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, 2002
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.)
9690 Deereco Road, Suite 100, Timonium, MD 21093
(Address of principal executive offices)
(410) 427-1700
(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, 2002
Common Stock, $.10 par value 37,131,144
(Class) (Number of shares)
OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
June 30, 2002
INDEX
Page No.
PART I Financial Information
Item 1. Consolidated Financial Statements:
Balance Sheets
June 30, 2002 (unaudited)
and December 31, 2001.................................... 2
Statements of Operations (unaudited)
Three- and six-month periods ended
June 30, 2002 and 2001................................... 3
Statements of Cash Flows (unaudited)
Six-month periods ended
June 30, 2002 and 2001................................... 4
Notes to Consolidated Financial Statements
June 30, 2002 (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... 25
PART II Other Information
Item 1. Legal Proceedings............................................ 27
Item 2. Changes in Securities and Use of Proceeds.................... 27
Item 3. Defaults Upon Senior Securities.............................. 27
Item 4. Submission of Matters to a Vote of Security Holders.......... 28
Item 6. Exhibits and Reports on Form 8-K............................. 28
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statement
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
2002 2001
--------------- ---------------
(Unaudited) (See Note)
ASSETS
Real estate properties
Land and buildings at cost................................................... $ 678,977 $ 684,848
Less accumulated depreciation................................................ (108,510) (100,038)
--------------- ---------------
Real estate properties--net............................................... 570,467 584,810
Mortgage notes receivable--net............................................... 190,802 195,193
--------------- ---------------
761,269 780,003
Other investments--net.......................................................... 48,391 50,791
--------------- ---------------
809,660 830,794
Assets held for sale--net....................................................... 5,972 7,396
--------------- ---------------
Total investments............................................................ 815,632 838,190
Cash and cash equivalents....................................................... 9,136 11,445
Accounts receivable--net........................................................ 3,027 4,565
Other assets.................................................................... 6,924 6,732
Operating assets for owned properties........................................... 22,691 29,907
--------------- ---------------
Total assets................................................................. $ 857,410 $ 890,839
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolving lines of credit....................................................... $ 207,690 $ 193,689
Unsecured borrowings............................................................ 100,000 197,526
Other long-term borrowings...................................................... 30,211 21,957
Accrued expenses and other liabilities.......................................... 14,375 16,790
Operating liabilities for owned properties...................................... 4,929 10,187
--------------- ---------------
Total liabilities............................................................ 357,205 440,149
Preferred stock................................................................. 212,342 212,342
Common stock and additional paid-in capital..................................... 484,719 440,071
Cumulative net earnings......................................................... 169,808 165,891
Cumulative dividends paid....................................................... (365,654) (365,654)
Unamortized restricted stock awards............................................. (116) (142)
Accumulated other comprehensive loss............................................ (894) (1,818)
--------------- ---------------
Total stockholders' equity................................................... 500,205 450,690
--------------- ---------------
Total liabilities and stockholders' equity................................... $ 857,410 $ 890,839
=============== ===============
Note - The balance sheet at December 31, 2001 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
for complete financial statements.
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------
2002 2001 2002 2001
----------------------------------------------------
Revenues
Rental income............................................................. $ 15,666 $ 14,729 $ 31,097 $ 30,750
Mortgage interest income.................................................. 5,186 5,535 10,598 11,213
Other investment income - net............................................. 1,056 1,008 2,159 2,266
Nursing home revenues of owned and operated assets........................ 12,210 43,796 33,958 89,793
Miscellaneous............................................................. 286 586 516 809
----------------------------------------------------
34,404 65,654 78,328 134,831
----------------------------------------------------
Expenses
Nursing home expenses of owned and operated assets........................ 13,485 43,676 37,185 90,126
Depreciation and amortization............................................. 5,352 5,504 10,678 11,045
Interest.................................................................. 7,110 9,243 15,276 18,915
General and administrative................................................ 1,770 3,155 3,489 5,504
Legal..................................................................... 797 766 1,652 1,717
State taxes............................................................... 87 107 216 213
Litigation settlement expense............................................. - 10,000 - 10,000
Provision for impairment.................................................. 2,483 8,381 2,483 8,381
Provision for uncollectible mortgages, notes and accounts receivable...... 3,679 681 3,679 681
Severance, moving and consulting agreement costs.......................... - 466 - 466
Adjustment of derivatives to fair value................................... (198) 70 (598) 552
----------------------------------------------------
34,565 82,049 74,060 147,600
----------------------------------------------------
(Loss) earnings before (loss) gain on assets sold and (loss) gain on early
extinguishment of debt.................................................... (161) (16,395) 4,268 (12,769)
(Loss) gain on assets sold - net............................................ (302) (7) (302) 612
----------------------------------------------------
Net (loss) earnings before (loss) gain on early extinguishment of debt...... (463) (16,402) 3,966 (12,157)
(Loss) gain on early extinguishment of debt................................. (77) 2,489 (49) 2,737
----------------------------------------------------
