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 September 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 September 30, 2001
Common Stock, $.10 par value 20,076,024
(Class) (Number of shares)
OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
September 30, 2001
INDEX
Page No.
PART I Financial Information
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets
September 30, 2001 (unaudited)
and December 31, 2000...............................2
Statements of Operations (unaudited)
Three-month and Nine-month periods ended
September 30, 2001 and 2000.........................3
Statements of Cash Flows (unaudited)
Nine-month period ended
September 30, 2001 and 2000............... .........4
Notes to Condensed Consolidated Financial Statements
September 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 6. Exhibits and Reports on Form 8-K..............................28
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
September 30, December 31,
2001 2000
---- ----
(Unaudited) (See Note)
ASSETS
Real estate properties
Land and buildings at cost ....................................... $ 701,370 $ 710,542
Less accumulated depreciation .................................... (101,861) (89,870)
-------- -------
Real estate properties - net ............................. 599,509 620,672
Mortgage notes receivable - net .................................. 185,861 206,710
------- -------
785,370 827,382
Other investments ..................................................... 47,818 53,242
------ ------
833,188 880,624
Assets held for sale - net ............................................ 7,377 4,013
----- -----
Total Investments ................................................ 840,565 884,637
Cash and cash equivalents ............................................. 14,145 7,172
Accounts receivable ................................................... 6,881 10,497
Other assets .......................................................... 3,789 9,338
Operating assets for owned properties ................................. 45,885 36,807
------ ------
Total Assets ..................................................... $ 911,265 $ 948,451
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving lines of credit ............................................. $ 203,641 $ 185,641
Unsecured borrowings .................................................. 199,641 225,000
Other long-term borrowings ............................................ 22,755 24,161
Subordinated convertible debentures ................................... - 16,590
Accrued expenses and other liabilities ................................ 16,708 18,002
Operating liabilities for owned properties ............................ 11,861 14,744
------ ------
Total Liabilities ................................................ 454,606 484,138
Preferred Stock ....................................................... 212,342 207,500
Common stock and additional paid-in capital ........................... 440,392 440,556
Cumulative net earnings ............................................... 171,272 182,548
Cumulative dividends paid ............................................. (365,654) (365,654)
Unamortized restricted stock awards ................................... (202) (607)
Accumulated other comprehensive loss .................................. (1,491) (30)
------ ---
Total Stockholders' Equity ....................................... 456,659 464,313
------- -------
Total Liabilities and Stockholders' Equity ....................... $ 911,265 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues
Rental income .............................................. $ 14,936 $ 15,503 $ 45,686 $ 49,652
Mortgage interest income ................................... 5,130 5,888 16,343 17,800
Other investment income - net .............................. 1,374 534 3,640 4,277
Nursing home revenues of owned and operated assets ......... 43,820 45,960 133,613 123,461
Miscellaneous .............................................. 1,575 126 2,384 483
----- --- ----- ---
66,835 68,011 201,666 195,673
Expenses
Nursing home expenses of owned and operated assets ......... 44,439 48,552 134,565 126,436
Depreciation and amortization .............................. 5,515 5,657 16,560 17,385
Interest ................................................... 9,124 9,846 28,039 32,221
General and administrative ................................. 2,203 1,830 7,707 4,631
Legal ...................................................... 1,145 481 2,862 974
State taxes ................................................ 126 15 339 241
Litigation settlement expense .............................. - - 10,000 -
Provision for impairment ................................... - 49,849 8,381 54,349
Provision for uncollectable accounts ....................... 19 12,100 700 12,100
Severance, moving and consulting agreement costs ........... 4,300 4,665 4,766 4,665
Charges for derivative accounting .......................... 561 - 1,113 -
--- ----- ----- ----
67,432 132,995 215,032 253,002
------ ------- ------- -------
Loss before (loss) gain on assets sold and gain
on early extinguishment of debt .......................... (597) (64,984) (13,366) (57,329)
(Loss) gain on assets sold - net ............................ (1,485) (109) (873) 10,342
Gain on early extinguishment of debt ......................... 226 - 2,963 -
--- ---- ----- ----
Net loss ..................................................... (1,856) (65,093) (11,276) (46,987)
Preferred stock dividends .................................... (5,029) (5,705) (14,966) (10,520)
------ ------ ------- -------
Net loss available to common ................................. $ (6,885) $ (70,798) $ (26,242) $ (57,507)
======== ========= ========= =========
Loss per common share:
Net loss per share - basic ................................. $ (0.34) $ (3.53) $ (1.31) $ (2.87)
======= ======= ======= =======
Net loss per share - diluted ............................... $ (0.34) $ (3.53) $ (1.31) $ (2.87)
======= ======= ======= =======
Dividends declared and paid per common share ................. $ - $ 0.25 $ - $ 0.75
=== ====== === ======
Weighted Average Shares Outstanding, Basic ................... 20,071 20,064 20,032 20,058
====== ====== ====== ======
Weighted Average Shares Outstanding, Diluted ................. 20,071 20,064 20,032 20,058
====== ====== ====== ======
Other comprehensive loss:
Unrealized Loss on Omega Worldwide, Inc .................... $ (814) $ (1,745) $ (567) $ (2,944)
====== ======== ====== ========
Unrealized Loss on Hedging Contracts ....................... $ (458) $ - $ (894) $ -
====== === ====== ===
Total comprehensive loss ..................................... $ (3,128) $ (66,838) $ (12,737) $ (49,931)
======== ========= ========= =========
See notes to condensed consolidated financial statements.
