights offering and Explorer's investment,
Hampstead will have fulfilled all of its obligations under the agreement, but
the advisory fee will only be payable at such time as all of the conditions to
payment of the advisory fee contained in the advisory agreement are met.
Direct Expenses. In addition to the Series C investment costs and the
Advisory Fee costs of $3.1 million, we agreed to reimburse Explorer for
Explorer's direct expenses. As of December 31, 2001, we have reimbursed Explorer
for approximately $0.54 million of such direct expenses.
Dividend and Governance Right Deferral. We and Explorer entered into a
dividend deferral letter agreement dated November 15, 2000 relating to the
extension of the dividend payment payable in connection with our Series C
preferred stock for the dividend period ended October 31, 2000. The deferral
period expired on April 2, 2001. The amount of the deferred dividend payment is
$4.667 million representing the total unpaid preferential cumulative dividend
for the October 2000 dividend. In exchange for the deferral, we also agreed to
pay Explorer a fee equal to 10% of the daily unpaid principal balance of the
unpaid dividend amount from November 15, 2000 until the dividend was paid. Under
certain circumstances, the portion of the unpaid dividend amount and fee which
is not paid in cash may be payable with additional shares of Series C preferred
stock. Shares of Series C preferred stock issued pursuant to this agreement are
valued at $100 per share, the stated per share liquidation preference, and are
convertible into our common stock at $6.25 per share. In consideration of the
payment of the deferral fee, Explorer agreed that the deferral of the subject
dividend would not be considered an unpaid dividend and, as a result, the
October 31, 2000 dividend period will not be included in the determination of
when Explorer's right to elect additional directors will vest.
By letter dated January 31, 2001, Explorer waived its right to elect
additional preferred stock directors through December 31, 2002 provided that the
dividends on any shares of Series C preferred stock would not be in arrears for
six or more dividend periods from January 31, 2001 through and including
December 31, 2002.
In full payment of our obligations under the dividend deferral letter
agreement, we issued 48,420 shares of Series C preferred stock to Explorer on
April 2, 2001.
Omega Worldwide
In 1995, we 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. In November
1997, we formed Omega Worldwide, Inc. ("Omega 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, we contributed
substantially all of our Principal assets to Omega Worldwide in exchange for
approximately 8.5 million shares of Omega Worldwide common stock and 260,000
shares of Series B preferred stock of which approximately 5.2 million shares
were distributed on April 2, 1998 to our stockholders and 2.3 million shares
were sold by us on April 3, 1998. In April 1999, in conjunction with an
acquisition by Omega Worldwide, we acquired an interest in Principal Healthcare
Finance Trust ("the Trust"), an Australian Unit Trust, which owns 47 nursing
home facilities and 399 assisted living units in Australia and New Zealand.
As of December 31, 2001, we hold 1,163,000 shares of Omega Worldwide common
stock and 260,000 shares of its preferred stock. The carrying value of our
investment in Omega Worldwide is $4.5 million, including the market value of its
common stock and liquidation preference in its preferred stock. We also hold a
$1.6 million investment in Principal, represented by 990,000 ordinary shares of
Principal, and a $1.3 million investment in the Trust.
Fleet Credit Guaranty. We guaranteed repayment of borrowings of Omega
Worldwide, pursuant to a revolving credit facility with a bank group, of which
Fleet Bank, N.A. acts as agent in exchange for an initial 1% fee and an annual
facility fee of 0.25%. At December 31, 2000, borrowings of $2.85 million were
outstanding under Omega Worldwide's revolving credit facility. Omega Worldwide's
credit agreement required scheduled payments to be made until fully repaid in
June 2001. Under this agreement, no further borrowings may be made by Omega
Worldwide under its revolving credit facility. We were required to provide
collateral in the amount of up to $8.8 million related to the guarantee of Omega
Worldwide's obligations. Upon repayment by Omega Worldwide of the remaining
outstanding balance under its revolving credit facility, the subject collateral
was released in connection with the termination of our guarantee.
Opportunity Agreement. We and Omega Worldwide have entered into an
opportunity agreement to provide each other with rights to participate in
transactions and make investments. The opportunity agreement provides that each
company will offer the other a right of first refusal to participate in
transactions or investments of which it becomes aware. In addition, both
companies agree to jointly pursue certain transactions and investments upon the
request of either company. The terms upon which each of us elect to participate
in any transaction or investment will be negotiated in good faith and must be
mutually acceptable to our respective boards of directors, with the affirmative
votes of the independent directors of each of the boards of directors. The
opportunity agreement has a term of ten years and automatically renews for
successive five-year terms, unless terminated.