Net (loss) earnings......................................................... (540) (13,913) 3,917 (9,420)
Preferred stock dividends................................................... (5,029) (5,029) (10,058) (9,937)
----------------------------------------------------
Net loss available to common................................................ $ (5,569) $(18,942) $ (6,141) $(19,357)
====================================================
Loss per common share:
Net loss per share - basic................................................ $ (0.15) $ (0.95) $ (0.19) $ (0.97)
====================================================
Net loss per share - diluted.............................................. $ (0.15) $ (0.95) $ (0.19) $ (0.97)
====================================================
Loss per common share before (loss) gain on early extinguishment of debt:
Net loss per share - basic................................................ $ (0.15) $ (1.07) $ (0.19) $ (1.10)
====================================================
Net loss per share - diluted.............................................. $ (0.15) $ (1.07) $ (0.19) $ (1.10)
====================================================
Dividends declared and paid per common share................................ $ - $ - $ - $ -
====================================================
Weighted-average shares outstanding, basic.................................. 37,129 20,013 32,302 20,013
====================================================
Weighted-average shares outstanding, diluted................................ 37,129 20,013 32,302 20,013
====================================================
Components of other comprehensive (loss) income:
Unrealized gain on Omega Worldwide, Inc................................... $ 12 $ 247 $ 558 $ 247
====================================================
Unrealized gain (loss) on hedging contracts............................... $ 83 $ (82) $ 366 $ (436)
====================================================
Total comprehensive (loss) income........................................... $ (445) $(13,748) $ 4,841 $ (9,609)
====================================================
See notes to consolidated financial statements.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
Six Months Ended
June 30,
-------------------------------------------
2002 2001
-------------------------------------------
Operating activities
Net earnings (loss)............................................................. $ 3,917 $ (9,420)
Adjustment to reconcile net earnings (loss) to cash provided by operating
activities:
Depreciation and amortization............................................... 10,678 11,045
Provision for impairment.................................................... 2,483 8,381
Provision for uncollectible mortgages, notes and accounts receivable........ 3,679 681
Loss (gain) on assets sold - net............................................ 302 (612)
Loss (gain) on early extinguishment of debt................................. 49 (2,737)
Adjustment of derivatives to fair value..................................... (598) 552
Other....................................................................... 1,332 630
Net change in accounts receivable for Owned and Operated assets--net............ 5,270 (3,474)
Net change in accounts payable for Owned and Operated assets.................... (3,219) (2,796)
Net change in other Owned and Operated assets and liabilities................... (93) 1,961
Net change in operating assets and liabilities.................................. 195 2,556
-------------------------------------------
Net cash provided by operating activities....................................... 23,995 6,767
-------------------------------------------
Cash flows from financing activities
Proceeds from revolving lines of credit--net.................................... 14,001 13,000
Proceeds from long-term borrowings - net........................................ 13,523 -
Repayments of long-term borrowings.............................................. (97,591) (38,699)
Receipts from Dividend Reinvestment Plan........................................ 3 20
Proceeds from rights offering and private placement - net....................... 44,600 -
Deferred financing costs paid................................................... (4,024) (698)
Other........................................................................... - (45)
-------------------------------------------
Net cash used in financing activities........................................... (29,488) (26,422)
-------------------------------------------
Cash flow from investing activities
Proceeds from sale of real estate investments--net.............................. 1,045 1,364
Capital improvements and funding of other investments--net...................... (252) (465)
Collection of mortgage principal................................................ 2,391 22,379
-------------------------------------------
Net cash provided by investing activities....................................... 3,184 23,278
-------------------------------------------
(Decrease) increase in cash and cash equivalents................................ (2,309) 3,623
Cash and cash equivalents at beginning of period................................ 11,445 7,172
-------------------------------------------
Cash and cash equivalents at end of period...................................... $ 9,136 $ 10,795
===========================================
See notes to consolidated financial statements.
Omega Healthcare Investors, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
June 30, 2002
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements for Omega
Healthcare Investors, Inc. have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP") 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 GAAP for complete financial statements. In our opinion,
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. Operating results for the three- and
six-month periods ended June 30, 2002 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2002. For further
information, refer to the financial statements and footnotes included in our
annual report on Form 10-K for the year ended December 31, 2001.
Note B - Properties
In the ordinary course of our business activities, we periodically evaluate
investment opportunities and extend credit to customers. We also regularly
engage in lease and loan extensions and modifications. Additionally, we actively
monitor and manage our investment portfolio with the objectives of improving
credit quality and increasing returns. In connection with portfolio management,
we engage in various collection and foreclosure activities.
When we acquire real estate pursuant to a foreclosure, lease termination or
bankruptcy proceeding, and do 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 and an agreement is imminent, 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.
Upon adoption of FASB 144 as of January 1, 2002, long-lived assets sold or
designated as held for sale after January 1, 2002 are reported as discontinued
operations in our financial statements.
