10-K: Annual report pursuant to Section 13 and 15(d)
Published on March 31, 1998
EXHIBIT 13
RESPONSE TO ITEM 14(a)(1) AND (2) AND 14(d)
INFORMATION INCORPORATED BY REFERENCE FROM
ANNUAL REPORT TO SHAREHOLDERS
LISTING OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
INDEX TO FINANCIAL INFORMATION
YEAR ENDED DECEMBER 31, 1996
OMEGA HEALTHCARE INVESTORS, INC.
ANN ARBOR, MICHIGAN
3
MANAGEMENT'S DISCUSSION AND ANALYSIS
OMEGA HEALTHCARE INVESTORS, INC.
"Safe Harbor" Statement Under the United States Private Securities
Litigation Reform Act of 1995 Statements that are not historical facts contained
in Management's Discussion and Analysis are forward-looking statements that
involve risks and uncertainties that could cause actual results to differ from
projected results. Some of the factors that could cause actual results to differ
materially include: the financial strength of the operators of the Company's
facilities as it affects their continuing ability to meet their obligations to
the Company under the terms of the Company's agreements with such operators;
changes in operators or ownership of operators; government policy relating to
the healthcare industry, including changes in the reimbursement levels under the
Medicare and Medicaid programs; operators' continued eligibility to participate
in the Medicare and Medicaid programs; changes in reimbursement by other third
party payors; occupancy levels at the Company's facilities; the availability and
cost of capital; the strength and financial resources of the Company's
competitors; the Company's ability to make additional real estate investments at
attractive yields and changes in tax laws and regulations affecting real estate
investment trusts.
Following is a discussion of the consolidated financial condition and
results of operations of the Company which should be read in conjunction with
the consolidated financial statements and accompanying notes.
RESULTS OF OPERATIONS
Year Ended December 31, 1996 compared to Year Ended December 31, 1995
Revenues for the year ended December 31, 1996 totaled $73,127,000,
increasing $11.7 million over 1995 revenues. The 1996 revenue growth stems
primarily from additional investments during 1995 and 1996. A partial year of
revenues from 1996 investments provided revenue increases of approximately $6.1
million, while a full year of revenues from 1995 investments added $3.8 million
to revenues. Additionally, approximately $1.4 million of the revenue growth
stems from participating incremental revenues which became effective during
1996.
Total investments of $643 million as of December 31, 1996 will provide 1997
annualized operating revenues of $77.8 million. Revenues will continue at this
level until additional 1997 investments are made and additional escalation
provisions commence in 1997. Annualized revenues for 1997 represent an $12.7
million increase over the 1996 annualized revenues of $65.1 million based on
investments of $548 million as of January 1, 1996.
Expenses for the year ended December 31, 1996 totaled $38,537,000,
increasing $6.6 million over expenses of $31.9 million for 1995. The 1996
provision for depreciation and amortization of real estate totaled $13,693,000,
increasing $698,000 over 1995. This increase stems from additional investments
funded in 1995 and 1996.
Interest expense for the year ended December 31, 1996 was approximately
$20,836,000, compared with $15.3 million for 1995. The increase in interest
expense is due to higher average borrowings of approximately $88 million, offset
by lower interest rates and reduced amortization of debt issue costs.
General and administrative expenses for 1996 totaled $4,008,000 or
approximately 5.5% of revenues as compared to 5.9% for 1995. The 1996 percentage
decrease relates to economies of scale stemming from additional investments made
in 1996 and 1995.
No provision for Federal income taxes has been made since the Company
intends to continue to qualify as a real estate investment trust under the
provisions of Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. Accordingly, the Company will not be subject to Federal income taxes on
amounts distributed to shareholders provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other conditions
Funds from operations available for distribution for 1996 was $48,989,000,
an increase of $5.5 million from the $43.5 million for 1995. Funds from
operations for the year ended December 31, 1996 totaled
1
$49,008,000, an increase of $6.0 million over the $43.0 million for 1995. The
1996 growth in cash flow is primarily due to the additional investments in 1996
and 1995 and the related increase in operating earnings before provisions for
depreciation and amortization.