3
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
Nine Months Ended
September 30,
2001 2000
---- ----
Operating activities
Net loss ................................................................... $ (11,276) $(46,987)
Adjustment to reconcile net loss to cash
provided by operating activities:
Depreciation and amortization .......................................... 16,560 17,385
Provision for impairment ............................................... 8,381 54,349
Provision for collection losses ........................................ 700 12,100
Loss/(Gain) on assets sold - net ....................................... 873 (10,342)
Gain on early extinguishment of debt ................................... (2,963) -
Other .................................................................. 3,291 2,078
Net change in accounts receivable for Owned & Operated assets - net ......... (8,120) (17,087)
Net change in accounts payable for Owned & Operated assets .................. (3,776) 5,421
Net change in other Owned & Operated assets and liabilities ................. (97) (12,723)
Net change in operating assets and liabilities .............................. 3,875 (3,383)
----- -----
Net cash provided by operating activities ................................... 7,448 811
Cash flow from financing activities
Proceeds of revolving lines of credit - net ................................. 18,000 25,041
Payments of long-term borrowings ............................................ (43,355) (121,447)
Receipts from Dividend Reinvestment Plan .................................... 29 430
Dividends paid .............................................................. - (22,253)
Proceeds from preferred stock offering ...................................... - 100,000
Deferred financing costs paid ............................................... (852) (4,976)
Other ....................................................................... (45) (9,339)
--- ------
Net cash used in financing activities ....................................... (26,223) (32,544)
Cash flow from investing activities
Proceeds from sale of real estate investments - net ......................... 1,514 35,793
Fundings of other investments - net ......................................... 1,444 (5,507)
Collection of mortgage principal ............................................ 22,790 1,632
------ -----
Net cash provided by investing activities ................................... 25,748 31,918
------ ------
Increase in cash and cash equivalents ....................................... 6,973 185
Cash and cash equivalents at beginning of period ............................ 7,172 4,105
----- -----
Cash and cash equivalents at end of period .................................. $ 14,145 $ 4,290
======== =======
See notes to condensed consolidated financial statements.
4
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 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 nine-month periods ended September 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 nine-month period ended September 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 foreclosure of
assets leased by a defaulting customer during that quarter.
5
A summary of the number of properties by category for the quarter ended
September 30, 2001 follows:
Total
Purchase / Owned & Healthcare Held for
Facility Count Leaseback Mortgages Operated Facilities Sale Total
-------------- --------- --------- -------- ---------- ---- -----
Balance at June 30, 2001 129 57 63 249 9 258
Properties transferred to Held for Sale - - (2) (2) 2 -
Properties transferred to Owned & Operated - - - - - -
Properties Sold / Mortgages Paid - - (1) (1) (1) (2)
Properties Leased / Mortgages Placed - - - - - -
Properties transferred to Purchase/Leaseback 2 (2) - - - -
-- -- -- -- -- ---
Balance at September 30, 2001 131 55 60 246 10 256
=== == == === == ===
Gross Investment
----------------
Balance at June 30, 2001 $ 581,468 $ 180,768 $ 121,368 $ 883,604 $ 5,698 $889,302
Properties transferred to Held for Sale - - (2,230) (2,230) 2,230 -
Properties transferred to Owned & Operated - - - - - -
Properties Sold / Mortgages Paid - - (3,404) (3,404) (149) (3,553)
Properties Leased / Mortgages Placed - 9,360 - 9,360 - 9,360
Properties transferred to Purchase / Leaseback 3,900 (3,900) - - - -
Capex and other - (367) 268 (99) (402) (501)
----- ---- --- --- ---- ----
Balance at September 30, 2001 $ 585,368 $ 185,861 $ 116,002 $ 887,231 $ 7,377 $894,608
========= ========= ========= ========= ======= ========
Real Estate Dispositions
The Company disposed of two facilities during the three-month period ended
September 30, 2001. One facility, located in Texas, had a total of 120 beds and
was classified as Owned & Operated Assets. The Company recognized a loss on
disposition of this facility of $1.5 million. The other facility, located in
Indiana, was classified as Assets Held for Sale. The Company recognized a net
gain on disposition of assets during the nine-month period ended September 30,
2000 of $10.3 million. The net gain was comprised of a $10.9 million gain on the
sale of four facilities previously leased to Tenet Healthsystem Philadelphia,
Inc., offset by a loss of $0.6 million on the sale of a 57 bed facility in
Colorado.
Notes and Mortgages Receivable
Income on notes and mortgages that are impaired will be recognized as cash
is received. During the nine-month period ended September 30, 2000 the Company
recorded a charge of $12.1 million to provision for loss on mortgages ($4.9
million) and notes receivable ($7.2 million).
During the quarter ended September 30, 2001, the Company entered into a
comprehensive settlement with Mariner Post-Acute Network, Inc. ("Mariner"),
resolving all outstanding issues relating to the Company's loan to Professional
Healthcare Management, Inc. ("PHCM"), a subsidiary of Mariner. Pursuant to the
settlement, the PHCM loan is secured by a first mortgage on 12 skilled nursing
facilities owned by PHCM with 1,668 operating beds. PHCM will remain obligated
on the total outstanding loan balance as of January 18, 2000, the date Mariner
filed for protection under Chapter 11 of the Bankruptcy Act, and is to pay the
6
Company accrued interest at a rate of approximately 11% for the period from the
filing date until September 1, 2001. Monthly payments with interest at the rate
of 11.57% per annum resumed October 1, 2001. The settlement agreement was
approved by the United States Bankruptcy Court in Wilmington, Delaware on August
22, 2001, and became effective as of September 1, 2001.