A summary of the number of properties by category for the quarter
ended June 30, 2002 follows:
Total Held
Purchase / Owned & Closed Healthcare for
Facility Count Leaseback Mortgages Operated Facilities Facilities Sale Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at March 31, 2002.............. 147 69 19 - 235 8 243
Properties transferred to
Held for Sale........................ - - - - - - -
Properties transferred to Owned &
Operated............................. - - - - - - -
Properties closed...................... (2) - (3) 3 (2) - (2)
Properties Sold / Mortgages
Paid................................. - - - - - (1) (1)
Transition Leasehold Interest.......... - - - - - - -
Properties Leased / Mortgages
Placed............................... - - - - - - -
Properties transferred to
Purchase/Leaseback................... 3 - (3) - - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002............... 148 69 13 3 233 7 240
====================================================================================================================================
Gross Investment
- ---------------------------------------
Balance at March 31, 2002.............. $650,000 $191,252 $ 36,953 $ - $878,205 $ 7,317 $885,522
Properties transferred to
Held for Sale........................ - - - - - - -
Properties transferred to Owned &
Operated............................. - - - - - - -
Properties closed...................... (5,560) - (1,300) 1,300 (5,560) - (5,560)
Properties Sold / Mortgages
Paid................................. - - - - - (1,345) (1,345)
Transition Leasehold Interest.......... - - - - - - -
Properties Leased / Mortgages
Placed............................... - - - - - - -
Properties transferred to
Purchase / Leaseback................. 14,364 - (14,364) - - - -
Impairment on Properties............... - - (2,483) - (2,483) - (2,483)
Capex and other........................ - (450) 67 - (383) - (383)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2002............ $658,804 $190,802 $ 18,873 $ 1,300 $869,779 $ 5,972 $875,751
====================================================================================================================================
Purchase / Leaseback
During the three-month period ending June 30, 2002, we leased three
properties, previously classified as Owned and Operated Assets, to a new
operator, Conifer Care Communities. The initial term for the master lease is for
56 months and includes three options to renew for four years each. The initial
base rent is four percent of gross revenues or approximately $0.4 million
annually for the first two years. After the second year, the rent increases by
the greater of three percent of the previous year's revenue or to an annual
minimum of $0.4 million.
As a result of the Department of Housing and Urban Development's ("HUD")
foreclosure proceedings associated with two closed facilities in North Carolina,
we have removed $5.2 million of net assets and $5.2 million of mortgage debt
from our Consolidated Balance Sheet as of June 30, 2002.
Mortgages Receivable
Mortgage interest income is recognized as earned over the terms of the
related mortgage notes. Reserves are taken against earned revenues from mortgage
interest when collection of amounts due becomes questionable or when
negotiations for restructurings of troubled operators lead to lower expectations
regarding ultimate collection. When collection is uncertain, mortgage interest
income on impaired mortgage loans is recognized as received after taking into
account application of security deposits.
No provision for loss on mortgages was recorded for the three- and
six-month periods ending June 30, 2002 and 2001. See Management's Discussion and
Analysis of Financial Condition and Results of Operations - Results of
Operations.
Owned and Operated Assets
At June 30, 2002, we own 13 facilities that were recovered from customers
and are operated for our own account. These facilities have 1,094 beds and are
located in five states.
During the three-month period ended June 30, 2002, we leased three
properties previously classified as Owned and Operated to a third-party
operator. See Purchase / Leaseback above. In addition, we closed three skilled
nursing facilities, which were classified as Owned and Operated Assets. The
three facilities included a 120-bed facility in Texarkana, Texas, an 88-bed
facility in Winthrop, Massachusetts and an 84-bed facility in Berkshire,
Massachusetts. A provision for impairment of $2.5 million was recorded to reduce
the carrying value of these assets to fair value less costs to dispose. See
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Results of Operations.
We intend to operate the remaining Owned and Operated assets for our own
account until such time as the facilities' operations are stabilized and are
re-leasable or saleable at lease rates or sale prices that maximize the value of
these assets to us. These facilities and their respective operations are
presented on a consolidated basis in our financial statements. In certain
instances, we might determine that the best course of action is to close a
facility in the event its future prospects appear limited. See Note J -
Subsequent Events.
The revenues, expenses, assets and liabilities included in our 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
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.
The revenues, expenses, assets and liabilities in our consolidated
financial statements which relate to our owned and operated assets are as
follows:
(Unaudited)
(In Thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- --------------------------------
2002 2001 2002 2001
------------------------------- --------------------------------
Revenues (1)
Medicaid......................................... $ 7,488 $ 26,321 $ 20,991 $ 53,561
Medicare......................................... 2,814 11,324 7,071 22,514
Private & other.................................. 1,908 6,151 5,896 13,718
------------------------------- --------------------------------
12,210 43,796 33,958 89,793
------------------------------- --------------------------------
Expenses
Patient care expenses............................ 7,832 29,568 23,110 62,721
Administration................................... 3,743 7,642 8,245 14,177
Property & related............................... 883 2,746 2,475 5,960
------------------------------- --------------------------------
12,458 39,956 33,830 82,858
------------------------------- --------------------------------
Contribution margin.............................. (248) 3,840 128 6,935
Management fees.................................. 678 2,418 1,878 4,867
Rent............................................. 349 1,302 1,477 2,401
------------------------------- --------------------------------
EBITDA (2)....................................... $ (1,275) $ 120 $ (3,227) $ (333)
=============================== ================================
(1) Nursing home revenues from these owned and operated assets are recognized
as services are provided.
(2) EBITDA represents earnings before interest, income taxes, depreciation and
amortization. We consider it to be a meaningful measure of performance of
our Owned and Operated Assets. EBITDA, in and of itself, does not represent
cash generated from operating activities in accordance with GAAP and
therefore should not be considered an alternative to net earnings as an
indication of operating performance or to net cash flow from operating
activities as determined by GAAP as a measure of liquidity, and is not
necessarily indicative of cash available to fund cash needs.
