UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
---
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-11316
OMEGA HEALTHCARE
INVESTORS, INC.
(Exact name of Registrant as specified in its charter)
Maryland 38-3041398
(State of Incorporation) (I.R.S. Employer Identification No.)
900 Victors Way, Suite 350, Ann Arbor, MI 48108
(Address of principal executive offices)
(734) 887-0200
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of June 30, 2001
Common Stock, $.10 par value 20,066,142
(Class) (Number of shares)
OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
June 30, 2001
INDEX
Page No.
--------
PART I Financial Information
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets
June 30, 2001 (unaudited)
and December 31, 2000 ................................... 2
Statements of Operations (unaudited)
Three-month and Six-month periods ended
June 30, 2001 and 2000 .................................. 3
Statements of Cash Flows (unaudited)
Six-month period ended
June 30, 2001 and 2000 .................................. 4
Notes to Condensed Consolidated Financial Statements
June 30, 2001 (unaudited) ............................... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ..............................................21
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......27
PART II Other Information
Item 1. Legal Proceedings ................................................28
Item 2. Changes in Securities and Use of Proceeds ........................28
Item 3. Defaults Upon Senior Securities ..................................28
Item 4. Submission of Matters to a Vote of Security Holders ..............29
Item 6. Exhibits and Reports on Form 8-K .................................31
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
2001 2000
---- ----
(Unaudited) (See Note)
ASSETS
Real estate properties
Land and buildings at cost ........................... $ 702,836 $ 710,542
Less accumulated depreciation ........................ (97,707) (89,870)
------- -------
Real estate properties - net ................. 605,129 620,672
Mortgage notes receivable - net ...................... 180,768 206,710
------- -------
785,897 827,382
Other investments ......................................... 55,709 53,242
------ ------
841,606 880,624
Assets held for sale - net ................................ 5,698 4,013
----- -----
Total Investments .................................... 847,304 884,637
Cash and cash equivalents ................................. 10,795 7,172
Accounts receivable ....................................... 17,032 10,497
Other assets .............................................. 5,220 9,338
Operating assets for owned properties ..................... 41,463 36,807
------ ------
Total Assets ......................................... $ 921,814 $ 948,451
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Revolving lines of credit ................................. $ 198,641 $ 185,641
Unsecured borrowings ...................................... 203,527 225,000
Other long-term borrowings ................................ 23,525 24,161
Subordinated convertible debentures ....................... - 16,590
Accrued expenses and other liabilities .................... 22,944 18,002
Operating liabilities for owned properties ................ 13,482 14,744
------ ------
Total Liabilities .................................... 462,119 484,138
Preferred Stock ........................................... 212,342 207,500
Common stock and additional paid-in capital ............... 440,382 440,556
Cumulative net earnings ................................... 173,128 182,548
Cumulative dividends paid ................................. (365,654) (365,654)
Unamortized restricted stock awards ....................... (284) (607)
Accumulated other comprehensive loss ...................... (219) (30)
------ -----
Total Shareholders' Equity ........................... 459,695 464,313
------- -------
Total Liabilities and Shareholders' Equity ........... $ 921,814 $ 948,451
========= =========
Note - The balance sheet at December 31, 2000, has been derived from the
audited consolidated financial statements at that date but does not
include all of the information and footnotes required by generally
accepted accounting principles in the United States 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 Six Months Ended
June 30, June 30,
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues
Rental income .......................................... $ 14,729 $ 16,268 $ 30,750 $ 34,270
Mortgage interest income ............................... 5,535 5,912 11,213 11,912
Other investment income - net .......................... 1,008 1,926 2,266 3,622
Nursing home revenues of owned and operated assets ..... 43,796 46,076 89,793 77,501
Miscellaneous .......................................... 586 266 809 357
---- ---- ---- ----
65,654 70,448 134,831 127,662
Expenses
Nursing home expenses of owned and operated assets ..... 43,676 46,919 90,126 77,884
Depreciation and amortization .......................... 5,504 5,818 11,045 11,728
Interest ............................................... 9,243 11,277 18,915 22,375
General and administrative ............................. 3,155 1,212 5,504 2,801
Legal .................................................. 766 472 1,717 493
State taxes ............................................ 107 113 213 226
Litigation settlement expense .......................... 10,000 - 10,000 -
Provision for impairment ............................... 8,381 - 8,381 4,500
Provision for uncollectable accounts ................... 681 - 681 -
Severance and consulting agreement costs ............... 466 - 466 -
Charges for derivative accounting ...................... 70 - 552 -
---- ---- ---- ----
82,049 65,811 147,600 120,007
------ ------ ------- -------
(Loss) earnings before (loss) gain on assets sold and gain
on early extinguishment of debt ...................... (16,395) 4,637 (12,769) 7,655
(Loss) gain on assets sold - net ........................ (7) 10,451 612 10,451
Gain on early extinguishment of debt ..................... 2,489 - 2,737 -
----- ----- ----- -----
Net (loss) earnings ...................................... (13,913) 15,088 (9,420) 18,106
Preferred stock dividends ................................ (5,029) (2,408) (9,937) (4,816)
------ ------ ------ ------
Net (loss) earnings available to common .................. $ (18,942) $ 12,680 $ (19,357) $ 13,290
========= ========= ========= =========
(Loss) Earnings per common share:
Net (loss) earnings per share - basic .................. $ (0.95) $ 0.63 $ (0.97) $ 0.66
======== ======== ======== ========
Net (loss) earnings per share - diluted ................ $ (0.95) $ 0.63 $ (0.97) $ 0.66
======== ======== ======== ========
Dividends declared and paid per common share ............. $ - $ - $ - $ 0.50
======== ======== ======= =========
Weighted Average Shares Outstanding, Basic ............... 20,013 20,129 20,013 20,055
====== ====== ====== ======
Weighted Average Shares Outstanding, Diluted ............. 20,013 20,129 20,013 20,055
====== ====== ====== ======
Other comprehensive income (loss):
Unrealized Gain (Loss) on Omega Worldwide, Inc. ........ $ 247 $ (873) $ 247 $ (1,199)
======== ======== ======== ========
Unrealized Loss on Hedging Contracts ................... $ (82) $ - $ (436) $ -
======== ======== ========= ========
Total comprehensive (loss) income ........................ $ (13,748) $ 14,215 $ (9,609) $ 16,907
======== ======== ======== ========
See notes to condensed consolidated financial statements.
3
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
Six Months Ended
June 30,
2001 2000
---- ----
Operating activities
Net (loss) earnings .............................................. $ (9,420) $ 18,106
Adjustment to reconcile net earnings to cash
provided by operating activities:
Depreciation and amortization ................................ 11,045 11,728
Provision for impairment ..................................... 8,381 4,500
Provision for collection losses .............................. 681 2,937
Gain on assets sold - net .................................... (612) (10,451)
Gain on early extinguishment of debt ......................... (2,737) -
Other ........................................................ 630 1,034
Net change in accounts receivable for Owned & Operated assets - net (3,474) (15,929)
Net change in accounts payable for Owned & Operated assets ........ (2,796) 4,777
Net change in other Owned & Operated assets and liabilities ....... 1,961 (17,621)
Net change in operating assets and liabilities .................... 3,108 (6,403)
----- ------
Net cash provided by (used in) operating activities ............... 6,767 (7,322)
Cash flows from financing activities
Proceeds of revolving lines of credit - net ....................... 13,000 10,400
Payments of long-term borrowings .................................. (38,699) (148)
Receipts from Dividend Reinvestment Plan .......................... 20 367
Dividends paid .................................................... - (14,816)
Deferred financing costs paid ..................................... (698) -
Other ............................................................. (45) -
---- ----
Net cash used in financing activities ............................. (26,422) (4,197)
Cash flow from investing activities
Proceeds from sale of real estate investments - net ............... 1,364 35,093
Fundings of other investments - net ............................... (465) (4,200)
Collection of mortgage principal .................................. 22,379 1,242
------ -----
Net cash provided by investing activities ......................... 23,278 32,135
------ ------
Increase in cash and cash equivalents ............................. 3,623 20,616
Cash and cash equivalents at beginning of period .................. 7,172 4,105
----- -----
Cash and cash equivalents at end of period ........................ $ 10,795 $ 24,721
======== ========
See notes to condensed consolidated financial statements.