On February 1, 2001, four Michigan facilities, previously operated by PHCM
and subject to the Company's pre-petition mortgage, were transferred by PHCM to
a new operator who paid for the facilities by execution of a promissory note
that has been assigned to the Company. PHCM was given a $4.5 million credit on
February 1, 2001 and an additional $3.5 million credit as of September 1, 2001,
both against the PHCM loan balance in exchange for the assignment of the
promissory note to the Company. The promissory note is secured by a first
mortgage on the four facilities.
Following the closing of the settlement agreement, the outstanding
principal balance on the PHCM loan is approximately $59.7 million. The PHCM loan
term will be ten years with PHCM having the option to extend for an additional
ten years. PHCM will also have the option to prepay the PHCM loan between
February 1, 2005 and July 31, 2005.
Owned and Operated Assets
The Company owns 60 facilities that were recovered from customers and are
operated for the Company's own account. These facilities have 4,701 beds and are
located in nine states. During the three-month period ended September 30, 2001,
one of the Company's previously Owned and Operated facilities was sold and two
were closed and reclassified to Assets Held for Sale.
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. As a result, these facilities and their respective
operations are presented on a consolidated basis in the Company's financial
statements. See Note J - Subsequent Events.
The revenues, expenses, assets and liabilities included in the Company's
condensed consolidated financial statements which relate to such owned and
operated assets are set forth in the table below. Nursing home revenues from
these owned and operated assets are recognized as services are provided. 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 have occurred at different times during
the periods presented.
7
Unaudited
(In Thousands)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues (1)
Medicaid ....................................... $ 27,084 $ 29,176 $ 80,645 $ 75,535
Medicare ....................................... 10,074 8,646 32,588 21,896
Private & Other ................................ 6,662 8,138 20,380 26,030
----- ----- ------ ------
Total Revenues ............................. 43,820 45,960 133,613 123,461
Expenses
Patient Care Expenses .......................... 30,917 28,782 93,638 78,885
Administration ................................. 7,246 13,171 21,423 30,613
Property & Related ............................. 3,092 3,084 9,052 7,955
----- ----- ----- -----
Total Expenses ............................. 41,255 45,037 124,113 117,453
Contribution Margin ............................ 2,565 923 9,500 6,008
Management Fees ................................ 2,217 2,337 7,084 6,235
Rent ........................................... 967 1,178 3,368 2,748
--- ----- ----- -----
Net Operating Loss ............................. $ (619) $ (2,592) $ (952) $ (2,975)
====== ======== ====== ========
Unaudited
(In Thousands)
September 30, December 31,
2001 2000
---- ----
ASSETS
Cash ........................................... $ 8,826 $ 5,364
Accounts Receivable - Net ...................... 38,150 30,030
Other Current Assets ........................... 6,013 5,098
----- -----
Total Current Assets ....................... 52,989 40,492
Investment in leasehold ........................ 1,722 1,679
Land and Buildings ............................. 116,002 130,601
Less Accumulated Depreciation .................. (17,043) (17,680)
------- -------
Land and Buildings - Net ....................... 98,959 112,921
------- -------
TOTAL ASSETS ................................... $ 153,670 $ 155,092
========= =========
LIABILITIES
Accounts Payable ............................... $ 4,861 $ 8,636
Other Current Liabilities ...................... 6,967 6,108
----- -----
Total Current Liabilities .................. 11,828 14,744
----- -----
TOTAL LIABILITIES .............................. $ 11,828 $ 14,744
======== ========
Assets Held for Sale
At September 30, 2001, the carrying value of assets held for sale totals
$7.4 million (net of impairment reserves of $15.9 million). The Company intends
to sell the remaining facilities as soon as practicable. 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 carrying 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 nine-month
periods ended September 30, 2001 and 2000.