June 30, December 31,
2002 2001
---------------------------------------
(Unaudited)
(In Thousands)
ASSETS
Cash................................... $ 4,707 $ 6,549
Accounts receivable--net............... 21,851 27,121
Other current assets................... 633 2,125
---------------------------------------
Total current assets................ 27,191 35,795
---------------------------------------
Investment in leasehold--net........... 207 661
Land and buildings..................... 20,172 80,071
Less accumulated depreciation.......... (3,025) (8,647)
---------------------------------------
Land and buildings--net................ 17,147 71,424
---------------------------------------
Total assets........................... $ 44,545 $107,880
=======================================
LIABILITIES
Accounts payable....................... $ 1,597 $ 4,816
Other current liabilities.............. 3,332 5,371
---------------------------------------
Total current liabilities........... 4,929 10,187
---------------------------------------
Total liabilities...................... $ 4,929 $ 10,187
=======================================
Accounts receivable for owned and operated assets is net of an allowance
for doubtful accounts of approximately $5.7 million at June 30, 2002 and $8.3
million at December 31, 2001.
Assets Held for Sale
At June 30, 2002, the carrying value of assets held for sale totaled $6.0
million (net of impairment reserves of $7.3 million). During the three-month
period ended June 30, 2002, we sold one building located in Texas, realizing
proceeds of $1.0 million, net of closing costs, resulting in a loss of $0.3
million. We intend 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 us to realize the carrying
value of the assets.
Segment Information
The following tables set forth the reconciliation of operating results and
total assets for our reportable segments for the three- and six-month periods
ending June 30, 2002 and 2001.
As of and for the three months ended June 30, 2002
--------------------------------------------------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
--------------------------------------------------------------------------------
(Unaudited)
(In Thousands)
Operating revenues................................. $ 20,852 $ 12,210 $ - $ 33,062
Operating expenses................................. - (13,485) - (13,485)
--------------------------------------------------------------------------------
Net operating income............................. 20,852 (1,275) - 19,577
Adjustments to arrive at net income:
Other revenues................................... - - 1,342 1,342
Interest expense................................. - - (7,110) (7,110)
Depreciation and amortization.................... (4,875) (241) (236) (5,352)
General and administrative....................... - - (1,770) (1,770)
Legal............................................ - - (797) (797)
State taxes...................................... - - (87) (87)
Provision for impairment......................... - (2,483) - (2,483)
Provision for uncollectible mortgage, notes
and accounts receivable........................ (3,679) - - (3,679)
Adjustment of derivatives to fair value.......... - - 198 198
--------------------------------------------------------------------------------
(8,554) (2,724) (8,460) (19,738)
--------------------------------------------------------------------------------
Income (loss) before loss on assets sold and
gain on early extinguishment of debt............. 12,298 (3,999) (8,460) (161)
Loss on assets sold -- net......................... - (302) - (302)
Loss on early extinguishment of debt............... - - (77) (77)
Preferred dividends................................ - - (5,029) (5,029)
--------------------------------------------------------------------------------
Net income (loss) available to common.............. $ 12,298 (4,301) (13,566) (5,569)
================================================================================
Total assets....................................... $744,122 $ 50,724 $ 62,564 $857,410
================================================================================
As of and for the three months ended June 30, 2001
--------------------------------------------------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
--------------------------------------------------------------------------------
(Unaudited)
(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 impairment......................... - (8,381) - (8,381)
Provision for uncollectible mortgage, notes
and accounts receivable........................ (681) - - (681)
Charges for derivative accounting................ - - (70) (70)
--------------------------------------------------------------------------------
(5,025) (9,317) (22,437) (36,779)
--------------------------------------------------------------------------------
Income (loss) before loss on assets sold and
gain on early extinguishment of debt............. 15,239 (9,197) (22,437) (16,395)
Loss 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 $ (9,204) $(24,977) $(18,942)
================================================================================
Total assets....................................... $681,754 $156,350 $ 83,710 $921,814
================================================================================
As of and for the six months ended June 30, 2002
--------------------------------------------------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
--------------------------------------------------------------------------------
(Unaudited)
(In Thousands)
Operating revenues................................. $ 41,695 $ 33,958 $ - $ 75,653
Operating expenses................................. - (37,185) - (37,185)
--------------------------------------------------------------------------------
Net operating income............................. 41,695 (3,227) - 38,468
Adjustments to arrive at net income:
Other revenues................................... - - 2,675 2,675
Interest expense................................. - - (15,276) (15,276)
Depreciation and amortization.................... (9,481) (756) (441) (10,678)
General and administrative....................... - - (3,489) (3,489)
Legal............................................ - - (1,652) (1,652)
State taxes...................................... - - (216) (216)
Provision for impairment......................... - (2,483) - (2,483)
Provision for uncollectible mortgages, notes
and accounts receivable........................ (3,679) - - (3,679)
Adjustment of derivatives to fair value.......... - - 598 598
--------------------------------------------------------------------------------
(13,160) (3,239) (17,801) (34,200)
--------------------------------------------------------------------------------
Income (loss) before loss on assets sold and