4
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2001
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 in the United States
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) considered necessary for a fair presentation have been
included. Certain reclassifications have been made to the 2000 financial
statements for consistency with the current presentation. Such reclassifications
have no effect on previously reported earnings or equity. Operating results for
the three-month and six-month periods ended June 30, 2001 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2001. 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, 2000.
Note B - Properties
In the ordinary course of its business activities, the Company periodically
evaluates investment opportunities and extends credit to customers. It also
regularly engages in lease and loan extensions and modifications. Additionally,
the Company actively monitors and manages its investment portfolio with the
objectives of improving credit quality and increasing returns. In connection
with portfolio management, the Company engages in various collection and
foreclosure activities.
When the Company acquires real estate pursuant to a foreclosure, lease
termination or bankruptcy proceeding, and does not immediately re-lease the
properties to new operators, the assets are included on the balance sheet as
"real estate properties," and the value of such assets is reported at the lower
of cost or fair value. (See "Owned and Operated Assets" below). Additionally,
when a formal plan to sell real estate is adopted, the real estate is classified
as "Assets Held for Sale," with the net carrying amount adjusted to the lower of
cost or fair value, less cost of disposal.
Based on management's current review of the Company's portfolio, a
provision for impairment on the value of assets held for sale of $8.4 million
was recorded for the three-month and six-month periods ended June 30, 2001. This
provision relates to additional properties that were added to Assets Held for
Sale during the three-month period ended June 30, 2001 as a result of the
5
foreclosure of assets leased by a defaulting customer during the quarter. A
provision for impairment in the value of the Assets Held for Sale of $4.5
million was recorded for the six-month period ended June 30, 2000.
A summary of the number of properties by category for the quarter ended
June 30, 2001 follows:
Total
Purchase / Owned & Healthcare Held for
Facility Count Leaseback Mortgages Operated Facilities Sale Total
--------- --------- -------- ---------- ---- -----
Balance at March 31, 2001 ................ 132 63 66 261 3 264
Properties transferred to Held for Sale .. (3) - (4) (7) 7 -
Properties transferred to Owned & Operated (3) (1) 4 - - -
Properties Sold / Mortgages Paid ......... - (5) - (5) (1) (6)
Properties Leased / Mortgages Placed ..... 3 - (3) - - -
--------------------------------------------------------------------
Balance at June 30, 2001 ................. 129 57 63 249 9 258
====================================================================
Gross Investment ($000's)
Balance at March 31, 2001 ................ $ 579,937 $ 206,774 $ 130,053 $ 916,764 $ 3,547 $ 920,311
Properties transferred to Held for Sale .. (11,499) - (1,043) (12,542) 12,542 -
Properties transferred to Owned & Operated (9,133) (4,349) 13,482 - - -
Properties Sold / Mortgages Paid ......... - (21,958) - (21,958) (156) (22,114)
Properties Leased / Mortgages Placed ..... 22,163 - (22,163) - - -
Impairment ............................... - - - - (8,344) (8,344)
Capex and other .......................... - 301 1,039 1,340 (1,891) (551)
-------------------------------------------------------------------------
Balance at June 30, 2001 ................. $ 581,468 $ 180,768 $ 121,368 $ 883,604 $ 5,698 $ 889,302
=========================================================================
Real Estate Dispositions
The Company disposed of an Indiana facility during the three-month period
ended June 30, 2001. The facility had a total of 40 beds and was classified as
Assets Held for Sale. During the three-month period ended June 30, 2000, the
Company recognized a gain on disposition of assets of $11.1 million from the
sale of four facilities previously leased to Tenet Healthsystem Philadelphia,
Inc., offset by a loss of $0.6 million on the sale of a 57 bed facility in
Colorado.
Notes and Mortgages Receivable
Income on notes and mortgages which are impaired will be recognized as cash
is received. No provision for loss on mortgages or notes receivable was recorded
during the six-month periods ended June 30, 2001 and 2000.
Owned and Operated Assets
The Company owns 63 facilities that were recovered from customers and are
operated for the Company's own account. These facilities have 4,942 beds and are
located in nine states. During the three-month period ended June 30, 2001, four
of the Company's previously Owned and Operated facilities were closed and
reclassified to Assets Held for Sale, four foreclosure facilities were added to
Owned and Operated and three facilities were re-leased to a new operator.
6
The Company intends to operate these owned and operated assets for its own
account until such time as these facilities' operations are stabilized and are
re-leasable or saleable at lease rates or sale prices that maximize the value of
these assets to the Company. Due to the deterioration in market conditions
affecting the long term care industry, the Company is unable to estimate when
such re-leasing and sales objectives might be achieved and now intends to
operate such facilities for an extended period. As a result, these facilities
and their respective operations are presented on a consolidated basis in the
Company's financial statements.
The revenues, expenses, assets and liabilities included in the Company's
condensed consolidated financial statements which relate to such owned and
operated assets (2) are as follows:
Unaudited
(In Thousands)
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues (1)
Medicaid ........................ $ 26,321 $ 26,834 $ 53,561 $ 46,359
Medicare ........................ 11,324 6,495 22,514 13,250
Private & Other ................. 6,151 12,747 13,718 17,892
----- ------ ------ ------
Total Revenues .............. 43,796 46,076 89,793 77,501
Expenses
Patient Care Expenses ........... 29,568 27,729 62,721 50,103
Administration .................. 7,642 12,763 14,177 17,442
Property & Related .............. 2,746 2,576 5,960 4,871
----- ----- ----- -----
Total Expenses .............. 39,956 43,068 82,858 72,416
Contribution Margin ............. 3,840 3,008 6,935 5,085
Management Fees ................. 2,418 2,281 4,867 3,898
Rent ............................ 1,302 1,570 2,401 1,570
----- ----- ----- -----
Net Operating Income (Loss) ..... $ 120 $ (843) $ (333) $ (383)
======== ======== ======== ========
(1) Nursing home revenues from these owned and operated assets
are recognized as services are provided.
(2) The amounts shown in the condensed consolidated financial
statements are not comparable, as the number of Owned and
Operated facilities and the timing of the foreclosures and re-
leasing activities occurred at different times during the
periods presented.
7
Unaudited
(In Thousands)
June 30, December 31,
2001 2000
---- ----
ASSETS
Cash ....................................... $ 5,045 $ 5,364
Accounts Receivable - Net .................. 33,504 30,030
Other Current Assets ....................... 6,349 5,098
----- -----
Total Current Assets ....................... 44,898 40,492
Investment in leasehold .................... 1,610 1,679
Land and Buildings ......................... 121,368 130,601
Less Accumulated Depreciation .............. (17,224) (17,680)
------- -------
Land and Buildings - Net ................... 104,144 112,921
------- -------
TOTAL ASSETS ............................... $ 150,652 $ 155,092
========= =========
LIABILITIES
Accounts Payable ........................... $ 5,841 $ 8,636
Other Current Liabilities .................. 7,641 6,108
----- -----
Total Current Liabilities .................. 13,482 14,744
------ ------
TOTAL LIABILITIES .......................... $ 13,482 $ 14,744
========= =========
Assets Held for Sale
At June 30, 2001, the carrying value of assets held for sale totals $5.7
million (net of impairment reserves of $16.3 million). The Company intends to
sell the remaining facilities as soon as practicable. However, a number of other
companies are actively marketing portfolios of similar assets and, in light of
the existing conditions in the long-term care industry generally, it has become
more difficult to sell such properties and for potential buyers to obtain
financing for such acquisitions. Thus, there can be no assurance if or when such
sales will be completed or whether such sales will be completed on terms that
allow the Company to realize the fair value of the assets.