Services Agreement. We and Omega Worldwide have entered into a services
agreement which provides for the allocation of indirect costs incurred by us to
Omega Worldwide. The allocation of indirect costs has been based on the
relationship of assets under our management to the combined total of those
assets and assets under Omega Worldwide's management. Upon expiration of this
agreement on June 30, 2000, we entered into a new agreement requiring quarterly
payments from Omega Worldwide of $37,500 for the use of offices and
administrative and financial services provided by us. Upon the reduction of our
accounting staff, the service agreement was renegotiated again on November 1,
2000 requiring quarterly payments from Omega Worldwide of $32,500. Costs
allocated to Omega Worldwide for 2001, 2000 and 1999 were $130,000, $404,000 and
$754,000 respectively. The former services agreement has expired and Omega
Worldwide is paying monthly invoices for services rendered.
Other
On December 30, 1998, we made a $6.0 million loan to Oakwood Living Centers
of Massachusetts, Inc., an affiliate of Oakwood Living Centers, Inc., of which
James E. Eden, a former director of our company, also is Chairman and Chief
Executive Officer. The loan bears interest at 14% per annum and is secured by a
first mortgage lien on accounts receivable and a second mortgage lien on six
skilled nursing facilities located in Massachusetts.
NOTE 12--DIVIDENDS
In order to qualify as a REIT, we are required to distribute dividends
(other than capital gain dividends) to our stockholders in an amount at least
equal to (A) the sum of (i) 90% of our "REIT taxable income" (computed without
regard to the dividends paid deduction and our net capital gain) and (ii) 90% of
the net income (after tax), if any, from foreclosure property, minus (B) the sum
of certain items of non-cash income. In addition, if we dispose of any built-in
gain asset during a recognition period, we will be required to distribute at
least 90% of the built-in gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before we
timely file our tax return for such year and paid on or before the first regular
dividend payment after such declaration. In addition, such distributions are
required to be made pro rata, with no preference to any share of stock as
compared with other shares of the same class, and with no preference to one
class of stock as compared with another class except to the extent that such
class is entitled to such a preference. To the extent that we do not distribute
all of our net capital gain or do distribute at least 90%, but less than 100% of
our "REIT taxable income," as adjusted, we will be subject to tax thereon at
regular ordinary and capital gain corporate tax rates.
On February 1, 2001, we announced the suspension of all common and
preferred dividends. This action is intended to preserve cash to facilitate our
ability to obtain financing to fund the 2002 debt maturities. Prior to
recommencing the payment of dividends on our common stock, all accrued and
unpaid dividends on our Series A, B and C preferred stock must be paid in full.
We have made sufficient distributions to satisfy the distribution requirements
under the REIT rules to maintain our REIT status for 2000.
On March 30, 2001, we exercised our option to pay the accrued $4,666,667
Series C dividend from November 15, 2000 and the associated deferral fee by
issuing 48,420 Series C preferred shares to Explorer on April 2, 2001, which are
convertible into 774,722 shares of our common stock at $6.25 per share. Such
election resulted in an increase in the aggregate liquidation preference of
Series C Preferred Stock as of April 2, 2001 to $104,842,000, including accrued
dividends through that date. Dividends paid in stock to a specific class of
stockholders, such as our payment of our Series C preferred stock in April 2001,
constitute dividends eligible for the 2001 dividends paid deduction.
The table below sets forth information regarding arrearages in payment of
preferred stock dividends:
Annual
Dividend Per Arrearage as of
Title of Class Share December 31, 2001
-------------- ------------ -----------------
9.25% Series A Cumulative
Preferred Stock...................... $ 2.3125 $ 5,318,750
8.625% Series B Cumulative
Preferred Stock...................... $ 2.1563 4,312,500
Series C Convertible
Preferred Stock...................... $10.0000 10,281,543
-----------
Total............................ $19,912,793
===========
Per share distributions by the Company were characterized in the following
manner for income tax purposes:
2001 2000 1999
---- ---- ----
Common
- ------
Ordinary income........................ $ -- $ -- $2.100
Return of capital...................... -- 1.000 0.700
Long-term capital gain................. -- -- --
----------------------------
Total dividends paid................ $ -- $1.000 $2.800
============================
Series A Preferred
- ------------------
Ordinary income........................ $ -- $2.313 $2.313
============================
Series B Preferred
- ------------------
Ordinary income........................ $ -- $2.156 $2.156
============================
Series C Preferred Non-Cash (1)
- -------------------------------
Return of capital...................... $4.842 $ -- $ --
============================
(1) Per share of Series C preferred stock. On an as-converted basis, non-cash
dividends were $0.25 per common share equivalent, plus deferral fee.