loss on early extinguishment of debt............. 28,535 (6,466) (17,801) 4,268
Loss on assets sold -- net......................... - (302) - (302)
Loss on early extinguishment of debt............... - - (49) (49)
Preferred dividends................................ - - (10,058) (10,058)
--------------------------------------------------------------------------------
Net income (loss) available to common.............. $ 28,535 (6,768) (27,908) (6,141)
================================================================================
Total assets....................................... $744,122 $ 50,724 $ 62,564 $857,410
================================================================================
As of and for the six months ended June 30, 2001
--------------------------------------------------------------------------------
Owned and
Operated and
Core Assets Held Corporate
Operations For Sale and Other Consolidated
--------------------------------------------------------------------------------
(Unaudited)
(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 impairment......................... - (8,381) - (8,381)
Provision for uncollectible mortgages, notes
and accounts receivable........................ (681) - - (681)
Charges for derivative accounting................ - - (552) (552)
--------------------------------------------------------------------------------
(9,349) (10,313) (34,737) (54,399)
--------------------------------------------------------------------------------
Income (loss) before loss on assets sold and
gain on early extinguishment of debt............. 32,614 (10,646) (34,737) (12,769)
Loss 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 $(10,034) $(41,937) $(19,357)
================================================================================
Total assets....................................... $681,754 $156,350 $ 83,710 $921,814
================================================================================
Note C - Concentration of Risk and Related Issues
As of June 30, 2002, our portfolio of domestic investments consisted of 233
healthcare facilities, located in 28 states and operated by 36 third-party
operators. Our gross investment in these facilities, before reserve for
uncollectible loans, totaled $873.8 million at June 30, 2002, with 97.3% of our
real estate investments related to long-term care facilities. This portfolio is
made up of 146 long-term healthcare facilities and two rehabilitation hospitals
owned and leased to third parties, fixed-rate, participating and convertible
participating mortgages on 69 long-term healthcare facilities and nine long-term
healthcare facilities that were recovered from customers and are currently
operated through third-party management contracts for our own account and three
facilities which are closed. In addition, four facilities subject to third-party
leasehold interests are included in Other Investments. We also hold
miscellaneous investments and closed healthcare facilities held for sale of
approximately $54.4 million at June 30, 2002, including $22.1 million related to
two non-healthcare facilities leased by the United States Postal Service
("USPS"), a $7.9 million investment in Omega Worldwide, Inc. ("Worldwide"),
Principal Healthcare Finance Limited ("PHFL"), an Isle of Jersey (United
Kingdom) company and Principal Healthcare Finance Trust, an Australian Unit
Trust, and $11.9 million of notes receivable, net of allowance. See Note J -
Subsequent Events.
Approximately 66.9% of our real estate investments are operated by six
public companies, including Sun Healthcare Group, Inc. (25.1%), Integrated
Health Services, Inc. ("IHS") (18.3%, including 10.9% as the manager for and 50%
owner of Lyric Health Care LLC), Advocat, Inc. (12.2%), Mariner Post-Acute
Network (6.8%), Alterra Healthcare Corporation ("Alterra") (3.9%), Kindred
Healthcare, Inc. ("Kindred") (formerly known as Vencor Operating, Inc.) (0.6%).
At June 30, 2002 the three largest private operators represent 3.6%, 2.6% and
2.6% of investments, respectively. No other operator represents more than 2.5%
of investments. The three states in which we have our highest concentration of
investments are Florida (16.2%), California (7.6%) and Illinois (7.6%).
Government Healthcare Regulation, Reimbursements and Industry Concentration
Risks
Nearly all of our properties are used as healthcare facilities; therefore,
we are directly affected by the risk associated with the healthcare industry.
Our lessees and mortgagors, as well as the facilities Owned and Operated for our
account, derive a substantial portion of their net operating revenues from
third-party payors, including the Medicare and Medicaid programs. These programs
are highly regulated by federal, state and local laws, rules and regulations and
are subject to frequent and substantial changes.
In addition, private payors, including managed care payors, are
increasingly demanding discounted fee structures and the assumption by
healthcare providers of all or a portion of the financial risk of operating a
healthcare facility. Efforts to impose greater discounts and more stringent cost
controls are expected to continue. Any changes in reimbursement policies that
reduce reimbursement levels could adversely affect the amounts we receive with
respect to our owned and operated portfolio and the revenues of our lessees and
mortgagors and thereby adversely affect those lessees' and mortgagors' abilities
to make their monthly lease or debt payments to us.
The possibility that the healthcare facilities will not generate income
sufficient to meet operating expenses or will yield returns lower than those
available through investments in comparable real estate or other investments are
additional risks of investing in healthcare-related real estate. Income from
properties and yields from investments in such properties may be affected by
many factors, including changes in governmental regulation (such as zoning
laws), general or local economic conditions (such as fluctuations in interest
rates and employment conditions), the available local supply and demand for
improved real estate, a reduction in rental income as the result of an inability
to maintain occupancy levels, natural disasters (such as earthquakes and floods)
or similar factors.
Real estate investments are relatively illiquid and, therefore, tend to
limit our ability to vary our portfolio promptly in response to changes in
economic or other conditions. Thus, if the operation of any of our properties
becomes unprofitable due to competition, age of improvements or other factors
such that the lessee or borrower becomes unable to meet its obligations on the
lease or mortgage loan, the liquidation value of the property may be
substantially less, particularly relative to the amount owing on any related
mortgage loan, than would be the case if the property were readily adaptable to
other uses.