8
Segment Information
The following tables set forth the reconciliation of operating results and
total assets for the Company's reportable segments for the three and six-month
periods ended June 30, 2001 and 2000.
For the three months ended June 30, 2001
----------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
---------- -------- --------- ------------
(In Thousands)
Operating Revenues ......................... $ 20,264 $ 43,796 $ - $ 64,060
Operating Expenses ......................... - (43,676) - (43,676)
----- ------- ------ -------
Net operating income ..................... 20,264 120 - 20,384
Adjustments to arrive at net income:
Other revenues ........................... - - 1,594 1,594
Interest expense ......................... - - (9,243) (9,243)
Depreciation and amortization ............ (4,344) (936) (224) (5,504)
General and administrative ............... - - (3,155) (3,155)
Legal .................................... - - (766) (766)
State Taxes .............................. - - (107) (107)
Litigation settlement expense ............ - - (10,000) (10,000)
Severance and consulting agreement costs . - - (466) (466)
Provision for uncollectable accounts ..... (681) - - (681)
Provision for impairment ................. - - (8,381) (8,381)
Charges for derivative accounting ........ - - (70) (70)
---- ---- ---- ----
(5,025) (936) (30,818) (36,779)
------ ---- ------- -------
Income (loss) before gain on assets sold and
gain on early extinguishment of debt .... 15,239 (816) (30,818) (16,395)
Gain on assets sold - net .................. - (7) - (7)
Gain on early extinguishment of debt ....... - - 2,489 2,489
Preferred dividends ........................ - - (5,029) (5,029)
----- ----- ------ ------
Net income (loss) available to common ...... $ 15,239 $ (823) $ (33,358) $ (18,942)
========= ========= ========= =========
Total Assets ............................... $ 681,754 $ 156,350 $ 83,710 $ 921,814
========= ========= ========= =========
9
For the three months ended June 30, 2000
----------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
---------- -------- --------- ------------
(In Thousands)
Operating Revenues .................. $ 22,180 $ 46,076 $ - $ 68,256
Operating Expenses .................. - (46,919) - (46,919)
----- ------- ----- -------
Net operating income .............. 22,180 (843) - 21,337
Adjustments to arrive at net income:
Other revenues .................... - - 2,192 2,192
Interest expense .................. - - (11,277) (11,277)
Depreciation and amortization ..... (4,489) (964) (365) (5,818)
General and administrative ........ - - (1,212) (1,212)
Legal ............................. - - (472) (472)
State Taxes ....................... - - (113) (113)
Provision for impairment .......... - - - -
----- ---- ----- -----
(4,489) (964) (11,247) (16,700)
------ ---- ------- -------
Earnings (loss) ..................... 17,691 (1,807) (11,247) 4,637
Gain on Assets Sold ................. 10,451 - - 10,451
Preferred dividends ................. - - (2,408) (2,408)
----- ----- ------ ------
Net income (loss) available to common $ 28,142 $ (1,807) $ (13,655) $ 12,680
=========== =========== =========== ===========
Total Assets ........................ $ 730,081 $ 167,631 $ 140,235 $ 1,037,947
=========== =========== =========== ===========
10
For the six months ended June 30, 2001
--------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
---------- -------- --------- ------------
(In Thousands)
Operating Revenues ......................... $ 41,963 $ 89,793 $ - $ 131,756
Operating Expenses ......................... - (90,126) - (90,126)
----- ------- ----- -------
Net operating income ..................... 41,963 (333) - 41,630
Adjustments to arrive at net income:
Other revenues ........................... - - 3,075 3,075
Interest expense ......................... - - (18,915) (18,915)
Depreciation and amortization ............ (8,668) (1,932) (445) (11,045)
General and administrative ............... - - (5,504) (5,504)
Legal .................................... - - (1,717) (1,717)
State Taxes .............................. - - (213) (213)
Litigation settlement expense ............ - - (10,000) (10,000)
Severance and consulting agreement costs . - - (466) (466)
Provision for uncollectable accounts ..... (681) - - (681)
Provision for impairment ................. - - (8,381) (8,381)
Charges for derivative accounting ........ - - (552) (552)
----- ----- ---- ----
(9,349) (1,932) (43,118) (54,399)
------ ------ ------- -------
Income (loss) before gain on assets sold and
gain on early extinguishment of debt .... 32,614 (2,265) (43,118) (12,769)
Gain on assets sold - net .................. - 612 - 612
Gain on early extinguishment of debt ....... - - 2,737 2,737
Preferred dividends ........................ - - (9,937) (9,937)
----- ----- ------ ------
Net income (loss) available to common ...... $ 32,614 $ (1,653) $ (50,318) $ (19,357)
========= ========= ========= =========
Total Assets ............................... $ 681,754 $ 156,350 $ 83,710 $ 921,814
========= ========= ========= =========
11
For the six months ended June 30, 2000
--------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
---------- -------- --------- ------------
(In Thousands)
Operating Revenues .................. $ 46,182 $ 77,501 $ - $ 123,683
Operating Expenses .................. - (77,884) - (77,884)
----- ------- ------ -------
Net operating income .............. 46,182 (383) - 45,799
Adjustments to arrive at net income:
Other revenues .................... - - 3,979 3,979
Interest expense .................. - - (22,375) (22,375)
Depreciation and amortization ..... (9,420) (1,578) (730) (11,728)
General and administrative ........ - - (2,801) (2,801)
Legal ............................. - - (493) (493)
State Taxes ....................... - - (226) (226)
Provision for impairment .......... - - (4,500) (4,500)
----- ----- ------ ------
(9,420) (1,578) (27,146) (38,144)
------ ------ ------- -------
Earnings (loss) ..................... 36,762 (1,961) (27,146) 7,655
Gain on Assets Sold ................. 10,451 - - 10,451
Preferred dividends ................. - - (4,816) (4,816)
----- ----- ------ ------
Net income (loss) available to common $ 47,213 $ (1,961) $ (31,962) $ 13,290
=========== =========== =========== ===========
Total Assets ........................ $ 730,081 $ 167,631 $ 140,235 $ 1,037,947
=========== =========== =========== ===========
Note C - Concentration of Risk and Related Issues
As of June 30, 2001, the Company's portfolio of domestic investments
consisted of 249 healthcare facilities, located in 29 states and operated by 31
third-party operators. The Company's gross investments in these facilities
totaled $883.6 million at June 30, 2001. This portfolio is made up of 127
long-term healthcare facilities and 2 rehabilitation hospitals owned and leased
to third parties, fixed rate, participating and convertible participating
mortgages on 57 long-term healthcare facilities and 52 long-term healthcare
facilities that were recovered from customers and are currently operated through
third-party management contracts for the Company's own account. In addition, 12
facilities subject to third-party leasehold interests are included in Other
Investments. The Company also holds miscellaneous investments and closed
healthcare facilities held for sale of approximately $63.0 million at June 30,
2001, including $22.3 million related to two non-healthcare facilities leased by
the United States Postal Service, an $8.6 million investment in Omega Worldwide,
Inc., Principal Healthcare Finance Limited, an Isle of Jersey (United Kingdom)
company and Principal Healthcare Finance Trust, an Australian Unit Trust, and
$15.7 million of notes receivable.
