UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-11316
OMEGA HEALTHCARE
INVESTORS, INC.
(Exact name of Registrant as specified in its charter)
Maryland 38-3041398
(State of Incorporation) (I.R.S. Employer Identification No.)
900 Victors Way, Suite 350, Ann Arbor, MI 48108
(Address of principal executive offices)
(734) 887-0200
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of March 31, 2000
Common Stock, $.10 par value 20,127,957
(Class) (Number of shares)
OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
March 31, 2000
INDEX
PART I Financial Information Page No.
- ------ --------------------- --------
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets
March 31, 2000 (unaudited)
and December 31, 1999......................................... 2
Statements of Operations (unaudited)-
Three-month periods ended
March 31, 2000 and 1999....................................... 3
Statements of Cash Flows (unaudited)-
Three-month periods ended
March 31, 2000 and 1999....................................... 4
Notes to Condensed Consolidated Financial Statements
March 31, 2000 (unaudited).................................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................................... 11
Item 3. Market Risk...................................................... 19
PART II Other Information
- ------- -----------------
Item 6. Exhibits and Reports on Form 8-K................................. 21
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
March 31, December 31,
2000 1999
---- ----
(Unaudited) (See Note)
ASSETS
Real estate properties
Land and buildings at cost ................................... $ 605,183 $ 678,605
Less accumulated depreciation ................................ (65,255) (65,854)
------- -------
Real estate properties - net ............................... 539,928 612,751
Mortgage notes receivable .................................... 213,229 213,617
------- -------
753,157 826,368
Other real estate - net ........................................ 147,097 65,847
Other investments .............................................. 58,075 61,705
------ ------
958,329 953,920
Assets held for sale ........................................... 36,705 36,406
------ ------
Total Investments (Cost of $1,060,289 at March 31, 2000
and $1,056,180 at December 31, 1999) ......................... 995,034 990,326
Cash and short-term investments ................................ 2,509 4,105
Goodwill and non-compete agreements - net ...................... 2,847 3,013
Other assets ................................................... 13,606 16,407
------ ------
Total Assets .............................................. $ 1,013,996 $ 1,013,851
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Acquisition lines of credit .................................... $ 177,000 $ 166,600
Unsecured borrowings ........................................... 310,996 310,996
Secured borrowings ............................................. 15,878 15,951
Subordinated convertible debentures ............................ 48,405 48,405
Accrued expenses and other liabilities ......................... 13,699 14,818
------ ------
Total Liabilities ......................................... 565,978 556,770
Preferred Stock ................................................ 107,500 107,500
Common stock and additional paid-in capital .................... 450,939 449,292
Cumulative net earnings ........................................ 235,123 232,105
Cumulative dividends paid ...................................... (343,749) (331,341)
Stock option loans ............................................. (2,427) (2,499)
Unamortized restricted stock awards ............................ (1,592) (526)
Accumulated other comprehensive income ......................... 2,224 2,550
----- -----
Total Shareholders' Equity ................................ 448,018 457,081
------- -------
Total Liabilities and Shareholders' Equity ................ $ 1,013,996 $ 1,013,851
=========== ===========
Note - The balance sheet at December 31, 1999, has been derived from
audited consolidated financial statements at that date but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
2
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In Thousands, Except Per Share Amounts)
Three Months Ended
March 31,
---------
2000 1999
---- ----
Revenues
Rental income ...................................................... $ 17,944 $ 18,128
Mortgage interest income ........................................... 6,000 10,217
Other investment income ............................................ 1,628 1,662
Other real estate income ........................................... 518 -
Miscellaneous ...................................................... 27 16
-- --
26,117 30,023
Expenses
Depreciation and amortization ...................................... 5,910 5,595
Interest ........................................................... 10,966 10,106
General and administrative ......................................... 1,723 1,497
----- -----
18,599 17,198
------ ------
Net earnings before provision for loss on assets held for sale ....... 7,518 12,825
Provision for loss on assets held for sale - net ..................... (4,500) -
------ -----
Net earnings ......................................................... 3,018 12,825
Preferred stock dividends ............................................ (2,408) (2,408)
------ ------
Net earnings available to common ..................................... $ 610 $ 10,417
======== ========
Net Earnings per common share:
Basic before provision for loss on assets held for sale ............ $ 0.26 $ 0.52
======== ========
Diluted before provision for loss on assets held for sale .......... $ 0.26 $ 0.52
======== ========
Basic after provision for loss on assets held for sale ............. $ 0.03 $ 0.52
======== ========
Diluted after provision for loss on assets held for sale ........... $ 0.03 $ 0.52
======== ========
Dividends paid per common share ...................................... $ 0.50 $ 0.70
======== ========
Average Shares Outstanding, Basic .................................... 19,982 19,899
====== ======
Average Shares Outstanding, Diluted .................................. 19,982 19,901
====== ======
Other comprehensive income (loss):
Unrealized Gain (Loss) on Omega Worldwide, Inc. .................... $ (326) $ 735
======== ========
Total comprehensive income ........................................... $ 2,692 $ 13,560
======== ========
See notes to condensed consolidated financial statements.