For the three months ended September 30, 2001
---------------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
---------- -------- --------- ------------
(In Thousands)
Operating Revenues ....................................... $ 20,066 $ 43,820 $ - $ 63,886
Operating Expenses ....................................... - (44,439) - (44,439)
------ ------- --- -------
Net operating income (loss)............................. 20,066 (619) - 19,447
Adjustments to arrive at net income (loss):
Other revenues ......................................... - - 2,949 2,949
Depreciation and amortization .......................... (4,273) (1,018) (224) (5,515)
Interest expense ....................................... - - (9,124) (9,124)
General and administrative ............................. - - (2,203) (2,203)
Legal .................................................. - - (1,145) (1,145)
State Taxes ............................................ - - (126) (126)
Litigation settlement expense .......................... - - - -
Provision for impairment ............................... - - - -
Provision for uncollectable accounts ................... (19) - - (19)
Severance, moving and consulting agreement costs ....... - - (4,300) (4,300)
Charges for derivative accounting ...................... - - (561) (561)
----- ----- ---- ----
(4,292) (1,018) (14,734) (20,044)
------ ------ ------- -------
Income (loss) before net loss on assets sold and
gain on early extinguishment of debt .................. 15,774 (1,637) (14,734) (597)
Loss on assets sold - net ................................ - (1,485) - (1,485)
Gain on early extinguishment of debt ..................... - - 226 226
Preferred dividends ...................................... - - (5,029) (5,029)
------- ----- ------ ------
Net income (loss) available to common .................... $ 15,774 $ (3,122) $ (19,537) $ (6,885)
======== ======== ========= ========
Total Assets ............................................. $ 686,411 $ 161,047 $ 63,807 $ 911,265
========= ========= ======== =========
9
For the three months ended September 30, 2000
---------------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
---------- -------- --------- ------------
(In Thousands)
Operating Revenues ....................................... $ 21,391 $ 45,960 $ - $ 67,351
Operating Expenses ....................................... - (48,552) - (48,552)
-------- ------- ---- -------
Net operating income (loss)............................. 21,391 (2,592) - 18,799
Adjustments to arrive at net income (loss):
Other revenues ......................................... - - 660 660
Depreciation and amortization .......................... (4,302) (967) (388) (5,657)
Interest expense ....................................... - - (9,846) (9,846)
General and administrative ............................. - - (1,830) (1,830)
Legal .................................................. - - (481) (481)
State Taxes ............................................ - - (15) (15)
Provision for impairment ............................... (1,940) (47,909) - (49,849)
Provision for uncollectable accounts ................... (12,100) - - (12,100)
Severance and consulting agreement costs ............... - - (4,665) (4,665)
------- ------- ------ ------
(18,342) (48,876) (16,565) (83,783)
------- ------- ------- -------
Income (loss) before net loss on assets sold ............. 3,049 (51,468) (16,565) (64,984)
Loss on assets sold-net .................................. (109) - - (109)
Preferred dividends ...................................... - - (5,705) (5,705)
----- ------ ------ ------
Net income (loss) available to common .................... $ 2,940 $ (51,468) $ (22,270) $ (70,798)
======= ========= ========= =========
Total Assets ............................................. $ 719,848 $ 166,038 $ 78,803 $ 964,689
========= ========= ======== =========
10
For the nine months ended September 30, 2001
--------------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
---------- -------- --------- ------------
(In Thousands)
Operating Revenues ....................................... $ 62,029 $ 133,613 $ - $ 195,642
Operating Expenses ....................................... - (134,565) - (134,565)
------- -------- --- --------
Net operating income (loss)............................. 62,029 (952) - 61,077
Adjustments to arrive at net income (loss):
Other revenues ......................................... - - 6,024 6,024
Depreciation and amortization .......................... (12,941) (2,950) (669) (16,560)
Interest expense ....................................... - - (28,039) (28,039)
General and administrative ............................. - - (7,707) (7,707)
Legal .................................................. - - (2,862) (2,862)
State Taxes ............................................ - - (339) (339)
Litigation settlement expense .......................... - - (10,000) (10,000)
Provision for impairment ............................... - - (8,381) (8,381)
Provision for uncollectable accounts ................... (700) - - (700)
Severance, moving and consulting agreement costs ....... - - (4,766) (4,766)
Charges for derivative accounting ...................... - - (1,113) (1,113)
------ ----- ------ ------
(13,641) (2,950) (57,852) (74,443)
------- ------ ------- -------
Income (loss) before net loss on assets sold and
gain on early extinguishment of debt .................. 48,388 (3,902) (57,852) (13,366)
Loss on assets sold - net ................................ - (873) - (873)
Gain on early extinguishment of debt ..................... - - 2,963 2,963
Preferred dividends ...................................... - - (14,966) (14,966)
---- ---- ------- -------
Net income (loss) available to common .................... $ 48,388 $ (4,775) $ (69,855) $ (26,242)
======== ======== ========= =========
Total Assets ............................................. $ 686,411 $ 161,047 $ 63,807 $ 911,265
========= ========= ======== =========
11
For the nine months ended September 30, 2000
--------------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
---------- -------- --------- ------------
(In Thousands)
Operating Revenues ....................................... $ 67,452 $ 123,461 $ - $ 190,913
Operating Expenses ....................................... - (126,436) - (126,436)
--- -------- --- --------
Net operating income (loss)............................. 67,452 (2,975) - 64,477
Adjustments to arrive at net income (loss):
Other revenues ......................................... - - 4,760 4,760
Depreciation and amortization .......................... (13,723) (2,545) (1,117) (17,385)
Interest expense ....................................... - - (32,221) (32,221)
General and administrative ............................. - - (4,631) (4,631)
Legal .................................................. - - (974) (974)
State Taxes ............................................ - - (241) (241)
Provision for impairment ............................... (1,940) (52,409) - (54,349)
Provision for uncollectable accounts ................... (12,100) - - (12,100)
Severance and consulting agreement costs ............... - - (4,665) (4,665)
------ ------ ------ ------
(27,763) (54,954) (39,089) (121,806)
------- ------- ------- --------
Income (loss) before gain on assets sold ................. 39,689 (57,929) (39,089) (57,329)
Gain on assets sold-net .................................. 10,342 - - 10,342
Preferred dividends ...................................... - - (10,520) (10,520)
------- ------- ------- -------
Net income (loss) available to common .................... $ 50,031 $ (57,929) $ (49,609) $ (57,507)
======== ========= ========= =========
Total Assets ............................................. $ 719,848 $ 166,038 $ 78,803 $ 964,689
========= ========= ======== =========
Note C - Concentration of Risk and Related Issues
As of September 30, 2001, the Company's portfolio of domestic investments
consisted of 246 healthcare facilities, located in 29 states and operated by 32
third-party operators. The Company's gross investments in these facilities
totaled $887.2 million at September 30, 2001. This portfolio is made up of 129
long-term healthcare facilities and 2 rehabilitation hospitals owned and leased
to third parties, fixed rate, participating and convertible participating
mortgages on 55 long-term healthcare facilities and 48 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 $55.2 million at September
30, 2001, including $22.3 million related to two non-healthcare facilities
leased by the United States Postal Service, a $7.7 million investment in Omega
Worldwide, Inc., Principal Healthcare Finance Limited, an Isle of Jersey (United
Kingdom) company and Principal Healthcare Finance Trust, an Australian Unit
Trust, and $14.3 million of notes receivable.