Seven public companies operate approximately 74.0% of the Company's
investments, including Sun Healthcare Group, Inc. (24.7%), Integrated Health
Services, Inc. (18.2%, including 10.8% as the manager for and 50% owner of Lyric
Health Care LLC), Advocat, Inc. (12.0%), Mariner Post-Acute Network (6.2%),
12
Kindred Healthcare, Inc. (formerly known as Vencor Operating, Inc.) (6.0%),
Alterra Healthcare Corporation (3.9%), and Genesis Health Ventures, Inc. (3.0%).
Kindred and Genesis manage facilities for the Company's own account, included in
Owned & Operated Assets. The two largest private operators represent 3.5% and
2.5%, respectively, of investments. No other operator represents more than 2.5%
of investments. The three states in which the Company has its highest
concentration of investments are Florida (16.1%), California (7.6%) and Illinois
(7.5%).
Government Healthcare Regulation, Reimbursements and Industry
Concentration Risks
Nearly all of the Company's properties are used as healthcare facilities,
therefore, the Company is directly affected by the risk associated with the
healthcare industry. The Company's lessees and mortgagors, as well as the
facilities owned and operated for the Company's account, derive a substantial
portion of their net operating revenues from third-party payers, including the
Medicare and Medicaid programs. Such programs are highly regulated and subject
to frequent and substantial changes. In addition, private payers, including
managed care payers, are increasingly demanding discounted fee structures and
the assumption by healthcare providers of all or a portion of the financial risk
of operating a healthcare facility. Any changes in reimbursement policies which
reduce reimbursement levels could adversely affect revenues of the Company's
lessees and borrowers and thereby adversely affect those lessees' and borrowers'
abilities to make their monthly lease or debt payments to the Company.
The possibility that the healthcare facilities will not generate income
sufficient to meet operating expenses or will yield returns lower than those
available through investments in comparable real estate or other investments are
additional risks of investing in healthcare-related real estate. Income from
properties and yields from investments in such properties may be affected by
many factors, including changes in governmental regulation (such as zoning
laws), general or local economic conditions (such as fluctuations in interest
rates and employment conditions), the available local supply and demand for
improved real estate, a reduction in rental income as the result of an inability
to maintain occupancy levels, natural disasters (such as earthquakes and floods)
or similar factors.
Real estate investments are relatively illiquid and, therefore, tend to
limit the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions. Thus, if the operation of any of the
Company's properties becomes unprofitable due to competition, age of
improvements or other factors such that the lessee or borrower becomes unable to
meet its obligations on the lease or mortgage loan, the liquidation value of the
property may be substantially less, particularly relative to the amount owing on
any related mortgage loan, than would be the case if the property were readily
adaptable to other uses.
13
Potential Risks from Bankruptcies
Generally, the Company's lease arrangements with a single operator who
operates more than one of the Company's facilities is designed pursuant to a
single master lease (a "Master Lease" or collectively, the "Master Leases").
Although each lease or Master Lease provides that the Company may terminate the
Master Lease upon the bankruptcy or insolvency of the tenant, the Bankruptcy
Reform Act of 1978 ("Bankruptcy Code") provides that a trustee in a bankruptcy
or reorganization proceeding under the Bankruptcy Code (or debtor-in-possession
in a reorganization under the Bankruptcy Code) has the power and the option to
assume or reject the unexpired lease obligations of a debtor-lessee. In the
event that the unexpired lease is assumed on behalf of the debtor-lessee, all
the rental obligations thereunder generally would be entitled to a priority over
other unsecured claims. However, the court also has the power to modify a lease
if a debtor-lessee in a reorganization were required to perform certain
provisions of a lease that the court determined to be unduly burdensome. It is
not possible at this time to determine whether or not a court would hold that
any lease or Master Lease contains any such provisions. If a lease is rejected,
the lessor has a general unsecured claim limited to any unpaid rent already due
plus an amount equal to the rent reserved under the lease, without acceleration,
for the greater of one year or 15% of the remaining term of such lease, not to
exceed the rent obligation for three years.
Generally, with respect to the Company's mortgage loans, the imposition of
an automatic stay under the Bankruptcy Code precludes the Company from
exercising foreclosure or other remedies against the debtor. A mortgagee also is
treated differently from a landlord in three key respects. First, the mortgage
loan is not subject to assumption or rejection because it is not an executory
contract or a lease. Second, the mortgagee's loan may be divided into (1) a
secured loan for the portion of the mortgage debt that does not exceed the value
of the property and (2) a general unsecured loan for the portion of the mortgage
debt that exceeds the value of the property. A secured creditor such as the
Company is entitled to the recovery of interest and costs only if and to the
extent that the value of the collateral exceeds the amount owed. If the value of
the collateral is less than the debt, a lender such as the Company would not
receive or be entitled to any interest for the time period between the filing of
the case and confirmation. If the value of the collateral does exceed the debt,
interest and allowed costs may not be paid during the bankruptcy proceeding but
accrue until confirmation of a plan or reorganization or some other time as the
court orders. Finally, while a lease generally would either be rejected or
assumed with all of its benefits and burdens intact, the terms of a mortgage,
including the rate of interest and timing of principal payments, may be modified
if the debtor is able to effect a "cramdown" under the Bankruptcy Code.
The receipt of liquidation proceeds or the replacement of an operator that
has defaulted on its lease or loan could be delayed by the approval process of
any federal, state or local agency necessary for the transfer of the property or
the replacement of the operator licensed to manage the facility. In addition,
certain significant expenditures associated with real estate investment (such as
real estate taxes and maintenance costs) are generally not reduced when
circumstances cause a reduction in income from the investment. In order to
protect its investments, the Company may take possession of a property or even
become licensed as an operator, which might expose the Company to successorship
liability to government programs or require the Company to indemnify subsequent
operators to whom it might transfer the operating rights and licenses. Third
party payors may also suspend payments to the Company following foreclosure
14
until the Company receives the required licenses to operate the facilities.
Should such events occur, the Company's income and cash flows from operations
would be adversely affected.
Risks Related to Owned and Operated Assets
As a consequence of the financial difficulties encountered by a number of
the Company's operators, the Company has recovered various long-term care
assets, pledged as collateral for the operators' obligations, either in
connection with a restructuring or settlement with certain operators or pursuant
to foreclosure proceedings. Under normal circumstances, the Company would
classify such assets as "Assets Held for Sale" and seek to re-lease or otherwise
dispose of such assets as promptly as practicable. However, a number of
companies are actively marketing portfolios of similar assets and, in light of
the current conditions in the long-term care industry generally, it has become
more difficult both to sell such properties and for potential buyers to obtain
financing to acquire such properties. During 2000, $24.3 million of assets
previously classified as held for sale were reclassified to "Owned and Operated
Assets" as the timing and strategy for sale or, alternatively, re-leasing, were
revised in light of prevailing market conditions.
The Company is typically required to hold applicable leases and is
responsible for the regulatory compliance at its owned and operated facilities.
The Company's management contracts with third-party operators for such
properties provide that the third-party operator is responsible for regulatory
compliance, but the Company could be sanctioned for violation of regulatory
requirements. In addition, the risk of third-party claims such as patient care
and personal injury claims may be higher with respect to Company owned and
operated properties as compared to the Company's leased and mortgaged assets.
Note D - Dividends
On February 1, 2001, the Company announced the suspension of all common and
preferred dividends. This action is intended to preserve cash to facilitate the
Company's ability to obtain financing to fund its 2002 maturing indebtedness.
Prior to recommencing the payment of dividends on the Company's Common stock,
all accrued and unpaid dividends on the Company's Series A, B and C preferred
stock must be paid in full. The Company has made sufficient distributions to
satisfy the distribution requirements under the REIT rules to maintain its REIT
status for 2000 and intends to satisfy such requirements under the REIT rules
for 2001. The cumulative unaccrued and unpaid dividends relating to all series
of the preferred stock, excluding the November 15, 2000 Series C dividends
described below, total $9.9 million as of June 30, 2001.