3
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
Three Months Ended
March 31,
2000 1999
---- ----
Operating activities
Net earnings ............................................................ $ 3,018 $ 12,825
Adjustment to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization ....................................... 5,910 5,595
Provision for impairment loss ....................................... 4,500 -
Provision for collection losses ..................................... 1,437 -
Other ............................................................... 633 998
--- ---
Funds from operations available for distribution and investment .......... 15,498 19,418
Net change in operating assets and liabilities ........................... (1,271) (4,069)
------ ------
Net cash provided by operating activities ................................ 14,227 15,349
Cash flows from financing activities
Proceeds of acquisition lines of credit .................................. 10,400 53,155
Payments of long-term borrowings ......................................... (73) (76)
Receipts from Dividend Reinvestment Plan ................................. 349 260
Dividends paid ........................................................... (12,408) (16,409)
Purchase of Company common stock ......................................... - (8,740)
Other .................................................................... - 1,283
----- -----
Net cash (used in) provided by financing activities ...................... (1,732) 29,473
Cash flow from investing activities
Acquisition of real estate ............................................... - (33,921)
Placement of mortgage loans ............................................. - (16,891)
Fundings of foreclosure activities ....................................... (11,644) -
Proceeds from sale of real estate investments - net ...................... 230 2,914
Fundings of other investments - net ...................................... (3,065) (2,532)
Collection of mortgage principal ......................................... 388 5,776
Other .................................................................... - (482)
------- ----
Net cash used in investing activities .................................... (14,091) (45,136)
------- -------
Decrease in cash and short-term investments .............................. $ (1,596) $ (314)
======== ========
See notes to condensed consolidated financial statements.
4
Omega Healthcare Investors, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2000
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for Omega Healthcare Investors, Inc. (the "Company"), have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals and impairment provisions to adjust the carrying value of
assets held for sale to fair value less cost of disposal) considered necessary
for a fair presentation have been included. Operating results for the
three-month period ended March 31, 2000, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000. For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1999.
Note B - Concentration of Risk and Related Issues
As a result of certain recent developments, the risks associated with
investing in long-term healthcare facilities, stemming in large part from
government legislation and regulation of operators of the facilities, has
increased. The Company's tenants/mortgagors depend on reimbursement legislation
which will provide them adequate payments for services because a significant
portion of their revenue is derived from government programs funded under
Medicare and Medicaid. The Medicare program implemented a Prospective Payment
System for skilled nursing facilities, which replaced cost-based reimbursements
with an acuity based system. The immediate effect was to significantly reduce
payments for services provided. Additionally, certain State Medicaid programs
have implemented similar acuity based systems. The reduction in payments to
nursing home operators pursuant to the Medicare and Medicaid payment changes has
negatively affected the revenues of the Company's nursing home facilities and
the ability of the operators of these facilities to service the capital costs
with capital providers like the Company. As a result, a number of the Company's
operators have filed petitions seeking reorganization under chapter 11 of the
U.S. Bankruptcy Code.
Most of the Company's nursing home investments were designed
exclusively to provide long-term healthcare services. These facilities are also
subject to detailed and complex specifications for the physical characteristics
as mandated by various governmental authorities. If the facilities cannot be
5
operated as long-term care facilities, finding alternative uses may be
difficult. The Company's triple-net leases require its tenants to comply with
such regulations affecting the physical characteristics of its facilities, and
the Company regularly monitors compliance by tenants with healthcare facilities'
regulations. Nevertheless, if tenants fail to perform these obligations, and the
Company recovers the facility through repossession, the Company may be required
to expend capital to comply with such regulations and maintain the value of its
investments.
As of March 31, 2000, 88.6% of the Company's real estate investments
($818.4 million) are related to long-term care skilled nursing facilities, 4.9%
to assisted living facilities, 2.8% to rehabilitation hospitals, and 3.7% to
medical office facilities. These healthcare facilities are located in 27 states
and are operated by 23 independent healthcare operating companies.
Approximately 80.2% of the Company's investments are operated by eight
public companies, including Sun Healthcare Group, Inc. (25.0%), Integrated
Health Services, Inc. (16.8%, including 9.9% as the manager for Lyric Health
Care LLC), Advocat, Inc. (11.6%), Vencor Operating, Inc. (7.7%), Genesis Health
Ventures, Inc. (6.3%), Mariner Post-Acute Network (6.1%), Alterra Healthcare
Corporation (3.6%) and Tenet Healthcare Corp. (3.1%). Vencor and Genesis manage
facilities for the Company's own account as explained more fully in Note C. The
two largest private operators represent 4.3% and 3.3% of investments. No other
operator represents more than 1.8% of investments. The three states in which the
Company has its highest concentration of investments are located are Florida
(15.3%), California (7.0%) and Illinois (6.9%).
Many of the public nursing home companies operating the Company's
facilities have recently reported significant operating and impairment losses.
Sun Healthcare Group, Inc., Mariner Post-Acute Network, Integrated Health
Services, Inc. and RainTree Healthcare Corporation have each filed for
protection under the Bankruptcy Code, with the last three filing during the
first quarter of 2000. These filings have interrupted the payment of interest on
mortgages. These operators collectively represent 45.7% of the Company's
investments as of March 31, 2000. Additionally, Advocat, Inc. has announced a
restatement of certain of its financial statements, and other operators are
experiencing financial difficulties. Advocat also suspended the payment of rents
during the period but recently reinstated partial payments under a standstill
agreement. The Company has initiated discussions with all operators who are
experiencing financial difficulties, as well as state officials who regulate its
properties. It also has proactively initiated various other actions to protect
its interests under its leases and mortgages. Given the current challenges to
its customers, the Company is actively involved with workout negotiations and
bankruptcy proceedings to preserve and protect the value of its investments.
While the earning capacity of certain properties has been reduced and the
reductions may extend to future periods, management believes that it has
recorded appropriate accounting impairment provisions based on its assessment of
current circumstances. However, upon foreclosure or lease termination, there can
be no assurance that the Company's investments in facilities would not be
written down based on appraisals.
During the period ended March 31, 2000, Mariner Post-Acute Network,
Advocat, Inc. and Integrated Health Services, Inc. discontinued payments to the
Company. Payments from Advocat, Inc. (on a reduced basis pursuant to a
standstill agreement) and from Integrated Health Services, Inc. were resumed in
April 2000, but Integrated Health Services, Inc. has not yet made its May
6
payment. There can be no assurance that these customers will be able to continue
those payments or that other customers will continue to make their payments as
scheduled.
Note C - Portfolio Valuation Matters
In the ordinary course of its business activities, the Company
periodically evaluates investment opportunities and extends credit to customers.