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
We are 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 our consolidated
financial position or results of operations.
On June 21, 2000, we were named as a defendant in certain litigation
brought against it by Madison/OHI Liquidity Investors, LLC ("Madison"), a
customer that claims that we have breached and/or anticipatorily breached a
commercial contract. Ronald M. Dickerman and Bryan Gordon are partners in
Madison and limited guarantors of Madison's obligations to us. 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 an amount
ranging from $15 - $28 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 our company. We contend that Madison is in
default under the contract in question. We believe that the litigation is
meritless. We continue to vigorously defend the case and have filed
counterclaims against Madison and the guarantors seeking repayment of
approximately $10.2 million, including default interest, that Madison owes us,
as well as damages resulting from the conversion of the collateral securing our
loan. The trial in this matter is currently set for July, 2002. The financial
statements do not contain any adjustments relating to the ultimate outcome of
this uncertainty.
On December 29, 1998, Karrington Health, Inc. brought suit against us in
the Franklin County, Ohio, Common Pleas Court (subsequently removed to the U.S.
District Court for the Southern District of Ohio, Eastern Division) alleging
that we repudiated and ultimately breached a financing contract to provide $95
million of financing for the development of 13 assisted living facilities.
Karrington was seeking recovery of approximately $34 million in damages it
alleged to have incurred as a result of the breach. On August 13, 2001, we paid
Karrington $10 million to settle all claims arising from the suit, but without
our admission of any liability or fault, which liability is expressly denied.
Based on the settlement, the suit has been dismissed with prejudice. The
settlement was recorded in the quarter ended June 30, 2001.
NOTE 15--SEVERANCE, MOVING AND CONSULTING AGREEMENT COSTS
We entered into several consulting and severance agreements in 2001 and
2000 related to the resignation of certain of our company's senior managers. In
addition, we incurred certain relocation costs in 2001 associated with our
corporate office move from Michigan to Maryland, effective January, 2002. Costs
incurred for these items total $5.07 million and $4.67 million for the years
ended December 31, 2001 and 2000, respectively. These costs are included in our
Consolidated Statements of Operations in 2001 and 2000.
NOTE 16--SEGMENT INFORMATION
The following tables set forth the reconciliation of operating results and
total assets for our reportable segments for the years ended December 31, 2001,
2000 and 1999.
The revenues, expenses, assets and liabilities in our consolidated
financial statements which related to our owned and operated assets are as
follows:
Year Ended December 31,
2001 2000 1999
---------------------------------
(In Thousands)
Revenues(1)
Medicaid............................... $101,542 $108,082 $ 16,636
Medicare............................... 40,178 31,459 4,861
Private & Other........................ 26,438 36,018 4,726
---------------------------------
Total Revenues...................... 168,158 175,559 26,223
---------------------------------
Expenses
Patient Care Expenses.................. 117,753 120,444 17,393
Administration......................... 26,825 33,264 4,925
Property & Related..................... 10,960 11,701 1,675
---------------------------------
Total Expenses...................... 155,538 165,409 23,993
---------------------------------
Contribution Margin.................... 12,620 10,150 2,230
Management Fees........................ 8,840 8,778 1,180
Rent................................... 4,516 3,788 --
Provision for Uncollectable Accounts... 7,291 1,000 --
---------------------------------
EBITDA(2).............................. $ (8,027) $ (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. We consider it to be a meaningful measure of performance of
our 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.
December 31,
2001 2000
------------------------
(In thousands)
ASSETS
Cash........................................ $ 6,549 $ 5,364
Accounts Receivable--net.................... 27,121 30,030
Other Current Assets........................ 2,125 5,098
------------------------
Total Current Assets..................... 35,795 40,492
------------------------
Investment in leasehold--net................ 661 1,679
Land and Buildings.......................... 80,071 130,601
Less Accumulated Depreciation............... (8,647) (17,680)
------------------------
Land and Buildings--net..................... 71,424 112,921
------------------------
TOTAL ASSETS................................ $107,880 $155,092
========================
LIABILITIES
Accounts Payable............................ $ 4,816 $ 8,636
Other Current Liabilities................... 5,371 6,108
------------------------
Total Current Liabilities................ 10,187 14,744
------------------------
TOTAL LIABILITIES........................... $ 10,187 $ 14,744
========================
Accounts receivable for owned and operated assets is net of an allowance
for doubtful accounts of approximately $8.3 million in 2001 and $7.0 million in
2000.