On March 30, 2001, the Company exercised its option to pay the accrued
$4,666,667 Series C dividend from November 15, 2000 and the associated waiver
fee by issuing 48,420 Series C preferred shares to Explorer on April 2, 2001,
which are convertible into 774,722 shares of the Company's common stock at $6.25
per share. Such election resulted in an increase in the aggregate liquidation
preference of Series C Preferred Stock as of April 2, 2001 to $104,842,000,
including accrued dividends through that date.
15
During the six-month period ended June 30, 2000 the Company paid dividends
of $2.7 million and $2.2 million, respectively, on its 9.25% Series A Cumulative
Preferred Stock and 8.625% Series B Cumulative Preferred Stock.
Note E - Earnings Per Share
The computation of basic earnings per share is determined 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 and, beginning in the third quarter of 2000, the assumed
conversion of the Series C Preferred Stock.
Note F - Omega Worldwide, Inc.
As of June 30, 2001 the Company holds a $5.7 million investment in Omega
Worldwide, Inc. ("Worldwide"), represented by 1,163,000 shares of common stock
and 260,000 shares of preferred stock. The Company also holds a $1.6 million
investment in Principal Healthcare Finance Limited, an Isle of Jersey (United
Kingdom) company, and a $1.3 million investment in Principal Healthcare Finance
Trust, an Australian Unit Trust. The Company had guaranteed repayment of
Worldwide borrowings pursuant to a revolving credit facility in exchange for an
initial 1% fee and an annual facility fee of 25 basis points. The Company was
required to provide collateral in the amount of $8.8 million related to the
guarantee of Worldwide's obligations. Worldwide repaid all borrowings under the
revolving credit facility in June 2001, the Company's guarantee was terminated
and the subject collateral was released.
Additionally, the Company had a Services Agreement with Worldwide that
provided for the allocation of indirect costs incurred by the Company to
Worldwide. The allocation of indirect costs has been based on the relationship
of assets under the Company's management to the combined total of those assets
and assets under Worldwide's management. Upon expiration of this agreement on
June 30, 2000, the Company entered into a new agreement requiring quarterly
payments from Worldwide of $37,500 for the use of offices and certain
administrative and financial services provided by the Company. Upon the
reduction of the Company's accounting staff, the Service Agreement was
renegotiated again on November 1, 2000 requiring quarterly payments from
Worldwide of $32,500. Costs allocated to Worldwide for the three-month and
six-month periods ended June 30, 2001 were $32,500 and $65,000, respectively,
compared with $185,000 and $389,000 for the same periods in 2000.
Note G - Litigation
The Company is subject to various legal proceedings, claims and other
actions arising out of the normal course of business. While any legal proceeding
16
or claim has an element of uncertainty, management believes that the outcome of
each lawsuit claim or legal proceeding that is pending or threatened, or all of
them combined, will not have a material adverse effect on its consolidated
financial position or results of operations.
On June 20, 2000, the Company and its former chief executive officer,
former chief financial officer and chief operating officer were named as
defendants in litigation brought by Ronald M. Dickerman, in his individual
capacity, in the United States District Court for the Southern District of New
York, alleging that the Company and the named executive officers violated
Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. Mr. Dickerman subsequently amended the complaint to
assert his claims on behalf of an unnamed class of plaintiffs. On July 28, 2000,
Benjamin LeBorys commenced a class action lawsuit making similar allegations
against the Company and certain of its officers and directors in the United
States District Court for the Southern District of New York. The cases were
consolidated, and Mr. LeBorys was named lead plaintiff. The Company's Motion to
Dismiss filed with the Court on February 16, 2001 was heard on May 29, 2001 at
which time the Court dismissed the suit without prejudice and granted leave to
the Plaintiffs to amend and re-file their complaint on or before July 20, 2001.
As the Plaintiffs did not re-file a complaint, the Court has dismissed the suit
with prejudice, resulting in a complete resolution in favor of the Company. (See
Note J - Subsequent Events)
On June 21, 2000, the Company was named as a defendant in certain
litigation brought against it by Madison/OHI Liquidity Investors, LLC
("Madison"), a customer that claims that the Company has breached and/or
anticipatorily breached a commercial contract. Mr. Dickerman is a partner of
Madison and is a guarantor of Madison's obligations to the Company. Madison
claims damages as a result of the alleged breach of approximately $700,000.
Madison seeks damages as a result of the claimed anticipatory breach in the
amount of $15 million or, in the alternative, Madison seeks specific performance
of the contract as modified by a course of conduct that Madison alleges
developed between Madison and the Company. The Company contends that Madison is
in default under the contract in question. The Company believes that the
litigation is meritless. The Company is defending vigorously and on December 5,
2000, filed counterclaims against Madison and the guarantors, including Mr.
Dickerman, seeking repayment of approximately $8.8 million that Madison owes the
Company.
On December 29, 1998, Karrington Health, Inc. brought suit against the
Company in the Franklin County, Ohio, Common Pleas Court (subsequently removed
to the U.S. District Court for the Southern District of Ohio, Eastern Division)
alleging that the Company repudiated and ultimately breached a financing
contract to provide $95,000,000 of financing for the development of 13 assisted
living facilities. Karrington was seeking recovery of approximately $34,000,000
in damages it alleged to have incurred as a result of the breach. On August 13,
2001, the Company paid Karrington $10,000,000 to settle all claims arising from
the suit, but without admission of any liability or fault by the Company, which
liability is expressly denied. Based on the settlement, the suit has been
dismissed with prejudice. (See Note J - Subsequent Events)
17
Note H - Borrowing Arrangements
The Company has a $175 million secured revolving credit facility that
expires on December 31, 2002. Borrowings under the facility bear interest at
2.5% to 3.25% over LIBOR, based on the Company's leverage ratio. Borrowings of
approximately $129 million are outstanding at June 30, 2001. Investments with a
gross book value of approximately $240 million are pledged as collateral for
this credit facility.
The Company has a $75 million secured revolving credit facility that
expires on March 31, 2002 as to $10 million and June 30, 2005 as to $65 million.
Borrowings under the facility bear interest at 2.5% to 3.75% over LIBOR, based
on the Company's leverage ratio and collateral assigned. Borrowings of
approximately $69.6 million are outstanding at June 30, 2001. Investments with a
gross book value of approximately $95 million are pledged as collateral for this
credit facility.
During the three-month and six-month periods ended June 30, 2001, the
Company repurchased $19.5 million and $21.5 million, respectively, of its 6.95%
Notes maturing in June 2002. At June 30, 2001, $103.5 million of these notes
remain outstanding.
As of June 30, 2001, the Company had an aggregate of $242 million of
outstanding debt which matures in 2002, including $103.5 million of 6.95% Notes
due June 2002 and $138 million on credit facilities expiring in 2002.