Seven public companies operate approximately 73.7% of the Company's
investments, including Sun Healthcare Group, Inc. (24.6%), Integrated Health
Services, Inc. (18.1%, including 10.7% as the manager for and 50% owner of Lyric
Health Care LLC), Advocat, Inc. (12.0%), Mariner Post-Acute Network (6.7%),
Kindred Healthcare, Inc. (formerly known as Vencor Operating, Inc.) (5.7%),
Alterra Healthcare Corporation (3.8%), and Genesis Health Ventures, Inc. (2.8%).
12
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 (16.0%), California (7.5%) 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 that
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
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.
14
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. During 2000 a number of
companies were actively marketing portfolios of similar assets and, in light of
the market conditions in the long-term care industry generally, it had become
more difficult both to sell 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 accumulated and unpaid dividends relating to all series of the
preferred stock, excluding the November 15, 2000 Series C dividends described
below, total $14.9 million as of September 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 deferral
fee by issuing 48,420 Series C preferred shares to Explorer Holdings, L.P.
("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.
During the nine-month period ended September 30, 2000 the Company paid
dividends of $4.0 million on its 9.25% Series A Cumulative Preferred Stock and
8.625% Series B Cumulative Preferred Stock.
15
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 September 30, 2001, the Company holds a $4.9 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
nine-month periods ended September 30, 2001 were $32,500 and $97,500,
respectively, compared with ($19,000) and $370,000 for the same periods in 2000.
16
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
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 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. Ronald M. Dickerman and Bryan
Gordon are partners in Madison and limited guarantors 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 continues to vigorously
defend the case and has filed counterclaims against Madison and the guarantors,
seeking repayment of approximately $9.4 million, excluding default interest,
that Madison owes the Company. The Company's Motion for Summary Judgment seeking
dismissal of Madison's anticipatory breach claim is scheduled for November 19,
2001. The trial in this matter is set for February 2002.
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 million of financing for the development of 13 assisted
living facilities. Karrington was seeking recovery of approximately $34 million
in damages it alleged to have incurred as a result of the breach. On August 13,
2001, the Company paid Karrington $10 million 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. The settlement was recorded in the quarter ended June
30, 2001.
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 London Interbank Offered Rates ("LIBOR"), based on the
Company's leverage ratio. Borrowings of approximately $129 million are
outstanding at September 30, 2001. Investments with a gross book value of
approximately $240 million are pledged as collateral for this credit facility.
17
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 $74.6 million are outstanding at September 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 nine-month periods ended September 30, 2001, the
Company repurchased $3.9 million and $25.4 million, respectively, of its 6.95%
Notes maturing in June 2002. At September 30, 2001, $99.6 million of these notes
remain outstanding.
As of September 30, 2001, the Company had an aggregate of $238.6 million of
outstanding debt that matures in 2002, including $99.6 million of 6.95% Notes
due June 2002 and $139 million on credit facilities expiring in 2002.
The recognition of $10 million of expense associated with the settlement of
the lawsuit with Karrington Health, Inc. described in Note G above resulted in a
violation of certain financial covenants in the loan agreements relating to the
Company's secured credit facilities as of June 30, 2001. The Company previously
obtained a waiver from the lenders under both credit facilities through
September 14, 2001. The lenders under the Company's $175 million secured credit
facility have extended this waiver through December 13, 2001. The waiver granted
by the lenders under the Company's $75 million secured credit facility has
expired and discussions with the lenders are continuing. The Company has not
received any notice of default or acceleration of the outstanding balance under
that facility. These covenant violations prevent the Company from drawing upon
the otherwise remaining availability under both credit facilities until a
permanent resolution is attained.
At September 30, 2001 the Company would have had $14.5 million available
under its secured revolving credit facilities if it were in compliance with the
applicable financial covenants. Certain assets that served as collateral for one
of the credit facilities were recovered from a customer during the June 30, 2001
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 $18.1 million subject to compliance with the applicable financial
covenants. (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
18
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 September 30, 2001, the Company had two interest rate swaps with
notional amounts of $32 million each, based on 30-day 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 September 30, 2001, 30-day LIBOR was 2.63%. 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 September 30, 2001 was a
liability of $351,344 and $1,200,369, 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 nine-month periods ended September 30, 2001 of $87,836 and
$263,508, respectively, together with the change in fair value of the swap of
$472,544 and $849,025, 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 September 30,
2001 was a liability of $805,928, which is included in other comprehensive
income as required under FASB No. 133 for fully effective cash flow hedges.
The fair values of these interest rate swaps are included in accrued
expenses and other liabilities in the Company's Condensed Consolidated Balance
Sheet at September 30, 2001.
FASB 144 Accounting for the Impairment or Disposal of Long-Lived Assets
The Financial Accounting Standards Board recently issued SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, which is
applicable to financial statements issued for fiscal years beginning after
December 15, 2001. The Company expects to adopt the new pronouncement effective
January 1, 2002. This pronouncement supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed. The Company has not yet evaluated the impact of this pronouncement
on its financial condition or results of operations.