Year Ended December 31, 1995 compared to Year Ended December 31, 1994
Revenues for the year ended December 31, 1995 totaled $61,430,000,
increasing $23.7 million over 1994 revenues. The 1995 revenue growth stems
primarily from additional investments during 1994 and 1995. A partial year of
revenues from 1995 investments provided revenue increases of approximately $3.3
million, while a full year of revenues from 1994 investments added $19.4 million
to revenues, including $14.3 million from the September 30, 1994 acquisition of
Health Equity Properties Incorporated ("HEP") as described in Note 13 to the
consolidated financial statements. Additionally, approximately $1.1 million of
the revenue growth stems from participating incremental revenues which became
effective during 1995.
Total investments of $548 million as of December 31, 1995 will provide 1996
annualized operating revenues of $65.1 million. Revenues will continue at this
level until additional 1996 investments are made and additional escalation
provisions commence in 1996. Annualized revenues for 1996 represent an $8.5
million increase over the 1995 annualized revenues of $56.6 million based on
investments of $476 million as of January 1, 1995.
Expenses for the year ended December 31, 1995 totaled $31,940,000,
increasing approximately $12.0 million over expenses of $20 million for 1994.
The 1995 provision for depreciation and amortization of real estate totaled
$12,995,000, increasing $6.3 million over 1994. This increase stems from a full
year provision for 1994 investments ($6 million, including $5.5 million from the
acquisition of HEP), plus a partial year of provision for 1995 investments.
Interest expense for the year ended December 31, 1995 was approximately
$15,325,000, compared with $10.5 million for 1994. The increase in interest
expense is primarily due to an increase in average outstanding borrowings on the
acquisition line of credit, partially offset by lower rates, plus interest on
debt assumed or incurred through the HEP acquisition in 1994.
General and administrative expenses for 1995 totaled $3.6 million or
approximately 5.9% of revenues as compared to 7.2% for 1994. The 1995 percentage
decrease is due to economies of scale resulting from the HEP acquisition and the
additional investments made in 1995.
Funds from operations available for distribution for 1995 was $43,537,000,
an increase of $18.2 million from the $25.3 million for 1994. Funds from
operations for the year ended December 31, 1995 totaled $43.0 million, an
increase of $18.2 million over the $24.8 million for 1994. The 1995 growth in
cash flow is primarily due to the additional investments in 1995 and 1994 and
the increase in operating earnings before provisions for depreciation and
amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company continually seeks new investments in healthcare properties,
primarily long-term care facilities, with the objective of profitable growth and
further diversification of the investment portfolio. Permanent financing for
future investments is expected to be provided through a combination of private
and public offerings of debt and equity securities. Management believes the
Company's liquidity and various sources of available capital are adequate to
finance operations, fund future investments in additional facilities, and meet
debt service requirements.
At December 31, 1996, the Company has a strong financial position with
total assets of $634.8 million, shareholders' equity of $383.0 million, and
long-term debt of $230.5 million, representing approximately 36% of total
capitalization. (Long-term debt excludes the revolving credit facility to the
extent that it is not term debt.) From January 1, 1997 through February 12,
1997, $16.2 million of subordinated debentures were converted for 565,062 shares
of common stock, reducing the long-term debt-to-total capitalization to
approximately 34%. The Company anticipates maintaining a long-term
debt-to-capitalization ratio of
2
approximately 40%. At year end the Company also has total liquidity of $125
million, represented primarily by permitted borrowings of up to $119 million
under its revolving credit line.
In February 1997, the Company filed two shelf registration statements with
the Securities and Exchange Commission permitting the issuance of up to
$250,000,000 of securities. The Company registered up to $150,000,000 related to
common stock, unspecified debt, preferred stock, and convertible securities
which may be issued from time to time in connection with a Registration
Statement on Form S-3. Additionally, the Company registered on Form S-4 common
stock totaling $100,000,000 to be issued in connection with future property
acquisitions. These Registration Statements, together with availability under
the revolving credit line, provide up to $369 million of capital availability to
the Company.
The Company has demonstrated a strong capacity to access the capital
markets by raising more than $900 million in capital since it was organized in
1992. The Company has raised more than $400 million in equity, including $130
from the initial public offering in 1992, $165 million from the HEP acquisition
in 1994 and two additional offerings, the latest completed in November 1996.