It also is regularly engaged in lease and loan extensions and modifications.
Additionally, the Company actively monitors and manages its investment portfolio
with the objectives of improving credit quality and increasing returns. In
connection with portfolio management, the Company engages in various collection
and foreclosure activities, and it believes management has the skills, knowledge
and experience to deal with such issues as may arise from time to time.
When the Company acquires real estate pursuant to a foreclosure or
bankruptcy proceeding and does not immediately release the properties to new
operators, the reacquired assets are classified on the balance sheet as "other
real estate" and the value of such assets is reported at the lower of cost or
fair value. Additionally, when a plan to sell real estate is adopted, the real
estate is classified as "assets held for sale," with the net carrying amount
adjusted to the lower of cost or fair value, less cost of disposal. Based on
management's current review of the portfolio, a $1.4 million provision for
collection losses was recorded for the three-month period ended March 31, 2000.
Assets Held For Sale
During 1998, management initiated a plan to dispose of certain
properties judged to have limited long-term potential and to redeploy the
proceeds. Following a review of the portfolio, assets identified for sale had a
cost of $95 million, a net carrying value of $83 million, and annualized
revenues of approximately $11.4 million. In 1998, the Company recorded a
provision for impairment of $6.8 million to adjust the carrying value of those
assets judged to be impaired to their fair value, less cost of disposal. During
1998, the Company completed sales of two groups of assets, yielding sales
proceeds of $42,036,000. Gains realized in 1998 from the dispositions
approximated $2.8 million. During 1999, the Company completed asset sales
yielding net proceeds of $18.2 million, realizing losses of $10.5 million. In
addition, management initiated a plan in the 1999 fourth quarter for additional
asset sales to be completed in 2000. The additional assets identified as assets
held for sale had a cost of $33.8 million, a net carrying value of $28.6 million
and annualized revenue of approximately $3.4 million. As a result of this
review, the Company recorded a provision for impairment of $19.5 million to
adjust the carrying value of assets held for sale to their fair value, less cost
of disposal. The Company intends to sell the remaining facilities as soon as
practicable, although there can be no assurance sales will be completed or
completed on favorable terms.
As of March 31, 2000, the carrying value of assets held for sale totals
$36.7 million. Of the 38 facilities held for sale, 32 are operated for the
Company's own account. During the three-month period ended March 31, 2000, the
Company realized disposition proceeds of $230,000, and recognized an additional
$4.5 million provision for impairment on assets held for sale. The Company
7
intends to sell the remaining facilities as soon as practicable. However, a
number of other companies are actively marketing portfolios of similar assets
and, in light of the existing conditions in the long-term care industry
generally, it has become more difficult to sell such properties and for
potential buyers to obtain financing for such acquisitions. Thus, there can be
no assurance if or when such sales will be completed or whether such sales will
be completed on terms that allow the Company to realize the fair value of such
assets.
Other Real Estate
The Company owns 42 facilities with 4,100 beds or assisted living units
located in eight states, which were recovered from customers and are operated
for the Company's own account. The investment in this real estate is classified
under Other Real Estate as of March 31, 2000. It includes 10 nursing homes
located in Massachusetts and Connecticut with 1,052 licensed beds. These
facilities were acquired by the Company on July 14, 1999 in lieu of foreclosure
and are currently being managed by Genesis Health Ventures, Inc. At March 31,
2000, the Company had invested approximately $68.5 million in these facilities.
The Company presently is considering various alternatives, including negotiating
a lease with one or more new operators or selling one or more of the facilities.
Income from these facilities approximated $460,000 for the three-month period
ended March 31, 2000.
At March 31, 2000, Other Real Estate also includes 18 facilities
formerly leased to RainTree Healthcare Corporation ("RainTree") which were taken
back by the Company on February 29, 2000 when RainTree filed for bankruptcy; in
connection with the bankruptcy proceeding, the Company bid $3.1 million for the
leasehold interest in 12 other RainTree facilities, all of which are now
operated for the account of the Company under a management agreement with Vencor
Operating, Inc. The carrying amount of the Company's investment in all 30
facilities is $75.8 million. Appraisals are being sought to determine if fair
market value is lower than the current carrying amount. Based on information
presently available, management believes there is no material impairment in the
carrying value of the facilities. However, there can be no assurance that the
value based on appraisals will not be less than cost. Information was not
available as to the operating income or loss for these facilities for the month
of March 2000.
Note D - Preferred Stock
During the three-month periods ended March 31, 2000 and March 31, 1999,
the Company paid dividends of $1.3 million and $1.1 million, respectively, on
its 9.25% Series A Cumulative Preferred Stock and 8.625% Series B Cumulative
Preferred Stock. Dividends on the preferred stock are payable quarterly.
Note E - Net Earnings Per Share
Net earnings per share is computed based on the weighted average number
of common shares outstanding during the respective periods. Diluted earnings per
share reflect the dilutive effect, if any, of stock options (2,701 shares for
the three-month period in 1999). Assumed conversion of the Company's 1996
convertible debentures is antidilutive.
8
Note F - Omega Worldwide, Inc.
As of March 31, 2000 the Company holds a $7,688,000 investment in Omega
Worldwide, Inc. ("Worldwide"), represented by 1,163,000 shares of common stock
and 260,000 shares of preferred stock. The Company has guaranteed repayment of
borrowings pursuant to a revolving credit facility in exchange for a 1% annual
fee and a facility fee of 25 basis points. The Company has been advised that at
March 31, 2000 borrowings of $8,850,000 are outstanding under Worldwide's
revolving credit facility. As of March 31, 2000, Worldwide was in default under
the revolving credit facility due to a decline in the Company's credit rating.
Worldwide's lender has waived the defaults under the revolving credit facility
through June 29, 2000.