NOTE 17--SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes quarterly results of operations for the years
ended
- -----------
Note:During the three-month period ended March 31, 2001, we recognized a gain on
sale of assets of $619 and gain on early extinguishment of debt of $248.
During the three-month period ended June 30, 2001, we recognized a
litigation settlement expense of $10,000, impairment of $8,381 and gain on
early extinguishment of debt of $2,489. During the three-month period ended
September 30, 2001, we recognized a loss on asset sales of $1,485 and a
gain on early extinguishment of debt of $226. During the three-month period
ended December 31, 2001, we recognized a provision of $7,291 for
uncollectible accounts on our owned and operated accounts receivable, a
provision for impairment of $1,227, gain on asset sales of $196 and gain on
early extinguishment of debt of $103. Additionally, during the three-month
periods ended September 30, 2001 and December 31, 2001, we recognized
charges related to the relocation of our corporate office of $4,300 and
$300, respectively. During the three-month periods ended March 31, 2000,
September 30, 2000 and December 31, 2000, we 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, we
recognized a gain of $10,451 related to assets sold during the period. (See
Note 2 - Properties).
NOTE 18--EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share:
The effect of converting the Series C Preferred Stock for the years 2001
and 2000 and the effects of converting the 1996 convertible debentures have been
excluded as all such effects are antidilutive.
NOTE 19 - SUBSEQUENT EVENTS
In January, 2002, Integrated Health Services, Inc., and its affiliate,
Lyric Health Care LLC, resumed payment of rents and mortgage interest to us at
reduced rates. We are currently negotiating with IHS to reach a permanent
restructuring agreement or to transition the facilities to a new operator or
operators.
In February, 2002, we completed a rights offering and private placement to
Explorer. Stockholders exercised subscription rights to purchase a total of 6.4
million shares of common stock at a subscription price of $2.92 per share,
raising gross proceeds of $18.7 million. In a related transaction, we closed a
private placement with Explorer, issuing a total of 10.7 million shares of
common stock at a price of $2.92 per share, raising gross proceeds of $31.3
million. We expect to use the proceeds from the rights offering and private
placement to repay outstanding indebtedness and for working capital and general
corporate purposes.
Amendments under both of our revolving credit facilities became effective
concurrently with the completion of the rights offering and private placement.
The amendments included modifications and/or eliminations to certain financial
covenants. The amendment regarding our $175 million revolving credit facility
included a one-year extension in maturity from December 31, 2002 to December 31,
2003 and a reduction in the total commitment from $175 million to $160 million.
As part of the amendment regarding our $75 million revolving credit facility, we
prepaid $10 million originally scheduled to mature in March 2002.
In connection with Explorer's February 2002 investment, we amended the
stockholders agreement with Explorer to provide that Explorer will be entitled
to designate to our Board of Directors that number of directors that would
generally be proportionate to Explorer's ownership of voting securities in our
company, not to exceed five directors (or six directors in the event that the
size of the Board of Directors is increased to ten directors). Explorer
currently beneficially owns a majority of our voting securities and therefore
would be entitled to designate a majority of our directors. Explorer will, so
long as it owns at least 15% of our voting securities, vote its shares in favor
of three independent directors as defined under the rules of the New York Stock
Exchange who are not affiliates of Explorer.
Also in connection with Explorer's February 2002 investment, the terms of
the outstanding Series C Preferred Stock, all of which is owned by Explorer,
were amended (1) to remove the restriction that previously prohibited the voting
or conversion of Series C Preferred Stock in excess of 49.9% of our outstanding
voting securities and (2) to provide that if we fail to pay dividends on the
Series C Preferred Stock for four quarters, the holders of the Series C
Preferred Stock will be entitled to designate two additional directors. However,
by letter dated January 31, 2001, Explorer waived its right to elect additional
directors resulting from dividend arrearages through December 31, 2002 provided
that the dividends on any shares of Series C Preferred Stock would not be in
arrears for six or more dividend periods from January 31, 2001 through and
including December 31, 2002.