19
Note J - Subsequent Events
On October 30, 2001, the Company announced a plan to raise $50 million in
new equity capital from its current stockholders. The Company's plan to raise
$50 million of new common equity consists of two components: a $27.24 million
rights offering to its common stockholders and a private placement of at least
$22.76 million to Explorer Holdings, L.P., the Company's largest stockholder.
In addition to customary closing conditions, the closing of the rights
offering and the private placement will be subject to the Company obtaining
certain amendments to its senior secured bank facilities and waiver of the
Company's current non-compliance with certain covenants on terms acceptable to
the Company and Explorer. Although the Company is in discussions with the
lenders under such facilities, the Company cannot provide any assurance as to
whether satisfactory amendments and waivers will be reached with such lenders
or, if so, as to the terms thereof. In the event such conditions are not
satisfied, the Company intends to terminate the rights offering and the private
placement.
A registration statement relating to the rights offering and the underlying
common stock issuable upon exercise of rights has not yet been filed with the
SEC. These securities, if registered, may not be sold nor may offers to buy be
accepted prior to the time the proposed registration statement becomes
effective. The rights offering will only be made by means of a prospectus
contained in a registration statement to be filed with the SEC. The securities
to be sold to Explorer in the private placement have not been registered under
the U.S. Securities Act of 1933, as amended, and may not be offered or sold
without registration thereunder or pursuant to an available exemption therefrom.
The Company does not currently intend to register these securities.
On November 1, 2001, seventeen properties previously classified as Owned
and Operated Assets were sold to Hickory Creek Healthcare Foundation, Inc.,
subject to a mortgage provided by the Company in the amount of $10.5 million.
The initial term of the mortgage is three years and the initial yield is 7.6%.
20
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Certain information contained in this report includes forward-looking
statements. Forward looking statements include statements regarding the
Company's future dividend policy, future liquidity and capital resources,
ability to repay indebtedness, 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 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 a bankruptcy
proceeding and retain security deposits for the debtor's obligations; (iv) the
availability and cost of capital; (v) regulatory and other changes in the
healthcare sector; (vi) the ability of the Company to manage, re-lease or sell
its owned and operated facilities; (vii) competition in the financing of
healthcare facilities; (viii) the effect of economic and market conditions
generally, and particularly in the healthcare industry; (ix) changes in interest
rates; (x) the amount and yield of any additional investments; (xi) changes in
tax laws and regulations affecting real estate investment trusts; (xii) access
to the capital markets and the cost of capital; (xiii) changes in the ratings of
the Company's debt securities; (xiv) the ability of the Company to negotiate
appropriate revisions to the terms of existing credit facilities and to complete
the proposed equity offering; and (xv) 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 and the
Company's registration statement on Form S-1 to be filed with the Securities and
Exchange Commission on or about November 2, 2001.
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)
21
Results of Operations
Revenues for the three-month and nine-month periods ended September 30,
2001 totaled $66.8 million and $201.7 million, respectively, a decrease of $1.2
million and an increase of $6.0 million, respectively, over the periods ending
September 30, 2000. Excluding nursing home revenues of Owned and Operated
Assets, revenues were $23.0 million and $68.1 million, respectively, for the
three-month and nine-month periods ended September 30, 2001, an increase of $1.0
million and a decrease of $4.2 million, respectively, from the comparable prior
year periods.
Rental income for the three-month and nine-month periods ended September
30, 2001 totaled $14.9 million and $45.7 million, respectively, a decrease of
$0.6 million and $4.0 million, respectively, over the same periods in 2000. The
three-month decrease is due to $1.5 million from reductions in lease revenue due
to foreclosures, bankruptcies and restructurings. This decrease is offset by
$0.3 million relating to contractual increases in rents that became effective in
2001 and $0.2 million relating to assets previously classified as owned and
operated. The nine-month decrease is due to $3.8 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 $0.9 million relating to contractual increases in
rents that became effective in 2001 as defined under the related agreements and
$0.2 million relating to assets previously classified as owned and operated.
Mortgage interest income for the three-month and nine-month periods ended
September 30, 2001 totaled $5.1 million and $16.3 million, respectively,
decreasing $0.8 million and $1.5 million, respectively, from the same periods in
2000. The three-month decrease is due to reduced investments resulting from the
payoff of mortgage notes. The nine-month decrease is due to reductions from
foreclosures, bankruptcies and restructurings ($0.5 million) and reduced
investments resulting from the payoffs of mortgage notes ($1.2 million). 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
nine-month periods ended September 30, 2001 totaled $43.8 million and $133.6
million, respectively, decreasing $2.1 million and increasing $10.2 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 2001 to a new operator. The increase in the nine-month period
is primarily due to the inclusion of 30 facilities formerly operated by RainTree
Healthcare Corporation ("RainTree") for the full nine-month period ended
September 30, 2001 versus seven months during the nine-month period ended
September 30, 2000.
Expenses for the three-month and nine-month periods ended September 30,
2001 totaled $67.4 million and $215.0 million, respectively, decreasing
approximately $65.6 million and $38.0 million, respectively, over expenses of
$133.0 million and $253.0 million for the three-month and nine-month periods
ended September 30, 2000.
Nursing home expenses for owned and operated assets for the three-month
period and nine-month periods ended September 30, 2001 decreased by $4.1 million
and increased by $8.1 million, respectively, from $48.6 million and $126.4
million for same periods in 2000. The decrease in the three-month period is due
22
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 2001 to
a new operator. The increase in the nine-month period is primarily due to the
inclusion of 30 facilities formerly operated by RainTree for the full nine-month
period ended September 30, 2001 versus seven months during the nine-month period
ended September 30, 2000.