Additionally, the Company has a Services Agreement with Worldwide,
which provides for the allocation of indirect costs incurred by the Company to
Worldwide. The allocation of indirect costs is based on the relationship of
assets under the Company's management to the combined total of those assets and
assets under Worldwide's management. Indirect costs allocated to Worldwide for
the three-month period ending March 31, 2000 were $205,000, compared with
$198,000 for the same period in 1999.
Note G - Subsequent Events
On May 2, 2000, the Board of Directors declared its regular quarterly
dividends of $.578 per share and $.539 per share, respectively, to be paid on
May 15, 2000 to Series A and Series B Cumulative Preferred shareholders of
record on May 5, 2000.
On May 5, 2000, the Company completed negotiations with its bank group
to replace its $200 million unsecured revolving credit facility with a new $175
million secured revolving credit facility that expires in December 2002, subject
to completion of definitive documentation. The Company was not in compliance
with certain financial covenants under the existing $200 million facility and,
as a result, borrowings thereunder are currently prohibited. The Company has
received waivers of these covenant defaults under the existing facility through
June 29, 2000 to permit completion of documentation for the new facility.
However, borrowings will continue to be prohibited until the Company completes
the Equity Investment (defined below) and addresses the July 15, 2000 and
February 1, 2001 maturities of borrowings totaling $130 million.
On May 11, 2000, the Company announced the execution of definitive
documentation with Explorer Holdings, L.P. pursuant to which the Company will
issue and sell up to $200.0 million of its capital stock to Explorer ("the
Equity Investment"). Initially, 1.0 million shares of a new series of
convertible preferred stock ("Series C Preferred") will be issued for an
aggregate
9
purchase price of $100.0 million, and up to an additional $100 million of new
capital will be available for liquidity and growth purposes upon satisfaction
of certain conditions. The shares of Series C Preferred will receive dividends
at the greater of 10% per annum or the dividend payable on shares of Common
Stock (with the Series C Preferred participating on an "as converted" basis).
Dividends on Series C Preferred accrue from the date of issuance and, for any
dividend period ending prior to February 1, 2001, may be paid in cash or
additional shares of Series C Preferred. Thereafter, all dividends must be
paid in cash. Other provisions of this arrangement are explained more fully
in Item 2 - Management's Discussion and Analysis of Financial Conditions and
Results of Operations.
On May 12, 2000, the Company entered into an agreement with Tenet
Healthsystem Philadelphia, Inc. to sell three medical office buildings and a
parking garage to Tenet for gross proceeds of $34,000,000. The transaction is
presently scheduled to close on or before May 31, 2000. The properties have a
current carrying value of approximately $23,000,000, and revenues from these
facilities totaled $1,076,000 for the three months ended March 31, 2000.
10
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
"Safe Harbor" Statement Under the United States Private Securities
Litigation Reform Act of 1995. Statements contained in this document that are
not based on historical fact are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include statements regarding the Company's future development
activities, the future condition and expansion of the Company's markets, the
sale of certain assets that have been identified for disposition, dividend
policy, the Company's ability to meet its liquidity requirements and the
Company's growth strategies, as well as other statements which may be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"estimate," "anticipate," or similar terms, variations of those terms or the
negative of those terms. These forward-looking statements involve risks and
uncertainties that could cause actual results to differ from projected results.
Some of the factors that could cause actual results to differ materially
include: the financial strength of the Company's facilities as it affects the
operators' continuing ability to meet their obligations to the Company under the
terms of the Company's agreements with such operators; the Company's ability to
complete the contemplated asset sales, Equity Investment and bank financing, and
if completed, the ability to do so on terms contemplated as favorable to the
Company; changes in the reimbursement levels under the Medicare and Medicaid
programs; operators' continued eligibility to participate in the Medicare and
Medicaid programs; changes in reimbursement by other third party payors;
occupancy levels at the Company's facilities; the limited availability and cost
of capital to fund or carry healthcare investments; the strength and financial
resources of the Company's competitors; the Company's ability to make additional
real estate investments at attractive yields; and changes in tax laws and
regulations affecting real estate investment trusts; and the risks identified in
Item 1, Note C above.
Following is a discussion of the consolidated results of operations,
financial position and liquidity and capital resources of the Company, which
should be read in conjunction with the consolidated financial statements and
accompanying notes. See also, Item 1, Note B regarding Concentration of Risk and
Related Issues and Note C regarding portfolio valuation matters above.
Results of Operations
Revenues for the three-month period ending March 31, 2000 totaled $26.1
million, a decrease of $3.9 million over the period ending March 31, 1999. The
decrease in 2000 revenue is due in part to approximately $2.6 million from
reductions in earning investments due to foreclosure and bankruptcy, $2.0
million from reduced investment caused by 1999 asset sales and the prepayment
and foreclosure of mortgages and a $1.4 million provision for losses on
restructuring of customer obligations. These decreases are offset by $1.5
million in additional revenue from 1999 investments and $591,000 of revenue
growth from participating incremental net revenues that became effective in
2000. As of March 31, 2000, gross real estate investments of $818 million have
an average annualized yield of approximately 11.6%.
11
Expenses for the three-month period ended March 31, 2000 totaled $18.6
million, an increase of $1.4 million over expenses for 1999. The provision for
depreciation and amortization for the three-month period ended March 31, 2000
totaled $5,910,000, increasing $315,000 over the same period in 1999. This
increase consists of $563,000 additional depreciation expense from properties
previously classified as mortgages offset by a reduction in amortization of
non-compete agreements of $249,000.
Interest expense for the three-month period ended March 31, 2000 was
$11.0 million, compared with $10.1 million for the same period in 1999. The
increase in 2000 is primarily due to higher average outstanding borrowings
during the 2000 period at slightly higher rates than the same period in the
prior year.