Additionally, nearly $500 million of debt capital has been raised, some of which
has been used to retire secured borrowing debt with higher interest rates. In
1996, the Company completed a placement of $95 million of 8.5% Convertible
Subordinated Debentures due 2001, and executed an agreement to increase its
current bank line of credit facility by $50 million and to extend the term of
the revolving credit agreement to July 1999. The increase in the credit facility
allows for an additional $25 million on the revolving credit facility,
increasing it to $125 million, plus the equivalent of $25 million in a pounds
sterling denominated term loan due in October 2000, for total permitted
borrowings of up to $150 million.
The Company distributes a large portion of the funds from operations
available for distribution. Cash dividends paid totaled $2.48 per share compared
with $2.36 per share for the year ended December 31, 1995. The dividend pay-out
ratio, that is the ratio of per share amounts for dividends paid to funds from
operations was 87% for 1996, compared with 88% for 1995, and 93% for 1994. The
Company believes that cash provided from quarterly operating activities at
current levels will continue to be sufficient to fund normal working capital
requirements and pay 1997 dividends at a quarterly rate of $0.645 per share as
declared at the January 22, 1997 Board of Directors meeting. Cash flow from
operations which is retained by the Company by continuing to gradually reduce
the dividend payout ratio will help to fund additional investments.
New investments generally are funded from temporary borrowings on the
acquisition credit line agreement. The purpose of the acquisition line is to
provide temporary funds for investments in healthcare facilities. Interest cost
incurred by the Company on borrowings under the acquisition line will vary
depending upon fluctuations in prime and/or LIBOR rates, and upon changes in the
Company's ratings by national agencies. Borrowings bear interest at LIBOR plus
1.25% or, at the Company's option at the prime rate. The Company expects to
periodically replace funds drawn on the acquisition line through fixed-rate
long-term borrowings, the placement of convertible debentures, or the issuance
of additional shares of capital stock. Historically, the Company's strategy has
been to match the maturity of its indebtedness with the maturity of its assets
and to employ fixed-rate long-term debt to the extent practicable.
3
INDEX TO FINANCIAL INFORMATION
The following consolidated financial statements of Omega Healthcare
Investors, Inc. and subsidiaries, included on pages 13 through 22 of the Annual
Report of the registrant to its shareholders for the year ended December 31,
1996, are incorporated by reference in Item 8:
Consolidated Balance Sheets -- December 31, 1996 and 1995.
Consolidated Statements of Operations -- Years ended December 31, 1996,
1995 and 1994.
Consolidated Statements of Shareholders' Equity -- Years ended December
31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows -- Years ended December 31, 1996,
1995 and 1994.
Notes to Consolidated Financial Statements -- December 31, 1996.
The following consolidated financial statement schedules of Omega
Healthcare Investors, Inc. and subsidiaries are included in Item 14(d):
Schedule III Real Estate and Accumulated Depreciation
Schedule IV Mortgage Loan on Real Estate
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are are not
required under the related instructions or are inapplicable and therefore have
been omitted.
4
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, 1996, and 1995
and the related consolidated statements of operations, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Omega
Healthcare Investors, Inc. and subsidiaries at December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Ernst & Young, LLP
January 21, 1997 (Except for
Note 17 as to which the date
is February 12, 1997)
Detroit, Michigan
5
CONSOLIDATED BALANCE SHEETS
OMEGA HEALTHCARE INVESTORS, INC.
See accompanying notes.
6
CONSOLIDATED STATEMENTS OF OPERATIONS
OMEGA HEALTHCARE INVESTORS, INC.
See accompanying notes.
7
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
OMEGA HEALTHCARE INVESTORS, INC.
See accompanying notes.
8
CONSOLIDATED STATEMENTS OF CASH FLOWS
OMEGA HEALTHCARE INVESTORS, INC.
See accompanying notes.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OMEGA HEALTHCARE INVESTORS, INC.
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
Omega Healthcare Investors, Inc. (the "Company") was incorporated on March
31, 1992, in the State of Maryland to (a) own and lease, and (b) provide
mortgage financing secured by income-producing healthcare facilities, with a
principal focus on diversified investments in long-term care facilities located
primarily in the United States.