Potential Risks from Bankruptcies
Our lease arrangements with operators who operate more than one of our
facilities are generally made pursuant to a single master lease ("Master Lease")
covering all of that operator's facilities. Although each lease or Master Lease
provides that we may terminate the Master Lease upon the bankruptcy or
insolvency of the tenant, the Bankruptcy Reform Act of 1978 ("Bankruptcy Act")
provides that a trustee in a bankruptcy or reorganization proceeding under the
Bankruptcy Act, or a debtor-in-possession in a reorganization, has the power and
the option to assume or reject the unexpired lease obligations of a
debtor-lessee. In the event that the unexpired lease is assumed on behalf of the
debtor-lessee, all the rental obligations 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 reorganization, were required to perform
certain provisions of a lease that the court determined to be unduly burdensome.
It is not possible to determine at this time whether or not any of our leases or
Master Leases contains any such provision. If a lease is rejected, the lessor
has a general unsecured claim limited to any unpaid rent already due plus an
amount equal to the rent reserved under the lease, without acceleration, for the
greater of one year or 15% of the remaining term of such lease, not to exceed
three years.
Generally, with respect to our mortgage loans, the imposition of an
automatic stay under the Bankruptcy Act precludes us from exercising foreclosure
or other remedies against the debtor. Pre-petition creditors generally do not
have rights to the cash flows from the properties underlying the mortgages. The
timing of the collection from mortgagors in bankruptcy depends on negotiating an
acceptable settlement with the mortgagor (and subject to approval of the
bankruptcy court) or the order of the bankruptcy court in the event a negotiated
settlement cannot be achieved. A mortgagee also is treated differently from a
landlord in three key respects. First, the mortgage loan is not subject to
assumption or rejection because it is not an executory contract or a lease.
Second, the mortgagee's loan may be divided into (1) a secured loan for the
portion of the mortgage debt that does not exceed the value of the property and
(2) a general unsecured loan for the portion of the mortgage debt that exceeds
the value of the property. A secured creditor such as ourselves is entitled to
the recovery of interest and costs only if, and to the extent that, the value of
the collateral exceeds the amount owed. If the value of the collateral exceeds
the amount of the debt, interest and allowed costs may not be paid during the
bankruptcy proceeding, but accrue until confirmation of a plan of reorganization
or such other time as the court orders. If the value of the collateral held by a
senior creditor is less than the secured debt, interest on the loan for the time
period between the filing of the case and confirmation may be disallowed.
Finally, while a lease generally would either be rejected or assumed with all of
its benefits and burdens intact, the terms of a mortgage, including the rate of
interest and timing of principal payments, may be modified if the debtor is able
to affect a "cramdown" under the Bankruptcy Act.
The receipt of liquidation proceeds or the replacement of an operator that
has defaulted on its lease or loan could be delayed by the approval process of
any federal, state or local agency necessary for the transfer of the property or
the replacement of the operator licensed to manage the facility. In addition,
some significant expenditures associated with real estate investment, such as
real estate taxes and maintenance costs, are generally not reduced when
circumstances cause a reduction in income from the investment. In order to
protect our investments, we may take possession of a property or even become
licensed as an operator, which might expose us to successor liability to
government programs or require us to indemnify subsequent operators to whom we
might transfer the operating rights and licenses. Third-party payors may also
suspend payments to us following foreclosure until we receive the required
licenses to operate the facilities. Should such events occur, our income and
cash flow from operations would be adversely affected.
Risks Related to Owned and Operated Assets
As a consequence of the financial difficulties encountered by a number of
our operators, we have recovered various long-term care assets, pledged as
collateral for the operators' obligations, either in connection with a
restructuring or settlement with certain operators or pursuant to foreclosure
proceedings. We are typically required to hold applicable licenses and are
responsible for the regulatory compliance at our owned and operated facilities.
Our management contracts with third-party operators for these properties provide
that the third-party operator is responsible for regulatory compliance, but we
could be sanctioned for violation of regulatory requirements. In addition, the
risk of third-party claims such as patient care and personal injury claims may
be higher with respect to our owned and operated properties as compared with our
leased and mortgaged assets.
Note D - Dividends
In order to qualify as a real estate investment trust ("REIT"), we are
required to distribute dividends (other than capital gain dividends) to our
stockholders in an amount at least equal to (A) the sum of (i) 90% of our "REIT
taxable income" (computed without regard to the dividends paid deduction and our
net capital gain) and (ii) 90% of the net income (after tax), if any, from
foreclosure property, minus (B) the sum of certain items of non-cash income. In
addition, if we dispose of any built-in gain asset during a recognition period,
we will be required to distribute at least 90% of the built-in gain (after tax),
if any, recognized on the disposition of such asset. Such distributions must be
paid in the taxable year to which they relate, or in the following taxable year
if declared before we timely file our tax return for such year and paid on or
before the first regular dividend payment after such declaration. In addition,
such distributions are required to be made pro rata, with no preference to any
share of stock as compared with other shares of the same class, and with no
preference to one class of stock as compared with another class except to the
extent that such class is entitled to such a preference. To the extent that we
do not distribute all of our net capital gain or do distribute at least 90%, but
less than 100% of our "REIT taxable income," as adjusted, we will be subject to
tax thereon at regular ordinary and capital gain corporate tax rates.