General and administrative expenses for the three-month period ended
March 31, 2000 totaled $1.7 million, an increase of $226,500 over the same
period in 1999. These expenses for the three-month period were approximately
6.6% of revenues, as compared to 5.0% of revenues for the 1999 period. The
increase in 2000 is due in part to payments of legal and financial advisory
fees.
Net earnings available to common shareholders were $5,110,000 for the
three-month period ended March 31, 2000 (excluding the non-recurring charge of
$4.5 million), decreasing approximately $5,307,000 from the 1999 period. This
decrease is largely the result of decrease in revenues, including provision of
collection losses. Higher depreciation, interest and general & administrative
costs also contributed to the reduction in net earnings. Net earnings per
diluted common share (excluding the loss on asset dispositions) decreased from
$0.52 for the three-month period ended March 31, 1999 to $0.26 for the
three-month period ended March 31, 2000.
Funds from Operations ("FFO") totaled $11,020,000 for the three-month
period ending March 31, 2000, representing a decrease of approximately
$5,765,000 over the same period in 1999 due to factors mentioned above. FFO is
net earnings available to common shareholders, excluding any gains or losses
from debt restructuring and the effects of asset dispositions, plus depreciation
and amortization associated with real estate investments. Properties recovered
by the Company required funding of $11.4 million for working capital during the
three-month period. Accordingly, cash available for distribution was negative
for the quarter.
No provision for Federal income taxes has been made since the Company
intends to continue to qualify as a real estate investment trust under the
provisions of Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. Accordingly, the Company will not be subject to Federal income taxes on
amounts distributed to shareholders, provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other conditions.
Although the Company has suspended dividends on its common stock pending
completion of the Equity Investment discussed below, the Company fully intends
to meet the 95% distribution test with dividends to be declared later in 2000.
Profits from operations of recovered properties are subject to tax, and the
Company intends to hold and operate recovered properties only long enough to
stabilize and then release or sell them.
12
Liquidity and Capital Resources
Overview
- --------
At March 31, 2000, the Company had total assets of $1.0 billion,
shareholders' equity of $448.0 million, and long-term debt of $375.3 million,
representing approximately 37% of total capitalization. Long-term debt excludes
funds borrowed under its acquisition credit agreements. The Company has $177.0
million drawn on its credit facilities at March 31, 2000. Proceeds from asset
sales and mortgage payments are currently expected to reduce borrowings on the
credit facility by approximately $45.0 million during 2000.
The Company has approximately $81.0 million of indebtedness that
matures July 15, 2000, and approximately $48.0 million of convertible debentures
that mature February 2001. Additionally, the term of the Company's $200.0
million revolving credit facility expires September 30, 2000.
In order to meet the Company's upcoming debt maturities, finance
operations and fund future investments, the Company has agreed to issue $100.0
million of Series C Preferred Stock (the "Equity Investment") to a private
equity investor, with up to an additional $100.0 million investment available
for future liquidity needs or growth opportunities on certain conditions. See
"-Equity Investment" below. The Equity Investment is subject to certain
conditions, including shareholder approval, and completion of documentation for
the Company's new credit facility and management incentive arrangements on terms
acceptable to the investor, and therefore the completion of the transaction
cannot be assured. The Company believes the proceeds from the first $100.0
million of the Equity Investment, together with the proceeds of certain asset
dispositions, will provide the Company sufficient liquidity to meet its
near-term debt maturities and working capital needs as well as the opportunity
to take advantage of certain growth opportunities. As the Company does not
otherwise have sufficient existing capital resources to repay the $81.0 million
of indebtedness that matures July 15, 2000, the Company would need funding from
other sources which have not been identified and may not be available or seek to
delay the repayment of the July maturities if the $100.0 million Equity
Investment has not been consummated prior to July 15, 2000.
Dividend Policy
- ---------------
The Company distributes a large portion of the cash available from
operations. Prior to March 31, 2000, the Company's historical policy had been to
make distributions on common stock of approximately 80% of FFO. Cash dividends
paid totaled $0.50 per share for the three-month period ending March 31, 2000,
compared with $0.70 per share for the same period in 1999. The dividend payout
ratio, that is the ratio of per share amounts for dividends paid to the per
share amounts of funds from operations, was approximately 90.7% for the
three-month period ending March 31, 2000 compared with 85.0% for the same period
in 1999.
13
Subject to completion of the $100.0 million Equity Investment, the
Board of Directors has announced its intention to declare dividends on the
Company's common stock at the annual rate of $1.00 per share. No common stock
dividend will be paid in the second quarter of 2000. Subject to the completion
of the Equity Investments, the Company intends to resume regularly quarterly
dividends of $0.25 per common share commencing with the dividend to be paid in
the 2000 third quarter. The Company currently intends to declare and pay regular
quarterly dividends on its preferred shares.
Equity Investment
- -----------------
On May 11, 2000, the Company announced the execution of definitive
documentation with Explorer Holdings, L.P. ("Explorer"), a private equity
investor, pursuant to which the Company will issue and sell up to $200.0 million
of its capital stock to Explorer. Initially, 1.0 million shares of a new
series of convertible preferred stock ("Series C Preferred") will be issued for
an aggregate purchase price of $100.0 million. The descriptions of the
transaction documents set forth herein do not purport to be complete and are
qualified in their entirety by the forms of such documents filed as exhibits to
this report.
Terms of Series C Preferred: The shares of Series C Preferred will be
-----------------------------
issued and sold for $100.00 per share and will be convertible into Common Stock
at any time by the holder at an initial conversion price of $6.25 per share of
Common Stock. The conversion price is subject to possible future adjustment in
accordance with customary antidilution provisions, including, in certain
circumstances, the issuance of Common Stock at an effective price less than the
then fair market value of the Common Stock. The Series C Preferred will rank on
a parity with the Company's outstanding shares of Series A and Series B
preferred stock as to priority with respect to dividends and upon liquidation.