The Company's operations commenced on August 14, 1992, the date of the
closing of the Company's initial public offering and the substantially
simultaneous purchase of its initial facilities. It has elected to be taxed as a
real estate investment trust under Sections 856 through 860 of the Internal
Revenue Code of 1986, as amended. The Company intends to continue to qualify as
such and, therefore, will distribute at least 95% of its real estate investment
trust taxable income to its shareholders.
Effective September 30, 1994, the Company acquired all of the common stock
of Health Equity Properties Incorporated. (See Note 13.) Beginning in 1994, the
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries after elimination of all material intercompany
accounts and transactions.
In 1995, the Company began to provide advisory services to Principal
Healthcare Finance Limited, a Company which owns and leases nursing homes in the
United Kingdom. (See Note 4.)
Real Estate Investments
As of December 31, 1996, the Company's real estate investments include
interests in 3 medical office buildings and 214 long-term care facilities,
operated by 34 independent operators.
Investments in 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.
The Company considers the need to provide for reserves for potential losses on
its investments based on management's periodic review of its portfolio. On the
basis of this review, a provision for losses on investments is not deemed
necessary.
Cash and Short-Term Investments
Short-term investments 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.
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) from the Company's purchase of
Health Equity Properties Incorporated (see Note 13) is amortized on a
straight-line basis over periods ranging from five to ten years. Accumulated
amortization was $3,653,000 and $2,029,000 at December 31, 1996 and 1995,
respectively.
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
$524,000, $1,072,000 and $1,028,000 in 1996, 1995, and 1994, respectively, is
classified as interest expense in the Consolidated Statements of Operations.
Unamortized deferred financing costs applicable to debt which is converted to
common stock are charged to paid-in capital at the date of conversion.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OMEGA HEALTHCARE INVESTORS, INC.
Revenue Recognition
Rental income and mortgage interest income is recognized as earned over the
terms of the related master leases and mortgage notes, respectively. Such income
includes periodic increases based on pre-determined formulas as defined in the
master leases and mortgage loan agreements. Certain mortgage agreements include
provisions for deferred interest which is not payable by the borrower until
maturity of the related note. The portion of deferred interest recognized as
earned approximates $608,000, $602,000 and $596,000 in 1996, 1995, and 1994,
respectively.
Federal and State Income Taxes
As a qualified real estate investment trust, the Company will not be
subject to Federal income taxes on its income, and no provisions for Federal
income taxes have been made. The reported amounts of the Company's assets and
liabilities as of December 31, 1996 exceeds the tax basis of assets by
approximately $70 million.
Earnings Per Share
Net earnings per share is computed based on the weighted average number of
common shares outstanding during the respective periods. The inclusion of
options using the treasury stock method and the assumed conversion of debentures
is not materially dilutive.
Stock Based Compensation
The Company grants stock options to employees and directors with an
exercise price equal to the fair value of the shares at the date of the grant.
In accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, compensation expense is not recognized for these stock
option grants.
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
2. REAL ESTATE PROPERTIES
The Company's real estate properties, represented by 132 long-term care
facilities and 3 medical office buildings at December 31, 1996, are leased under
provisions of master leases with initial terms ranging from 5 to 17 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.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OMEGA HEALTHCARE INVESTORS, INC.
A summary of the Company's investment in real estate properties is as
follows:
The following table summarizes the changes in real estate properties and
accumulated depreciation during 1996 and 1995:
Additions for 1994 include $165 million stemming from the acquisition of
HEP. (See Note 13.)
The future minimum rentals expected to be received for the remainder of the
initial terms of the leases are as follows:
3. MORTGAGE NOTES RECEIVABLE
Mortgage notes receivable relate to 82 long-term care facilities. The
mortgage notes are secured by first mortgage liens on the borrowers' underlying
real estate and personal property. Through December 31, 1996, principal payments
have been made pursuant to the terms of the underlying mortgage agreements.
Based on
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OMEGA HEALTHCARE INVESTORS, INC.
management's review, no provision for loss is considered necessary. The
following table summarizes the changes in mortgage notes during 1996 and 1995:
The face amount of mortgage notes receivable follow:
The stated interest rates indicated above for Participating Mortgages and
Convertible Participating Mortgages are subject to annual increases based upon
increases in the Consumer Price Index or increases in revenues of the underlying
long-term care facilities, with certain maximum limits. Certain of the mortgage
notes, designated as "Convertible Participating" also permit the Company to
convert the note into ownership of the related real and personal property.