On February 1, 2001, we announced the suspension of all common and
preferred dividends. This action was intended to preserve cash to facilitate our
ability to obtain financing to fund the 2002 debt maturities. Prior to
recommencing the payment of dividends on our common stock, all accrued and
unpaid dividends on our Series A, B and C preferred stock must be paid in full.
We have made sufficient distributions to satisfy the distribution requirements
under the REIT rules to maintain our REIT status for 2001 and intend to satisfy
such requirements under the REIT rules for 2002. The accumulated and unpaid
dividends relating to all series of preferred stocks total $30.0 million as of
June 30, 2002.
On March 30, 2001, we exercised our option to pay the accrued $4,666,667
Series C dividend from November 15, 2000 and the associated deferral fee by
issuing 48,420 Series C preferred shares to Explorer Holdings, L.P. ("Explorer")
on April 2, 2001, which are convertible into 774,720 shares of our common stock
at $6.25 per share. Such election resulted in an increase in the aggregate
liquidation preference of Series C Preferred Stock as of April 2, 2001 to
$104,842,000. Dividends paid in stock to a specific class of stockholders, such
as our payment of our Series C preferred stock in April 2001, constitute
dividends eligible for the 2001 dividends paid deduction.
Since dividends on the Series A and Series B Preferred Stock have been in
arrears for more than 18 months, the holders of the Series A and Series B
Preferred Stock (voting together as a single class) have the right to elect two
additional directors to our Board of Directors in accordance with the terms of
the Series A and Series B Preferred Stock and our Bylaws. Explorer, the sole
holder of the Series C Preferred Stock, also has the right to elect two other
additional directors to our Board of Directors in accordance with the terms of
the Series C Preferred Stock and our Bylaws. Explorer, without waiving its
rights under the terms of the Series C Preferred Stock or the Stockholders
Agreement, has advised us that it is not currently seeking the election of the
two additional directors resulting from the Series C dividend arrearage unless
the holders of the Series A and Series B Preferred Stock seek to elect
additional directors.
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 the assumed conversion of the Series C Preferred Stock.
Note F - Omega Worldwide, Inc.
As of June 30, 2002, we hold a $5.1 million investment in Omega Worldwide,
Inc., represented by 1.16 million shares of common stock and 0.26 million shares
of preferred stock. We also hold 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. See Note J - Subsequent Events.
Note G - Litigation
We are subject to various legal proceedings, claims and other actions
arising out of the normal course of business. While any legal proceeding or
claim has an element of uncertainty, we believe that the outcome of each lawsuit
claim or legal proceeding that is pending or threatened, or all of them
combined, will not have a material adverse effect on our consolidated financial
position or results of operations.
On June 21, 2000, we were named as a defendant in certain litigation
brought against us by Madison/OHI Liquidity Investors, LLC ("Madison"), for the
breach and/or anticipatory breach of a revolving loan commitment. Ronald M.
Dickerman and Bryan Gordon are partners in Madison and limited guarantors
("Guarantors") of Madison's obligations to us. Madison claimed damages as a
result of the alleged breach of approximately $0.7 million and damages in an
amount ranging from $15 to $28 million for the anticipatory breach. We filed
counterclaims against Madison and the guarantors seeking repayment of
approximately $7.4 million of unpaid principal on the loan, plus accrued
interest. After the trial began on July 22, 2002, the parties agreed to settle
all claims in the suit in consideration of the payment to us by Madison for the
sum of $5.4 million. The payment by Madison consists of a $0.4 million cash
payment for our attorneys' fees, with the balance to be evidenced by the
amendment of the existing promissory note from Madison to us. The note will
reflect a principal balance of $5.0 million, with interest accruing at 9% per
annum, payable over three years upon liquidation of the collateral securing the
note. The note is also fully guaranteed by the Guarantors; provided that if all
accrued interest and 75% of original principal has been repaid within 18 months,
the Guarantors will be released. The financial statements have been adjusted to
reflect the restructuring and reduction of our investment in connection with the
settlement of this matter.
Note H - Borrowing Arrangements
On December 21, 2001, we reached amended agreements with the bank groups
under both of our revolving credit facilities. The amendments became effective
as of the closing of the rights offering and private placement to Explorer on
February 21, 2002. The amendments included modifications and/or eliminations to
certain financial covenants.
The amendment regarding our $175.0 million revolving credit facility
included a one-year extension in maturity from December 31, 2002 to December 31,
2003 and a reduction in the total commitment from $175.0 million to $160.0
million.
As part of the amendment regarding our $75.0 million revolving credit
facility, we prepaid $10.0 million in December 2001, originally scheduled to
mature in March 2002. This voluntary prepayment resulted in a permanent
reduction in the total commitment, thereby reducing the credit facility to $65.0
million.
Our $160.0 million secured revolving line of credit facility expires on
December 31, 2003. Borrowings under this facility bear interest at 2.50% to
3.25% over London Interbank Offered Rate ("LIBOR") through December 31, 2002 and
3.00% to 3.25% over LIBOR after December 31, 2002. Borrowings of approximately
$142.7 million were outstanding as of June 30, 2002. Additionally, $12.8 million
of letters of credit were outstanding against this credit facility at June 30,
2002. These letters of credit were collateral for certain long-term borrowings
and Owned and Operated insurance programs. LIBOR-based borrowings under this
facility bear interest at a weighted-average rate of 5.19% at June 30, 2002.