The shares of Series C Preferred will receive dividends at the greater of 10%
per annum or the dividend payable on shares of Common Stock, with the Series C
Preferred participating on an "as converted" basis. Dividends on Series C
Preferred accrue from the date of issuance and, for dividend periods ending
prior to February 1, 2001, may be paid at the option of the Company in cash or
additional shares of Series C Preferred. Thereafter, dividends must be paid in
cash. The Series C Preferred will vote (on an "as converted" basis) together
with the Common Stock on all matters submitted to stockholders. However, without
the consent of the Company's Board of Directors, no holder of Series C Preferred
may vote or convert shares of Series C Preferred if the effect thereof would be
to cause such holder to beneficially own more than 49.9% of the Company's Voting
Securities. If dividends on the Series C Preferred are in arrears for four
quarters, the holders of the Series C Preferred, voting separately as a class
(and together with the holder of Series A and Series B Preferred if and when
dividends on such series are in arrears for six or more quarters and special
class voting rights are in effect with respect to the Series A and Series B
Preferred), will be entitled to elect directors who, together with the other
directors designated by the holders of Series C Preferred, would constitute a
majority of the Company's Board of Directors.
Investment Agreement: The general terms of the Equity Investment are
---------------------
set forth in the Investment Agreement. In addition to setting forth the terms on
which Explorer will acquire initially the $100.0 million of Series C Preferred,
the Investment Agreement also contains provisions pursuant to which Explorer
will make available, upon satisfaction of certain conditions, up to $50.0
14
million to be used to pay indebtedness maturing on or before February 1, 2001
(the "Liquidity Commitment"). Any amounts drawn under the Liquidity Commitment
will be evidenced by the issuance of additional shares of Series C Preferred at
a conversion price equal to the lower of $6.25 or the then fair market value of
the Company's Common Stock.
Any amounts of the Liquidity Commitment not utilized by the Company are
available to the Company through July 1, 2001, upon satisfaction of certain
conditions, to fund growth (the "Growth Equity Commitment"). Draws under the
Growth Equity Commitment will be evidenced by Common Stock issued at the then
fair market value less a discount agreed to by Explorer and the Company
representing the customary discount applied in rights offerings to an issuer's
existing security holders, or, if not agreed, 6%. Draws under the Growth Equity
Commitment will reduce the amounts available under the Liquidity Commitment.
Following the drawing in full of the Growth Equity Commitment or upon expiration
of the initial Growth Equity Commitment, Explorer will have the option to
provide up to an additional $50.0 million to fund growth for an additional
twelve month period (the "Increased Growth Equity Commitment"). Draws under the
Increased Growth Equity Commitment will be subject to the same conditions as
applied to the Growth Equity Commitment and the Common Stock so issued will be
priced in the same manner described above.
If Explorer exercises its option to fund the Increased Growth Equity
Commitment, the Company will have the option to engage in a Rights Offering
to all common stockholders other than Explorer and its Affiliates. In the
Rights Offering, stockholders will be entitled to acquire their proportionate
share of the Common Stock issued in connection with the Growth Equity
Commitment at the same price paid by Explorer. Proceeds received from the
Rights Offering will be used to repurchase Common Stock issued to Explorer
under the Growth Equity Commitment.
Upon the first to occur of the drawing in full of the Increased Growth
Equity Commitment or the expiration of the Increased Growth Equity Commitment,
the Company will again have the option to engage in a second Rights Offering.
Stockholders (other than Explorer and its Affiliates) will be entitled to
acquire their proportionate share of the Common Stock issued in connection with
the Increased Growth Equity Commitment at the same price paid by Explorer.
Proceeds received in connection with the second Rights Offering will be used to
repurchase Common Stock issued to Explorer under the Increased Growth Equity
Commitment.
In connection with obtaining stockholder approval of the issuance of
the capital stock to be issued to Explorer in the subject transaction,
stockholders will be asked to elect to the Company's Board of Directors four
nominees designated by Explorer. A fifth "independent" director nominee,
mutually determined by the Company and Explorer will also be nominated for
election to the Company's Board of Directors. The remaining four directors will
be comprised of individuals, including Essel W. Bailey, Jr., Chairman and Chief
Executive Officer, designated by the incumbent directors and acceptable to
Explorer.
The Investment Agreement contains representations, warranties and
indemnification provisions customary for a transaction of this nature. The
consummation of the contemplated transaction is subject to the completion of the
new $175 million secured credit facility with Fleet Bank, N.A., a waiver from
one of the Company's lenders and compensation and severance arrangements with
members of the Company's senior management team, in each case on terms
acceptable to Explorer, as well as other customary closing conditions, and
therefore the completion of the transaction cannot be assured.
15
The Company has agreed not to solicit or enter into discussions
regarding an Alternative Proposal, provided that the Company may consider an
unsolicited proposal that the Board of Directors determines in good faith is
reasonably likely to result in a Superior Proposal. The Company has agreed to
pay Explorer $6.0 million (the "Termination Fee") if the transaction is
terminated under certain circumstances, including termination in connection with
the acceptance of a Superior Proposal (as defined in the Investment Agreement).
Under certain circumstances, the Company will be required to pay Explorer the
Termination Fee if an Alternative Proposal results in a transaction within 18
months following termination. The Company has agreed to reimburse Explorer for
up to $2.5 million in out-of-pocket expenses.
Stockholders Agreement: In connection with the Equity Investment,
-----------------------
the Company will enter into a Stockholders Agreement with Explorer pursuant
to which Explorer will be entitled to designate up to four members of the
Company's Board of Directors depending on the percentage of either Series C
Preferred or total Voting Securities acquired from time to time by Explorer
pursuant to the Investment Agreement. The director designation rights will
terminate upon the first to occur of the tenth anniversary of the Stockholders
Agreement or when Explorer beneficially owns less than 5% of the total Voting
Securities of the Company.