Conversions would generally result in purchase/leaseback transactions with
annual economic benefit to the Company substantially the same as under the
mortgage notes.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OMEGA HEALTHCARE INVESTORS, INC.
The estimated fair value of the Company's mortgage loans at December 31,
1996 is approximately $245,700,000. Fair value is based on the estimates of
management and on rates currently prevailing for comparable loans.
On the basis of contractual provisions of the various agreements, the
principal balances of mortgage notes receivable as of December 31, 1996, are
expected to mature or to be converted to purchase/leaseback transactions
approximately as follows: $2,347,000 in 1997, $2,057,000 in 1998, $1,166,000 in
1999, $28,357,000 in 2000, $13,152,000 in 2001 and $170,395,000 thereafter.
4. INVESTMENT IN PRINCIPAL HEALTHCARE FINANCE LIMITED
In July, 1995, the Company formed and provided the initial funding for
Principal Healthcare Finance Limited ("Principal"), an Island of Jersey based
company organized to purchase and lease back nursing homes in the United
Kingdom. The Company also manages and provides advisory services to Principal
under a renewable contract. Principal owns and leases 42 nursing homes acquired
at a cost of $116 million as of December 31, 1996.
The Company's initial funding for Principal included approximately
$24,000,000 in the form of a sterling denominated subordinated loan due December
31, 2000. Through October 31, 1996 the Company also provided temporary advances
to Principal, including approximately $8,000,000 under a related subordinated
loan agreement. In October 1996, Principal completed a private placement of
equity to unaffiliated investors. Following the completion of the private
placement, the Company owns directly or indirectly non-voting ordinary shares of
Principal, with total equity investment approximating $7,000,000. The Company's
non-voting ownership interest is stated on the basis of cost.
5. CONCENTRATION OF RISK
As of December 31, 1996, 96% of the Company's real estate investments
related to long-term care facilities. The Company's facilities are located in 24
states and are operated by 34 independent healthcare operating companies.
Approximately 55% of the Company's real estate investments are operated by 8
public companies: Advocat, Inc. (18.7%), GranCare, Inc. (9.9%), Regency Health
Services, Inc. (7.8%), Unison Healthcare Corp. (7.5%), Res-Care, Inc. (4.8%),
Sun Healthcare Group, Inc. (3.0%), Integrated Health Services, Inc. (1.9%) and
Horizon/CMS Healthcare Corp. (1.8%). Of the remaining 26 independent operators,
none operate investments in facilities representing more than 8.1% of the total
real estate investments.
6. LIQUIDITY DEPOSITS AND ADDITIONAL SECURITY
Liquidity deposits and letters of credit received from certain operators
pursuant to leases and mortgages total $21,512,000. These generally represent
the initial monthly rental and mortgage interest income for a period of six
months with respect to certain of the investments. The deposits consist of
$11,065,000 held by the Company, $5,047,000 held by escrow agents, and
$5,400,000 in the form of 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.
7. BORROWING ARRANGEMENTS
On July 17, 1995, the Company consummated a $100,000,000 unsecured
revolving line of credit facility, which replaced a $60,000,000 secured line of
credit. The 1995 agreement was amended and restated on June 6, 1996, increasing
the facility to $150,000,000. The amended facility provides a pounds sterling
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OMEGA HEALTHCARE INVESTORS, INC.
denominated 40-month term loan for the equivalent of $25,000,000, which was
fully drawn at December 31, 1996. At the Company's option, the interest rate on
the term loan can be fixed for the entire term of the loan. The amended facility
also permits additional pounds sterling denominated borrowings for the
equivalent of approximately $25,000,000. Borrowings bear interest at LIBOR plus
1.25% or, at the Company's option at the prime rate. The underlying revolving
credit agreement contains various covenants and expires on July 1, 1999. Total
borrowings available under the agreement ($119,000,000 at December 31, 1996) are
based upon levels of eligible real estate investments.