The Company had $50 million of funding available through July 1, 2001
pursuant to an Investment Agreement with Explorer which can be used, upon
satisfaction of certain conditions, to fund growth. Following the drawing in
full or expiration of this commitment, Explorer will have the option to provide
up to an additional $50 million to fund growth for an additional twelve-month
period. (See Note D - Dividends)
The Company is required to meet certain financial covenants, including
prescribed leverage and interest coverage ratios on its long-term borrowings. At
June 30, 2001 the Company had $28.2 million available under its secured
revolving credit facilities prior to giving effect to the August settlement of
the Karrington litigation described in Note G above. As a result of recognizing
the Karrington settlement expense in the quarter ended June 30, 2001, the
Company is not in compliance with one of the financial covenants under its
credit facilities. The lenders have granted the Company a waiver through
September 14, 2001 during which time all parties will be working together to
resolve this covenant violation situation. Accordingly, as of the date of this
report, the Company has $14.7 million available under its secured revolving
credit facilities. Certain assets that served as collateral for one of the
credit facilities were recovered from a customer during the quarter. These
assets are no longer eligible to serve as collateral, resulting in reduced
availability under the credit facility. The Company has the ability to replace
this collateral and increase the availability under the line by up to an
18
additional $18.0 million subject to compliance with the applicable financial
covenants. The Company's ability to draw upon the remaining availability under
the credit facilities has been limited by the covenant violation noted above
until such time as a permanent resolution is attained. (See Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources)
Note I - Effect of New Accounting Pronouncements
The Company utilizes interest rate swaps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. In June
1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is required
to be adopted in years beginning after June 15, 2000. The Company adopted the
new Statement effective January 1, 2001. The Statement requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedge item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
At June 30, 2001, the Company had two interest rate swaps with notional
amounts of $32 million each, based on 30-day London Interbank Offered Rates
(LIBOR). Under the terms of the first agreement, which expires in December 2001,
the Company receives payments when LIBOR exceeds 6.35% and pays the counterparty
when LIBOR is less than 6.35%. At June 30, 2001, 30-day LIBOR was 3.86 %. This
interest rate swap may be extended for an additional twelve months at the option
of the counterparty and therefore does not qualify for hedge accounting under
FASB No. 133. The fair value of this swap at January 1, and June 30, 2001 was a
liability of $351,344 and $727,825, respectively. The liability at January 1 was
recorded as a transition adjustment in other comprehensive income and is being
amortized over the initial term of the swap. Such amortization for the
three-month and six-month periods ended June 30, 2001 of $87,836 and $175,672,
respectively, together with the change in fair value of the swap of ($17,313)
and $376,481, respectively, is included in charges for derivative accounting in
the Company's Condensed Consolidated Statement of Operations.
Under the second agreement, which expires December 31, 2002, the Company
receives payments when LIBOR exceeds 4.89% and pays the counterparty when LIBOR
is less than 4.89%. The fair value of this interest rate swap at June 30, 2001
was a liability of $260,660, which is included in other comprehensive income as
required under FASB No. 133 for fully effective cash flow hedges.
19
The fair values of these interest rate swaps are included in accrued
expenses and other liabilities in the Company's Condensed Consolidated Balance
Sheet at June 30, 2001.
Note J - Subsequent Events
On June 20, 2000, the Company and its former chief executive officer,
former chief financial officer and chief operating officer were named as
defendants in litigation brought by Ronald M. Dickerman, in his individual
capacity, in the United States District Court for the Southern District of New
York, alleging that the Company and the named executive officers violated
Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder. Mr. Dickerman subsequently amended the complaint to
assert his claims on behalf of an unnamed class of plaintiffs. On July 28, 2000,
Benjamin LeBorys commenced a class action lawsuit making similar allegations
against the Company and certain of its officers and directors in the United
States District Court for the Southern District of New York. The cases were
consolidated, and Mr. LeBorys was named lead plaintiff. The Company's Motion to
Dismiss filed with the Court on February 16, 2001 was heard on May 29, 2001 at
which time the Court dismissed the suit without prejudice and granted leave to
the Plaintiffs to amend and re-file their complaint on or before July 20, 2001.
As the Plaintiffs did not re-file a complaint, the Court has dismissed the suit
with prejudice. (See Note G - Litigation)
Karrington Health, Inc. brought suit against the Company alleging that the
Company repudiated and ultimately breached a financing contract to provide
$95,000,000 of financing for the development of 13 assisted living facilities.
Karrington was seeking recovery of approximately $34,000,000 in damages it
alleges to have incurred as a result of the breach. On August 13, 2001, the
Company paid Karrington $10,000,000 to settle all claims arising from the suit,
but without admission of any liability or fault by the Company, which liability
is expressly denied. Based on the settlement, the suit has been dismissed with
prejudice. (See Note G - Litigation)
20
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
Certain information contained in this report includes forward looking
statements. Forward looking statements include statements regarding the
Company's expectations, beliefs, intentions, plans, objectives, goals,
strategies, future events or performance and underlying assumptions and other
statements other than statements of historical facts. These statements may be
identified, without limitation, by the use of forward looking terminology such
as "may" "will" "anticipates" "expects" "believes" "intends" "should" or
comparable terms or the negative thereof. All forward looking statements
included herein are based on information available on the date hereof. Such
statements only speak as of the date hereof and no obligation to update such
forward looking statements should be assumed. Actual results may differ
materially from those reflected in such forward looking statements as a result
of a variety of factors, including, among other things: (i) the ability of the
Company to dispose of assets held for sale on a timely basis and at appropriate
prices; (ii) uncertainties relating to the operation of the Company's Owned and
Operated Assets, including those relating to reimbursement by third-party
payors, regulatory matters and occupancy levels; (iii) the general distress of
the healthcare industry; (iv) continued deterioration of the operating results
and financial condition of the Company's operators; (v) the ability of the
Company's operators in bankruptcy to reject unexpired lease obligations, modify
the terms of the Company's mortgages, and impede the ability of the Company to
collect unpaid rent or interest during the pendency of a bankruptcy proceeding
and retain security deposits for the debtor's obligations; (vi) the availability
and cost of capital; (vii) regulatory and other changes in the healthcare
sector; (viii) the ability of the Company to manage , re-lease or sell its owned
and operated facilities; (ix) competition in the financing of healthcare
facilities; (x) the effect of economic and market conditions and changes in
interest rates; (xi) the resumption of dividends; (xii) the amount and yield of
any additional investments; (xiii) changes in tax laws and regulations affecting
real estate investment trusts;(xiv) access to the capital markets and the cost
of capital (xv) changes in the ratings of the Company's debt securities; (xvi)
and the risk factors set forth herein, including without limitation Note C -
Concentration of Risk and Related Issues to the Condensed Consolidated Financial
Statements included in Item 1.
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 condensed consolidated financial
statements and accompanying notes. (See Note B - Properties and Note C -
Concentration of Risk and Related Issues.)
Results of Operations
Revenues for the three-month and six-month periods ended June 30, 2001
totaled $65.7 million and $134.8 million, respectively, a decrease of $4.8
million and an increase of $7.2 million, respectively, over the periods ending
21
June 30, 2000. Excluding nursing home revenues of Owned and Operated Assets,
revenues were $21.9 million and $45.0 million, respectively, for the three-month
and six-month periods ended June 30, 2001, a decrease of $2.5 million and $5.1
million, respectively, from the comparable prior year periods.
Rental income for the three-month and six-month periods ended June 30, 2001
totaled $14.7 million and $30.8 million, respectively, a decrease of $1.5
million and $3.5 million, respectively, over the same periods in 2000. The
three-month decrease is due to $1.1 million reductions in lease revenue due to
foreclosures, bankruptcies and restructurings and $0.7 million from reduced
investments resulting from the sale of assets in 2000, offset by approximately
$0.3 million relating to contractual increases in rents that became effective in
2001. The six-month decrease is due to $2.3 million from reductions in lease
revenue due to foreclosures, bankruptcies and restructurings, and $1.8 million
from reduced investments resulting from the sale of assets in 2000. These
decreases are offset by $0.6 million relating to contractual increases in rents
that became effective in 2001 as defined under the related agreements.
Mortgage interest income for the three-month and six-month periods ended
June 30, 2001 totaled $5.5 million and $11.2 million, respectively, decreasing
$0.4 million and $0.7 million, respectively, from the same periods in 2000. The
decrease is due to reductions from foreclosures, bankruptcies and restructurings
and reduced investments resulting from the payoffs of mortgage notes. These
decreases are partially offset by contractual increases in interest income that
became effective in 2001 as defined under the related agreements.