The provision for depreciation and amortization totaled $5.5 million and
$16.6 million, respectively, during the three-month and nine-month periods ended
September 30, 2001. This is a decrease of $0.1 million and $0.8 million,
respectively, over the same periods in 2000. The decrease is primarily due to
assets sold in 2000, 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 nine-month periods ended September
30, 2001 was approximately $9.1 million and $28.0 million, compared with $9.8
million and $32.2 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 nine-month
periods ended September 30, 2001 totaled $2.2 million and $7.7 million,
respectively, as compared to $1.8 million and $4.6 million, respectively, for
the same periods in 2000, an increase of $0.4 million and $3.1 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 nine-month periods ended September
30, 2001 totaled $1.1 million and $2.9 million, respectively, an increase of
$0.7 million and $1.9 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)
The nine-month period ended September 30, 2001 included a $10 million
litigation settlement expense related to a suit brought against the Company by
Karrington, Health, Inc. which was recorded in the quarter ended June 30, 2001.
(See Note G - Litigation)
Expenses for the nine-month period ended September 30, 2001 included a
provision for impairment of $8.4 million. This provision was recorded to reduce
the cost basis of assets recovered from a defaulting operator to their fair
value less costs of disposal, since these assets are being marketed for sale. A
provision for impairment of $54.3 million was recognized in the 2000 period,
including $41.1 million related to foreclosure assets operated for the Company's
account, $11.3 million related to assets held for sale and $1.9 million related
to a leased asset doubtful of recovery.
23
Charges totaling $0.7 million for provision for uncollectable accounts were
taken during the nine-month period ended September 30, 2001 relating to
write-off of rents due from and funds advanced to the defaulting operator. A
provision for uncollectable accounts of $12.1 million was recognized in the 2000
periods, including a provision for loss on mortgages ($4.9 million) and notes
receivable ($7.2 million).
Severance, moving and consulting agreement costs of $4.3 million were
recorded in the three-month period ended September 30, 2001 in connection with
the Company's planned relocation to Maryland. The nine-month period ended
September 30, 2001 also includes $0.5 million related to the termination of an
employment contract with an officer of the Company. Severance and consulting
agreement costs of $4.7 million were recognized during the same period in 2000.
The Company disposed of one healthcare facility during the three-month
period ended September 30, 2001, resulting in a loss on sale of $1.5 million.
The loss on sale of $0.9 million for the nine-month period ended September 30,
2001 includes the gain on sale of $0.6 million from the sale of three healthcare
facilities. For the nine-month period ended September 30, 2000, a gain of $10.3
million was recognized on the disposal of real estate. The net gain was
comprised of a $10.9 million gain on the sale of four facilities previously
leased to Tenet Healthsystem Philadelphia, Inc., offset by a loss of $0.6
million on the sale of a healthcare facility.
Funds from operations ("FFO") for the three-month and nine-month periods
ended September 30, 2001 were $0.5 million and a deficit of $2.3 million,
respectively, an increase of approximately $15.7 million and a decrease of $6.2
million, respectively, as compared to the deficit of $15.2 million and positive
$3.9 million for the same periods in 2000 due to factors mentioned above.
Diluted FFO amounts were $3.1 million and $5.5 million, respectively, for the
three-month and nine-month periods ended September 30, 2001, as compared to the
deficit of $11.0 million and positive $10.2 million for the same period in 2000
due to factors mentioned above. FFO is defined as net earnings available to
common stockholders, excluding any gains or losses from debt restructuring and
the effects of asset dispositions, plus depreciation and amortization associated
with real estate investments. 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 stockholders. FFO in and of itself does not represent cash generated from
operating activities in accordance with generally accepted accounting principles
("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.
24
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 stockholders.
Liquidity and Capital Resources
At September 30, 2001, the Company had total assets of $911.3 million,
stockholders' equity of $456.7 million, and long-term debt of $426.0 million,
representing approximately 46.7% of total capitalization.
The Company has two secured revolving credit facilities in place, providing
up to $250 million of financing, of which $203.6 million was outstanding and
$13.7 million of which was utilized for the issuance of letters of credit at
September 30, 2001. The recognition of $10 million of expense associated with
the settlement of the lawsuit with Karrington Health, Inc. resulted in a
violation of certain of the financial covenants in the loan agreements with the
Company's primary lenders at June 30, 2001. The Company previously obtained a
waiver from the lenders under both credit facilities through September 14, 2001.
The lenders under the Company's $175 million secured credit facility have
extended this waiver through December 13, 2001. The waiver granted by the
lenders under the Company's $75 million secured credit facility has expired and
discussions with the lenders are continuing. The Company has not received any
notice of default or acceleration of the outstanding balance under that
facility. These covenant violations prevent the Company from drawing upon the
otherwise remaining availability under both credit facilities until a permanent
resolution is attained.
As of the date of this report, the Company would have had $14.5 million
available under its secured revolving credit facilities if the Company were in
compliance with the covenants in the loan documents. Certain assets that served
as collateral for one of the credit facilities were recovered from a customer
during the June 30, 2001 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 $18.1 million subject to compliance with
the applicable financial covenants.
As of September 30, 2001, the Company had an aggregate of $238.6 million of
outstanding debt that matures in 2002, including $99.6 million of 6.95% Notes
due June 2002, $10 million on its credit facility maturing on March 31, 2002,
and $129 million on credit facilities expiring on December 31, 2002.