Borrowings of $6,000,000 at December 31, 1996 bear interest at a rate of
7.43% and borrowings of $74,690,000 at December 31, 1995 bear interest at 7.45%.
The following is a summary of long-term borrowings:
In 1995, the Company exchanged 9.88% Senior Subordinated Collateralized
Mortgage Accrual Notes for 10% Unsecured Senior Notes due July 15, 2000. The
Company also exchanged the entire outstanding balance of 7.11% Senior Mortgage
Collateralized Notes for approximately $37,065,000 of 7.40% Unsecured Notes due
July 15, 2000, plus cash of approximately $6 million. The effective interest
rate for the new unsecured notes is 8.8%, with interest-only payments due
semi-annually through July 2000.
On January 24, 1996, the Company issued $95 million of 8.5% Convertible
Subordinated Debentures (the Debentures) due 2001. The Debentures are
convertible at any time into shares of Common Stock at a conversion price of
$28.625 per share. The Debentures are unsecured obligations of the Company and
are subordinate in right and payment to the Company's senior unsecured
indebtedness. As of December 31, 1996 there were 3,312,139 shares reserved for
issuance under the Debentures. (See Note 17.)
Real estate investments with an original cost of approximately $32,600,000
are secured by outstanding secured borrowings totaling $24,275,000 at December
31, 1996. The Industrial Development Revenue Bonds are payable in monthly
installments of approximately $88,000, including interest at approximately 9.6%.
HUD loans are payable in monthly installments of approximately $66,000,
including interest at approximately 8.3%. Mortgage notes are payable in monthly
installments of approximately $90,000, including interest at approximately 9.7%.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OMEGA HEALTHCARE INVESTORS, INC.
Assuming none of the Company's borrowing arrangements are refinanced,
converted or prepaid prior to maturity, required principal payments for each of
the five years following December 31, 1996 and the aggregate due thereafter are
set forth below:
The estimated fair values of the Company's long-term borrowings at December
31, 1996 is approximately $236,128,000. Fair values are based on the estimates
of management and on rates currently prevailing for comparable loans.
8. FINANCIAL INSTRUMENTS
At December 31, 1996 and 1995, the carrying amounts and fair values of the
Company's financial instruments are as follows:
Fair value estimates are subjective in nature and are dependent on a number
of important assumptions, including estimates of future cash flows, risks,
discount rates and relevant comparable market information associated with each
financial instrument. The use of different market assumptions and estimation
methodologies may have a material effect on the reported estimated fair value
amounts. Accordingly, the estimates presented above are not necessarily
indicative of the amounts the Company would realize in a current market
exchange.
9. RETIREMENT ARRANGEMENTS
The Company has a 401(k) Profit Sharing Plan covering all eligible
employees. Under the Plan, employees are eligible to make contributions, and the
Company, at its discretion, may match contributions and make a profit sharing
contribution.
In 1993, the Company adopted the 1993 Retirement Plan for Directors, an
unfunded plan covering all members of the Board of Directors upon completion of
not less than five years service on the Board. The benefits payable upon
retirement from the Board are based on years of service and the director fees in
effect as of the date the director ceases to be a member of the Board.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OMEGA HEALTHCARE INVESTORS, INC.
In 1993, the Company also adopted the 1993 Deferred Compensation Plan which
covers all eligible employees and members of the Board. Under this unfunded
plan, the Company may award units which result in participation in the dividends
and future growth in the value of Company's common stock. The total number of
units permitted by the plan is 200,000. Units awarded to eligible participants
(63,500 units at December 31, 1996) 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 $654,000 in 1996, $366,000 in 1995 and $283,000 in 1994.
10. SHAREHOLDERS' EQUITY AND STOCK OPTIONS
Under the terms of the 1993 Stock Option and Restricted Stock Plan as
amended in 1995, the Company reserved 750,000 shares of common stock for grants
to be issued during a period of up to 10 years. Directors, officers, and key
employees are eligible to participate in the Plan. Options for 295,165 shares
have been granted to eligible participants. Additionally, 28,244 shares of
restricted stock have been granted under the provisions of the Plan. The market
value of the restricted shares on the date of the award has been recorded as
unearned compensation-restricted stock, with the unamortized balance shown as a
separate component of shareholders' equity. Unearned compensation is amortized
to expense over the vesting period, with charges to operations of $240,000,
$253,000 and $157,000 in 1996, 1995 and 1994, respectively.