Nursing home revenues of owned and operated assets for the three-month and
six-month periods ended June 30, 2001 totaled $43.8 million and $89.8 million,
respectively, decreasing $2.3 million and increasing $12.3 million,
respectively, over the same periods in 2000. The decrease for the three-month
period is due to a decreased number of operated facilities versus the same
three-month period in 2000 as a result of the closure of certain facilities and
their reclassification to Assets Held for Sale as well as the re-lease of three
facilities during the three-months ended June 30, 2001 to a new operator. The
increase in the six-month period is primarily due to the inclusion of 30
facilities formerly operated by RainTree Healthcare Corporation ("RainTree") for
the full six-month period ended June 30, 2001 versus four months during the
six-month period ended June 30, 2000.
Expenses for the three-month and six-month periods ended June 30, 2001
totaled $82.0 million and $147.6 million, respectively, increasing approximately
$16.2 million and $27.6 million, respectively, over expenses of $65.8 million
and $120.0 million for the three-month and six-month periods ended June 30,
2000.
Nursing home expenses for owned and operated assets for the three-month
period and six-month periods ended June 30, 2001 decreased by $3.2 million and
increased by $12.2 million, respectively, from $46.9 million and $77.9 million
for same periods in 2000. The decrease in the three-month period is due to a
decreased number of facilities versus the same three-month period in 2000 as a
result of the closure of certain facilities and their reclassification to Assets
Held for Sale as well as the re-lease of three facilities during the three
22
months ended June 30, 2001 to a new operator. The increase in the six-month
period is primarily due to the inclusion of 30 facilities formerly operated by
RainTree for the full six-month period ended June 30, 2001 versus four months
during the three-month period ended June 30, 2000.
The provision for depreciation and amortization totaled $5.5 million and
$11.0 million, respectively, during the three-month and six-month periods ended
June 30, 2001. This is a decrease of $0.3 million and $0.7 million,
respectively, over the same periods in 2000. The decrease is primarily due to
assets sold in 2000 and lower depreciable values due to impairment charges on
owned and operated properties, and a reduction in the amortization of goodwill
and non-compete agreements.
Interest expense for the three-month and six-month periods ended June 30,
2001 was approximately $9.2 million and $18.9 million, compared with $11.3
million and $22.4 million, respectively, for the same periods in 2000. The
decrease in 2001 is primarily due to lower average outstanding borrowings during
the 2001 period, partially offset by slightly higher average interest rates due
to increased rate spreads under the Company's credit facilities versus last
year.
General and administrative expenses for the three-month and six-month
periods ended June 30, 2001 totaled $3.2 million and $5.5 million, respectively,
as compared to $1.2 million and $2.8 million, respectively, for the same periods
in 2000, an increase of $1.9 million and $2.7 million. The increase is due
primarily to consulting costs related to the efforts associated with the
business objective of re-leasing the Company's owned and operated assets,
restructuring activities and other non-recurring expenses including executive
recruiting fees.
Legal expenses for the three-month and six-month periods ended June 30,
2001 totaled $0.8 million and $1.7 million, respectively, an increase of $0.3
million and $1.2 million, respectively, over the same periods in 2000. The
increase is largely attributable to legal costs associated with the foreclosure
of assets and other negotiations with the Company's troubled operators as well
as the defense of various lawsuits in which the Company is party to. (See Note G
- - Litigation)
During the three-month period ended June 30, 2001 the Company recorded a
$10 million litigation settlement expense related to a suit brought against it
by Karrington, Health, Inc. (See Note G - Litigation)
A provision for impairment of $8.4 million is included in expenses for the
six-month period ended June 30, 2001. This provision was to reduce the cost
basis of assets recovered from a defaulting operator to their fair value less
cost to dispose, as these assets are being marketed for sale. A provision for
impairment of $4.5 million was recognized in the 2000 period.
A charge of $681,000 for provision for uncollectable accounts was taken
during the three-month period ended June 30, 2001 relating to write-off of rents
due from and funds advanced to the defaulting operator.
23
Severance and consulting agreement costs of $466,000 were recognized during
the three-month period ended June 30, 2001 related to the termination of an
employment contract with an officer of the Company.
During the six-month period ended June 30, 2001, the Company recognized a
gain on disposal of real estate of $0.6 million. For the three-month and
six-month periods ended June 30, 2000, a gain of $10.5 million was recognized on
the disposal of real estate.
Funds from operations (FFO) for the three-month and six-month periods ended
June 30, 2001 were deficits of $7.5 million and $2.7 million, respectively, a
decrease of approximately $15.5 million and $21.8 million, respectively, as
compared to the $8.0 million and $19.1 million for the same periods in 2000 due
to factors mentioned above. Diluted FFO amounts were a deficit of $4.8 million
and a positive $2.4 million, respectively, for the three-month and six-month
periods ended June 30, 2001, as compared to the $9.1 million and $21.3 million
for the same period in 2000 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. The Company considers FFO
to be one performance measure which is helpful to investors of real estate
companies because, along with cash flows from operating activities, financing
activities and investing activities, it provides investors an understanding of
the ability of the Company to incur and service debt, to make capital
expenditures and to pay dividends to its shareholders. FFO in and of itself does
not represent cash generated from operating activities in accordance with GAAP
and therefore should not be considered an alternative to net earnings as an
indication of operating performance or to net cash flow from operating
activities as determined by GAAP as a measure of liquidity and is not
necessarily indicative of cash available to fund cash needs.
No provision for Federal income taxes has been made since the Company
continues to qualify as a real estate investment trust under the provisions of
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended.
Accordingly, the Company has not been subject to Federal income taxes on amounts
distributed to shareholders, as it distributed at least 95% (90% in 2001) of its
real estate investment trust taxable income and has met certain other
conditions.
Liquidity and Capital Resources
The settlement of the lawsuit with Karrington Health, Inc. fixed the amount
of expense associated with this claim against the Company at $10 million and was
therefore recorded at June 30, 2001. The recognition of this expense has
resulted in a violation of one of the financial covenants in the loan agreements
with the Company's primary lenders. The lenders have granted the Company a
waiver through September 14, 2001 during which time all parties will be working
together to resolve this covenant violation situation.
24
At June 30, 2001 the Company had total assets of $921.8 million,
shareholders' equity of $459.7 million, and long-term debt of $425.7 million,
representing approximately 46.2% of total capitalization. The Company has
revolving credit facilities in place, providing up to $250 million of financing,
of which $198.6 million was drawn at June 30, 2001. As of the date of this
report, the Company has $14.7 million available under its secured revolving
credit facilities. Certain assets that served as collateral for one of the
credit facilities were recovered from a customer during the quarter. These
assets are no longer eligible to serve as collateral, resulting in reduced
availability under the credit facility. The Company has the ability to replace
this collateral and increase the availability under the line by up to an
additional $18.0 million subject to compliance with the applicable financial
covenants. The Company's ability to draw upon the remaining availability under
the credit facilities has been limited by the covenant violation waiver noted
above until such time as a permanent resolution is attained.
As of June 30, 2001, the Company had an aggregate of $242 million of
outstanding debt which matures in 2002, including $103.5 million of 6.95% Notes
due June 2002 and $138 million on credit facilities expiring in 2002.
The Company has historically distributed to shareholders a large portion of
the cash available from operations. The Company's historical policy has been to
make distributions on Common Stock of approximately 80% of FFO, but on February
1, 2001, the Company announced the suspension of all common and preferred
dividends. This action is intended to preserve cash to facilitate the Company's
ability to obtain financing to fund the 2002 debt maturities. Additionally, on
March 30, 2001, the Company exercised its option to pay the accrued $4,666,667
Series C dividend from November 15, 2000 and the associated waiver fee by
issuing 48,420 Series C preferred shares to Explorer on April 2, 2001, which are
convertible into 774,722 shares of the Company's common stock at $6.25 per
share.