In addition, Explorer will agree not to transfer any shares of Series C
Preferred (or the Common Stock issuable upon conversion of the Series C
Preferred) without board approval until the first anniversary of Explorer's
initial investment. Thereafter, Explorer will be permitted to transfer shares in
accordance with certain exemptions from the registration requirements imposed by
the Securities Act of 1933, as amended, or upon exercise of certain registration
rights granted to Explorer by the Company and set forth in a Registration Rights
Agreement (a "Public Sale"). After July 1, 2001, Explorer will be permitted to
transfer its Voting Securities to a Qualified Institutional Buyer ("QIB") if
either (i) the total amount of Voting Securities does not exceed 9.9% of the
Company's total Voting Securities or (ii) the QIB transferee becomes a party to
the standstill agreement contained in the Stockholders Agreement. Any transfer
of Voting Securities by Explorer or its Affiliates (other than in connection
with a Public Sale) is subject to a right of first offer that can be exercised
by the Company or any other purchaser that the Company may designate. These
transfer restrictions will terminate on the fifth anniversary of Explorer's
initial investment.
Pursuant to the standstill provisions in the Stockholders Agreement,
Explorer has agreed that until the fifth anniversary of the consummation of
Explorer's initial investment, it will not acquire, without the prior approval
of the Company's Board of Directors, beneficial ownership of any Voting
Securities (other than pursuant to the Liquidity Commitment, the Growth Equity
Commitment and the Increased Growth Equity Commitment and additional
acquisitions of up to 5% of the Company's Voting Securities). In the event that
Explorer or its Affiliates beneficially own Voting Securities representing more
than 49.9% of the total voting power of the Company, the terms of the Series C
Preferred and the Stockholders Agreement provide that no holder of Series C
Preferred shall be entitled to vote any shares of Series C Preferred that would
result in such holder, together with its affiliates, voting in excess of 49.9%
16
of the then outstanding voting power of the Company. In addition, shares of
Series C Preferred cannot be converted to the extent that such conversion would
cause the converting stockholder to beneficially own in excess of 49.9% of the
then outstanding voting power of the Company.
The Company has amended its Stockholders' Right Plan to exempt
Explorer and any of its transferees that become parties to the standstill as
Acquiring Persons under such plan. Subsequent acquisitions of Voting Securities
by a transferee of more than 9.9% of Voting Securities from Explorer are limited
to not more than 2% of the total amount of outstanding Voting Securities in any
12 month period.
Miscellaneous: The Company has agreed to indemnify Explorer, its
--------------
Affiliates and the individuals that will serve as directors of the Company
against any losses and expenses that may be incurred as a result of the
assertion of certain claims, provided that the conduct of the indemnified
parties meets certain required standards. In addition, the Company has agreed
to pay Explorer an advisory fee if Explorer provides assistance to the Company
in connection with evaluating growth opportunities or other financing matters.
The amount of the advisory fee will be mutually determined by the Company and
Explorer at the time the services are rendered based upon the nature and extent
of the services provided. The Company will also reimburse Explorer on or
before closing for Explorer's out-of-pocket expenses, up to a maximum of
$2.5 million, incurred in connection with the Equity Investment.
Credit Facilities
- -----------------
Depending on the availability and cost of external capital, the Company
anticipates making additional investments in healthcare facilities. New
investments generally are funded from temporary borrowings under the Company's
acquisition credit line agreements. Interest cost incurred by the Company on
borrowings under the revolving credit line facilities will vary depending upon
fluctuations in prime and/or LIBOR rates. With respect to the unsecured
acquisition credit line, interest rates depend in part upon changes in the
Company's ratings by national agencies, which were significantly downgraded
during 2000. The term of the $200.0 million unsecured facility expires on
September 30, 2000. Borrowings under the facility bear interest at LIBOR plus
1.5% or, at the Company's option, at the prime rate. On May 5, 2000, the Company
completed negotiations with its bank group to replace its $200.0 million
unsecured revolving credit facility with a new $175.0 million secured revolving
credit facility that expires in December 2002. The Company was not in compliance
with certain financial covenants under the subject facility and, as a result,
borrowings thereunder are currently prohibited. The Company has received waivers
of these covenant defaults under the existing facility through June 29 to permit
completion of documentation for the new facility. Borrowings under the new
facility will bear interest at 3.25% over LIBOR until March 31, 2001. Additional
borrowings under the $175 million credit facility will not be available until
the Company has provided for repayment of the $48.0 convertible notes maturing
in February 2001 and has received at least $75.0 million of new equity pursuant
to the Equity Investment. The Company also has a $50 million secured revolving
credit facility with a group of banks under which borrowings bear interest at
LIBOR plus 2.00% or, at the Company's option, at the prime rate.
The Company has historically replaced funds drawn on the revolving
credit facilities through fixed-rate long-term borrowings, the placement of
17
convertible debentures, or the issuance of additional shares of common and/or
preferred stock. Industry turmoil and continuing adverse economic conditions
affecting the long-term care industry cause the terms on which the Company can
obtain additional borrowings to become unfavorable. If the Company is in need of
capital to repay indebtedness as it matures, the Company may be required to
liquidate properties at times which may not permit realization of maximum
recovery in such investments. In recent periods, the Company's ability to
execute this strategy has been severely limited by conditions in the credit and
capital markets and the long-term care industry.
Year 2000 Compliance
The Company is not aware of any significant adverse effects of Year 2000 on
its systems and operations.
18
Item 3 - Market Risk
The Company is exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. The Company does not enter into
derivatives or other financial instruments for trading or speculative purposes.
The Company seeks to mitigate the effects of fluctuations in interest rates by
matching the term of new investments with new long-term fixed rate borrowing to
the extent possible.
The market value of the Company's long-term fixed rate borrowings and
mortgages are subject to interest rate risk. Generally, the market value of
fixed rate financial instruments will decrease as interest rates rise and
increase as interest rates fall. The estimated fair value of the Company's total
long-term borrowings at March 31, 2000 was $299 million. A 1% increase in
interest rates would result in a decrease in fair value of long-term borrowings
by approximately $6.5 million.