The following is a summary of activity under the plan.
At December 31, 1996, options currently exercisable (155,162) have a
weighted average exercise price of $23.42. Shares available for future grants as
of December 31, 1996 and December 31, 1995 were 426,591 and 506,385
respectively.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." This new standard prescribes a fair value based method of
accounting for employee stock options or similar equity instruments and requires
certain pro forma disclosures. For purposes of the pro forma disclosures
required under Statement 123, the estimated fair value of the options is
amortized to expense over the option's vesting period. Based on the Company's
option activity, net earnings and net earnings per share on a pro forma basis
does not differ significantly from that determined under APB 25. In determining
the estimated fair value of the Company's stock options as of the date of grant,
a Black-Scholes option pricing model was used with the following
weighted-average assumptions: risk-free interest rates of 6.5%; a dividend yield
of 7.25%; volatility factors of
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OMEGA HEALTHCARE INVESTORS, INC.
the expected market price of the Company's common stock at 15%; and a
weighted-average expected life of the options of 8 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
11. DIVIDENDS
In order to qualify as a real estate investment trust, the Company must,
among other requirements, distribute at least 95% of its real estate investment
trust taxable income to its shareholders. Per share dividend payments by the
Company were characterized in the following manner for income tax purposes:
12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Following are details of changes in operating assets and liabilities
(excluding the effects of noncash expenses), and other noncash transactions:
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OMEGA HEALTHCARE INVESTORS, INC.
The following are detailed cash flows for the acquisition of Health Equity
Properties Incorporated for the year ended December 31, 1994.
13. ACQUISITION OF HEALTH EQUITY PROPERTIES INCORPORATED
On September 30, 1994, the Company acquired all the outstanding stock of
Health Equity Properties Incorporated ("HEP"), a healthcare real estate
investment trust. The total purchase consideration for HEP approximated $180
million, comprising common stock of $143 million represented by 5,826,000
shares, long-term debt assumed ($26 million) and other obligations, professional
fees and costs incurred in the transaction.
The acquisition was accounted for as a purchase, with the acquired assets
and liabilities recorded at their estimated fair values at the date of the
acquisition. Presented below are unaudited pro forma condensed consolidated
results of operations for the year ended December 31, 1994, as if the purchase
occurred as of January 1, 1994. The pro forma results of operations give effect
to depreciation associated with the increase in the estimated fair values of the
facility investments based on useful lives ranging from 25 to 30 years. Effect
is also given to the amortization of non-compete agreements and goodwill from
the acquisition, based on useful lives ranging from 5 to 10 years, and for the
anticipated cost savings due to personnel reductions and other efficiencies of
scale. The following pro forma results of operations are presented for
comparative purposes only, and they are not necessarily indicative either of
results that would have occurred had the transaction been effected as of January
1, 1994, or of future results of operations of the consolidated companies.
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OMEGA HEALTHCARE INVESTORS, INC.
14. EXTRAORDINARY CHARGE FOR PREPAYMENT OF DEBT
During 1995, the Company entered into three transactions to prepay various
secured borrowings. The Company consummated a $100,000,000 unsecured line of
credit to replace a $60,000,000 secured line of credit. Also, as discussed in
Note 7, the Company redeemed its outstanding senior mortgage notes through the
issuance of unsecured notes. The prepayment of these borrowings resulted in an
extraordinary charge of $6,479,000, representing the write-off of unamortized
deferred financing costs and fees and costs associated with the prepayment.
15. LITIGATION
The Company is subject to certain legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the amount
of ultimate liability, if any, with respect to these actions will not materially
affect the consolidated financial position of the company.
16. COMMITMENTS
The Company has commitments, subject to certain conditions, to provide
additional financing totaling $29 million as of December 31, 1996.
17. SUBSEQUENT EVENTS
A quarterly dividend of $.645 per share was declared by the Board of
Directors on January 22, 1997, payable on February 14, 1997 to shareholders of
record on February 3, 1997.
Through February 12, 1997, $16,175,000 of subordinated convertible
debentures were converted for 565,062 shares of common stock.
20