In prior years, the Company historically distributed to stockholders a
large portion of the cash available from operations. The Company's historical
policy had 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
25
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 can give no assurance as to when or if the dividends will be
reinstated on the common stock or preferred stock or the amount of the dividends
if and when such payments are recommenced. The Company does not anticipate
paying dividends on any class of capital stock unless and until the
approximately $110 million ($108 million as of the date of this report) of
indebtedness maturing in the first half of 2002 has been repaid. 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 $0.25 per common share and $0.75 per common
share, respectively, for the three-month and nine-month periods ended September
31, 2000. No common dividends were paid during the first three quarters of 2001.
The Company has received a capital commitment from the holder of its Series
C Preferred Stock and has announced a rights offering to its current
stockholders, together with a "backstop" for the rights offering and private
placement with the Series C holder, to provide a total of $50 million of new
equity into the Company. (See Note J - Subsequent Events)
Assuming the Company obtains the amendments it is seeking to the credit
facilities on satisfactory terms and that the rights offering and Explorer's
investment is completed, 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. 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. There also can be no assurance that the
Company will be able to complete the equity offering as planned, including the
required extension by one year of the December 31, 2002 expiring credit
facility. 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 stockholders,
or to pursue additional 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 stockholders.
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 September 30, 2001 was $396 million. A one-percent
increase in interest rates would result in a decrease in the fair value of
long-term borrowings by approximately $5.3 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
September 30, 2001, the Company had two interest rate swaps with notional
amounts of $32 million each, based on 30-day 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 September 30, 2001 was a deficit of $2,006,297. (See Note
I - Effect of New Accounting Pronouncements)
27
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note G 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
None this period.
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:
-------------------------------------------------------- ---------------- -------------------
Annual
Dividend Per Arrearage as of
Title of Class Share September 30, 2001
-------------------------------------------------------- ---------------- -------------------
-------------------------------------------------------- ---------------- -------------------
9.25% Series A Cumulative Preferred Stock $2.3125 $3,989,063
-------------------------------------------------------- ---------------- -------------------
-------------------------------------------------------- ---------------- -------------------
8.625% Series B Cumulative Preferred Stock $2.1563 3,234,375
-------------------------------------------------------- ---------------- -------------------
-------------------------------------------------------- ---------------- -------------------
Series C Convertible Preferred Stock $10.0000 7,660,493
-------------------------------------------------------- ---------------- -------------------
-------------------------------------------------------- ---------------- -------------------
TOTAL $14,883,931
-------------------------------------------------------- ---------------- -------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following Exhibits are filed herewith:
Exhibit Description
------- -----------
4.1 Form of Amended and Restated Articles Supplementary for Series C
Convertible Preferred Stock (Incorporated by reference to Exhibit B to
the Schedule 13D filed by Explorer Holdings, L.P. on October 29, 2001
on behalf of the Company)
28
4.2 Form of Articles Supplementary for Series D Convertible Preferred
Stock (Incorporated by reference to Exhibit C to the Schedule 13D
filed by Explorer Holdings, L.P. on October 29, 2001 on behalf of the
Company)
10.1 Employment Agreement between Omega Healthcare Investors, Inc. and R.
Lee Crabill, Jr., dated July 30, 2001
10.2 Employment Agreement between Omega Healthcare Investors, Inc. and
Robert O. Stephenson, dated August 30, 2001
10.3 Employment Agreement between Omega Healthcare Investors, Inc. and
Daniel J. Booth, dated October 15, 2001
10.4 Retention, Severance and Release Agreement between Omega Healthcare
Investors, Inc. and F. Scott Kellman, dated October 9, 2001
10.5 Retention, Severance and Release Agreement between Omega Healthcare
Investors, Inc. and Laurence D. Rich, dated August 1, 2001
10.6 Amended and Restated Secured Promissory Note between Omega Healthcare
Investors, Inc. and Professional Health Care Management, Inc. dated as
of September 1, 2001
10.7 Settlement Agreement between Omega Healthcare Investors, Inc.,
Professional Health Care Management, Inc., Living Centers - PHCM,
Inc., GranCare, Inc., and Mariner Post-Acute Network, Inc. dated as of
September 1, 2001
10.8 Investment Agreement, dated as of October 29, 2001, by and between
Omega Healthcare Investors, Inc. and Explorer Holdings, L.P.
(Incorporated by reference to Exhibit A to the Schedule 13D filed by
Explorer Holdings, L.P. on October 29, 2001 on behalf of the Company)
10.9 Form of Amended and Restated Stockholders Agreement (Incorporated by
reference to Exhibit D to the Schedule 13D filed by Explorer Holdings,
L.P. on October 29, 2001 on behalf of the Company)
29
10.10 Form of Amended and Restated Registration Rights Agreement
(Incorporated by reference to Exhibit E to the Schedule 13D filed by
Explorer Holdings, L.P. on October 29, 2001 on behalf of the Company)
10.11 Amendment No. 2 to Rights Agreement (Incorporated by reference to
Exhibit F to the Schedule 13D filed by Explorer Holdings, L.P. on
October 29, 2001 on behalf of the Company)
(b) Reports on Form 8-K
The following reports on Form 8-K were filed since June 30, 2001:
Form 8-K dated October 31, 2001: Report with the following exhibits:
Press release issued by Omega Healthcare Investors, Inc. on October
30, 2001
30
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: November 2, 2001 By: /s/ C. Taylor Pickett
-----------------
C. Taylor Pickett
Chief Executive Officer
Date: November 2, 2001 By: /s/ Robert O. Stephenson
--------------------
Robert O. Stephenson
Chief Financial Officer
31