The Company is subject to risks associated with debt or preferred equity
financing, including the risk that existing indebtedness may not be refinanced
or that the terms of such refinancing may not be as favorable as the terms of
current indebtedness. If the Company were unable to refinance its indebtedness
on acceptable terms, it might be forced to dispose of properties on
disadvantageous terms, which might result in losses to the Company and might
adversely affect the cash available for distribution to shareholders. If
interest rates or other factors at the time of the refinancing result in higher
interest rates upon refinancing, the Company's interest expense would increase,
which might affect the Company's ability to make distributions on its Common
Stock. Dividends on the Company's Common Stock have been suspended pending
completion of the Equity Investment.
The majority of the Company's borrowings were completed pursuant to
indentures which limit the amount of indebtedness the Company may incur.
Accordingly, in the event that the Company is unable to raise additional equity
or borrow money because of these limitations, the Company's ability to acquire
additional properties may be limited. If the Company is unable to acquire
additional properties, its ability to increase the distributions with respect to
common shares will be limited to management's ability to increase funds from
operations, and thereby cash available for distribution, from the existing
properties in the Company's portfolio.
Potential Risks from Bankruptcies
Generally, the Company's lease arrangements with a single operator who
operates more than one of the Company's facilities is pursuant to a single
master lease (a "Master Lease" or collectively, the "Master Leases"). Although
each lease or Master Lease provides that the Company may terminate the Master
Lease upon the bankruptcy or insolvency of the tenant, the Bankruptcy Reform Act
of 1978 ("Bankruptcy Code") provides that a trustee in a bankruptcy or
reorganization proceeding under the Bankruptcy Code (or debtor-in-possession in
a reorganization under the Bankruptcy Code) has the power and the option to
assume or reject the unexpired lease obligations of a debtor-lessee. 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
19
if a debtor-lessee in reorganization were required to perform certain provisions
of a lease that the court determined to be unduly burdensome. It is not possible
to determine at this time whether or not any lease or Master Lease contains any
such provisions. If a lease is rejected, the lessor has a general unsecured
claim limited to any unpaid rent already due plus an amount equal to the rent
reserved under the lease, without acceleration, for the greater of one year or
15% of the remaining term of such lease, not to exceed three years. If any lease
is rejected, the Company may also lose the benefit of any participation interest
or conversion right.
Generally, with respect to the Company's mortgage loans, the imposition of
an automatic stay under the Bankruptcy Code precludes lenders from exercising
foreclosure or other remedies against the debtor. A mortgagee also is treated
differently from a landlord in three key respects. First, the mortgage loan is
not subject to assumption or rejection because it is not an executory contract
or a lease. Second, the mortgagee's loan may be divided into (1) a secured loan
for the portion of the mortgage debt that does not exceed the value of the
property and (2) a general unsecured loan for the portion of the mortgage debt
that exceeds the value of the property. A secured creditor such as the Company
is entitled to the recovery of interest and costs only if and to the extent that
the value of the collateral exceeds the amount owed. If the value of the
collateral is less than the debt, a lender such as the Company would not receive
or be entitled to any interest for the time period between the filing of the
case and confirmation. If the value of the collateral does exceed the debt,
interest and allowed costs may not be paid during the bankruptcy proceeding, but
accrue until confirmation of a plan or reorganization or some other time as the
court orders. Finally, while a lease generally would either be rejected or
assumed with all of its benefits and burdens intact, the terms of a mortgage,
including the rate of interest and timing of principal payments, may be modified
if the debtor is able to effect a "cramdown" under the Bankruptcy Code.
The receipt of liquidation proceeds or the replacement of an operator that
has defaulted on its lease or loan could be delayed by the approval process of
any federal, state or local agency necessary for the transfer of the property or
the replacement of the operator licensed to manage the facility. In addition,
certain significant expenditures associated with real estate investment (such as
real estate taxes and maintenance costs) are generally not reduced when
circumstances cause a reduction in income from the investment. In order to
protect its investments, the Company may take possession of a property or even
become licensed as an operator, which might expose the Company to successorship
liability to government programs or require indemnity of subsequent operators to
whom it might transfer the operating rights and licenses. Should such events
occur, the Company's income and cash flows from operations would be adversely
affected.
20
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following Exhibits are filed herewith:
Exhibit Description
------- -----------
4.1 First Amendment to the Omega Healthcare Investors,
Inc. 1993 Stock Option and Restricted Stock Plan As
Amended and Restated
4.2 Amendment No. 1, dated May 11, 2000 to Rights Agreement,
dated as of May 12, 1999, between Omega Healthcare
Investors, Inc. and First Chicago Trust Company, as
Rights Agent
10.1 Change in Control Agreement, dated March 22, 2000, by
and between Omega Healthcare Investors, Inc. and
certain of the Company's Officers
10.2 Investment Agreement, dated as of May 11, 2000, by
and among Omega Healthcare Investors, Inc. and
Explorer Holdings, L.P., including Exhibit A thereto
(Form of Articles Supplementary for Series C
Convertible Preferred Stock), Exhibit B thereto
(Form of Additional Equity Financing) and Exhibit C
thereto (Form of Stockholders Agreement)
10.3 Agreement of Sale and Purchase dated May 12, 2000,
by and between Omega Healthcare Investors, Inc.
and Tenet Healthsystem Philadelphia, Inc.
27 Financial Data Schedule
(b) Reports on Form 8-K - None were filed.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
Registrant
Date: May 19, 2000 By: /s/ESSEL W. BAILEY, JR.
------------------------
Essel W. Bailey, Jr.
President
Date: May 19, 2000 By: /s/DAVID A. STOVER
-------------------
David A. Stover
Chief Financial Officer
22