The Company anticipates that it will reinstate dividends on its common and
preferred stock when the Company determines that it has sufficient resources or
satisfactory plans to meet its 2002 debt maturities, but the Company can give no
assurance as to when the dividends will be reinstated or the amount of the
dividends if and when such payments are recommenced. Prior to recommencing the
payment of dividends on the Company's Common stock, all accrued and unpaid
dividends on the Company's Series A, B and C Preferred Stock must be paid in
full. The Company has made sufficient distributions to satisfy the distribution
requirements under the REIT rules to maintain its REIT status for 2000 and
intends to satisfy such requirements under the REIT rules for 2001.
Cash dividends paid totaled $0.50 per common share for the three-month
period ended March 31, 2000. No common dividends were paid during the first and
second quarters of 2001 nor during the second quarter of 2000.
The Company has $50 million of funding available through July 1, 2001
pursuant to an Investment Agreement with Explorer Holdings, L.P. ("Explorer")
which can be used, upon satisfaction of certain conditions, to fund growth.
Following the drawing in full or expiration of this commitment, Explorer will
have the option to provide up to an additional $50 million to fund growth for an
additional twelve-month period.
25
Management believes the Company's liquidity and various sources of
available capital, including funds from operations and expected proceeds from
planned asset sales, are adequate to finance operations, meet recurring debt
service requirements and fund future investments through the next 12 months,
including through the waiver period, but is taking immediate steps to facilitate
a refinancing of maturing 2002 debt, including the announced suspension of
dividends and the pursuit of additional capital. As a result of the ongoing
financial challenges facing long-term care operators, the availability of the
external capital sources historically used by the Company has become extremely
limited and expensive, and, therefore, no assurance can be given that the
Company will be able to replace or extend the 2002 debt maturities, or that any
refinancing or replacement financing would be on favorable terms to the Company.
If the Company were unable to refinance its 2002 debt maturities or other
indebtedness on acceptable terms, it might be forced to dispose of properties on
disadvantageous terms, which might result in losses to the Company and might
adversely affect the cash available for distribution to shareholders, or to
pursue dilutive equity financing. If interest rates or other factors at the time
of the refinancing result in higher interest rates upon refinancing, the
Company's interest expense would increase, which might affect the Company's
ability to make distributions to its shareholders.
26
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to various market risks, including the potential
loss arising from adverse changes in interest rates. The Company does not enter
into derivatives or other financial instruments for trading or speculative
purposes, but the Company seeks to mitigate the effects of fluctuations in
interest rates by matching the term of new investments with new long-term fixed
rate borrowing to the extent possible.
The market value of the Company's long-term fixed rate borrowings and
mortgages are subject to interest rate risk. Generally, the market value of
fixed rate financial instruments will decrease as interest rates rise and
increase as interest rates fall. The estimated fair value of the Company's total
long-term borrowings at June 30, 2001 was $398 million. A one-percent increase
in interest rates would result in a decrease in the fair value of long-term
borrowings by approximately $4.7 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. (See Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources.
The Company utilizes interest rate swaps to fix interest rates on
variable rate debt and reduce certain exposures to interest rate fluctuations.
At June 30, 2001, the Company had two interest rate swaps with notional amounts
of $32 million each, based on 30-day London Interbank Offered Rates (LIBOR).
Under the first $32 million agreement, the Company receives payments when LIBOR
interest rates exceed 6.35% and pays the counterparties when LIBOR rates are
under 6.35%. The amounts exchanged are based on the notional amounts. The $32
million agreement expires in December 2001 but may be extended for an additional
year by the counterparty.
Under the terms of the second agreement, which expires in December 2002,
the Company receives payments when LIBOR rates exceed 4.89% and pays the
counterparties when LIBOR rates are under 4.89%. The combined fair value of the
interest rate swaps at June 30, 2001 was a deficit of $988,485. (See Note I -
Effect of New Accounting Pronouncements.)
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note G and Note J to the Condensed Consolidated Financial Statements in
Item 1 hereto, which are hereby incorporated by reference in response to this
item.
Item 2. Changes in Securities and Use of Proceeds
On March 30, 2001, the Company exercised its option to pay the accrued
$4,666,667 Series C dividend from November 15, 2000 and the associated waiver
fee by issuing 48,420 Series C preferred shares to Explorer on April 2, 2001,
which are convertible into 774,722 shares of the Company's Common Stock at $6.25
per share.
The shares of Series C Preferred are governed by the Articles Supplementary
for Series C Convertible Preferred Stock (the "Articles Supplementary") filed
with the State Department of Assessments and Taxation of Maryland on July 14,
2000. The shares of Series C Preferred were issued without registration under
the Securities Act of 1933, as amended (the "Securities Act") because the
issuance did not involve a sale within the meaning of the Securities Act and/or
in reliance upon the private placement exemption provided by Section 4(2) of the
Securities Act.
Item 3. Defaults upon Senior Securities
(a) Payment Defaults. Not Applicable.
(b) Dividend Arrearages. On February 1, 2001, the Company announced
the suspension of dividends on all common and preferred stock. See
Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources. Dividends
on the Company's preferred stock are cumulative, and therefore all
accrued and unpaid dividends on the Company's Series A, B and C
Preferred Stock must be paid in full prior to recommencing the
payment of cash dividends on the Company's Common Stock. The table
below sets forth information regarding arrearages in payment of
preferred stock dividends:
28
Annual
Dividend Per Arrearage as of
Title of Class Share June 30, 2001
-------------- ----- -------------
9.25% Series A Cumulative Preferred Stock $2.3125 $2,659,375
8.625% Series B Cumulative Preferred Stock $2.1563 2,156,250
Series C Preferred Stock $10.0000 5,039,443
---------
TOTAL $9,855,068
==========
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on May 22, 2001.
(b) The following directors were elected at the meeting for a
three-year term: Edward Lowenthal, Christopher W. Mahowald and Stephen
D. Plavin. Thomas W. Erickson, Donald J. McNamara and Daniel A. Decker
were elected to complete the remainder of the terms of the directors
who resigned prior to the completion of their terms. The following
directors were not elected at the meeting but their term of office
continued after the meeting: Thomas F. Franke, Harold J. Kloosterman
and Bernard J. Korman.
29
(a) The results of the vote were as follows:
Manner of Vote Edward Christopher Stephen D. Thomas W. Donald J. Daniel A.
Cast Lowenthal W. Mahowald Plavin Erickson McNamara Decker
---- --------- ----------- ------ -------- -------- ------
For 34,078,188 34,067,752 34,072,686 34,062,778 34,063,083 34,080,253
Withheld 9,221 19,657 14,723 27,775 27,470 5,750
Against -- -- -- -- -- --
Abstentions and
broker non-votes 463,944 463,944 463,944 460,800 460,800 465,350
(b) Not applicable.
30
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following Exhibits are filed herewith:
Exhibit Description
------- -----------
10.1 Letter Agreement between Omega Healthcare
Investors, Inc. and The Hampstead Group,
L.L.C. dated as of June 1, 2001
10.2 Employment Agreement between Omega Healthcare
Investors, Inc. and C. Taylor Pickett, dated
June 12, 2001
(b) Reports on Form 8-K - none were filed.
31
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
Registrant
Date: August 14, 2001 By: /s/ C. Taylor Pickett
-------------------------
C. Taylor Pickett
Chief Executive Officer
Date: August 14, 2001 By: /s/ Robert O. Stephenson
----------------------------
Robert O. Stephenson
Chief Financial Officer
32