In February, 2002, we refinanced an investment in a Baltimore, Maryland
asset leased by United States Postal Service ("USPS") resulting in $13.0 million
of net cash proceeds. The new, fully amortizing mortgage has a 20-year term with
a fixed interest rate of 7.26%. This transaction is cash neutral on a monthly
basis, as lease payments due from USPS equal debt service on the loan.
During the first quarter of 2002, we leased 13 properties previously
classified as Owned and Operated Assets. We entered into agreements to lease
four Arizona facilities to subsidiaries of Infinia Health Care Companies and to
sublease four other Arizona facilities to the same party. The agreements
initially began as management arrangements, effective March 1, 2002, and convert
into leases upon Infinia and us obtaining various approvals. The terms for the
four Arizona leases and four subleases are 10 years and 3 years, respectively,
with an initial combined annual net rent payment of $1.02 million. Also on March
1, 2002, we leased four facilities in Massachusetts to subsidiaries of
Harborside Healthcare Corporation. The initial lease term for the four
properties is 10 years with an initial annual rent payment of $1.675 million. We
leased one additional facility on March 1, 2002, for an initial annual rent of
$0.38 million. Additionally, on February 1, 2002, the leasehold interest in one
facility was terminated by the landlord, bringing the total number of Owned and
Operated Assets down from 33 at December 31, 2001 to 19 as of March 1, 2002.
From January 1 to March 27, 2002, we purchased $35.6 million of our 6.95%
bonds due in June 2002, leaving an outstanding balance of $61.9 million.
F-30
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
OMEGA HEALTHCARE INVESTORS, INC.
December 31, 2001
(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 $8,130,000 at December 31, 2001.
(3) Certain of the real estate indicated are security for HUD loans totaling
$5,203,135 at December 31, 2001.
(4) Certain of the real estate indicated are security for the Provident line of
credit borrowings totaling $64,689,068 at December 31, 2001.
(5) Certain of the real estate indicated are security for the Fleet line of
credit borrowings totaling $129,000,000 at December 31, 2001.
(a) The variance in impairment in the table shown above relates to assets
previously classified as held for sale which were reclassified to owned and
operated assets during 2000.
The reported amount of our real estate at December 31, 2001 is less than the tax
basis of the real estate by approximately $12.1 million.
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
OMEGA HEALTHCARE INVESTORS, INC.
December 31, 2001
(1) The mortgage loans included in this schedule represent first mortgages on
facilities used in the delivery of long-term healthcare, such facilities
are located in the states indicated.
(2) The aggregate cost for federal income tax purposes is equal to the carrying
amount.
(4) A mortgagor with a mortgage on seven facilities located in Florida and
Texas and a mortgage on two facilities located in Georgia filed for Chapter
11 bankruptcy protection in February 2000. In November 2001, the mortgagor
informed us that it did not intend to pay future mortgage interest due.
(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 8.73%
and that the mortgagor make monthly payments in 2001 of $45,000 on a timely
basis. As of December 31, 2001, the mortgagor was past due approximately
$70,000 but paid $50,000 in January, which covered November and half of
December.
INDEX TO EXHIBITS
I-1 to I-3
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/ ROBERT O. STEPHENSON
--------------------------------
Robert O. Stephenson
Chief Financial Officer
Dated: March 29, 2002
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/ C. TAYLOR PICKETT Chief Executive Officer March 29, 2002
- ----------------------
C. Taylor Pickett
PRINCIPAL FINANCIAL OFFICER
/s/ ROBERT O. STEPHENSON Chief Financial Officer March 29, 2002
- ------------------------
Robert O. Stephenson
DIRECTORS
/s/ DANIEL A. DECKER Chairman of the Board March 29, 2002
- --------------------
Daniel A. Decker
/s/ THOMAS W. ERICKSON Director March 29, 2002
- ----------------------
Thomas W. Erickson
/s/ THOMAS F. FRANKE Director March 29, 2002
- --------------------
Thomas F. Franke
/s/ Director March 29, 2002
- -------------------------
Harold J. Kloosterman
/s/ BERNARD J. KORMAN Director March 29 2002
- ---------------------
Bernard J. Korman
/s/ EDWARD LOWENTHAL Director March 29, 2002
- --------------------
Edward Lowenthal
/s/ CHRISTOPHER W. MAHOWALD Director March 29, 2002
- ---------------------------
Christopher W. Mahowald
/s/ DONALD J. MCNAMARA Director March 29, 2002
- ----------------------
Donald J. McNamara
/s/ STEPHEN D. PLAVIN Director March 29, 2002
- ---------------------
Stephen D. Plavin
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