Cost for the letters of credit range from 2.50% to 3.25%, based on our leverage
ratio. Real estate investments with a gross book value of approximately $239.8
million are pledged as collateral for this revolving line of credit facility at
June 30, 2002.
Our $65.0 million line of credit facility expires on June 30, 2005.
Borrowings under this facility bear interest at 2.50% and 3.75% over LIBOR,
based on our leverage ratio and collateral assignment. Borrowings of
approximately $65.0 million were outstanding at June 30, 2002. LIBOR based
borrowings under this facility bear interest at a weighted-average rate of 5.59%
at June 30, 2002. Real estate investments with a gross book value of
approximately $117.1 million are pledged as collateral for this revolving line
of credit facility at June 30, 2002.
During the three-month period ended June 30, 2002, we paid off the
remaining $61.9 million of our 6.95% Notes that matured in June 2002. As a
result of HUD's foreclosure proceedings associated with two closed facilities in
North Carolina, we have removed $5.2 million in net assets and $5.2 million of
mortgage debt from our Consolidated Balance Sheet. See Note B - Properties,
Purchase / Leaseback and Management's Discussion and Analysis for further
detail.
Note I - Accounting for Derivatives
We utilize interest rate swaps to fix interest rates on variable rate debt
and reduce certain exposures to interest rate fluctuations. In June 1998, the
Financial Accounting Standards Board ("FASB") issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities, which was required
to be adopted in years beginning after June 15, 2000. We adopted the new
Statement effective January 1, 2001. The Statement requires us to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will either be offset against the change in fair value of the hedged assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedge item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings.
At June 30, 2002, we had two interest rate swaps with notional amounts of
$32.0 million each, based on 30-day LIBOR. Under the terms of the first
agreement, which expires in December 2003, we receive payments when LIBOR
exceeds 6.35% and pay the counterparty when LIBOR is less than 6.35%. At June
30, 2002, 30-day LIBOR was 1.84%. This interest rate swap was extended to
December 2003 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 June 30,
2002 and December 31, 2001 was a liability of $0.7 million and $1.3 million,
respectively.
The initial liability at January 1, 2001 was recorded as a transition
adjustment in other comprehensive income and was recognized over the initial
term of the swap ending December 31, 2001. As such, the liability was fully
amortized by December 31, 2001. The change in fair value was $0.2 million and
$0.6 million for the three- and six-month periods ending June 30, 2002,
respectively, as compared to $0 and $0.4 million the same periods in 2001. The
change in fair value, along with the amortization, is included in charges for
derivative accounting in our Consolidated Statement of Operations.
Under the second agreement, which expires December 31, 2002, we receive
payments when LIBOR exceeds 4.89% and pay the counterparty when LIBOR is less
than 4.89%. The fair value of this interest rate swap at June 30, 2002 and
December 31, 2001 was a liability of $0.5 million and $0.8 million,
respectively. The change in fair value of $0.1 million and $0.4 million for the
three- and six-month periods ending June 30, 2002, respectively, as compared to
$0.3 million for both the three- and six-month periods in 2001. The change in
fair value is included in other comprehensive income as required under FASB No.
133 for fully effective cash flow hedges.
The fair values of these interest rate swaps are included in accrued
expenses and other liabilities in our Consolidated Balance Sheet at June 30,
2002 and December 31, 2001.
Note J - Subsequent Events
On August 1, 2002, we entered into a Master Lease to lease two facilities,
a 63-bed facility in Hicksville, Ohio and a 75-bed facility in Gaston, Indiana,
to Hickory Creek Healthcare Foundation, Inc., a Georgia not-for-profit
corporation. The initial lease term for the two properties is ten years with an
initial annual rent payment of $415,000.
Additionally, on August 1, 2002, the leasehold interest in three facilities
in Alabama was terminated by the landlord and transferred to another operator.
We paid a one-time fee of $100,000 in conjunction with the termination and
release of the three leaseholds.
As a result of re-leasing efforts subsequent to the end of the second
quarter, the total number of Owned and Operated Assets decreased from 13 as of
June 30, 2002 to eight as of the filing date hereof.
On August 1, 2002, Omega Worldwide, Inc. issued a press release announcing
that it had entered into a definitive merger agreement with Four Seasons
Healthcare Limited ("Four Seasons") for the acquisition of all the outstanding
common shares of Worldwide at $3.32 per share. The merger is subject to various
conditions, including the acceptance of the tender offer by the holders of a
majority of the outstanding shares of Worldwide and the cash purchase by Four
Seasons of at least 90% of the shares of Principal Finance Healthcare Limited
not held by Worldwide. We currently hold 1.16 million common shares and 260,000
preferred shares of Worldwide, 990,000 common shares and warrants to purchase
185,033 common shares in PHFL. In connection with the tender ofer, we have
committed to sell our stock and other interests in Worldwide and PHFL, although
there is no assuance that the tender offer will close.
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion contains forward-looking statements. These
statements relate to our expectations regarding our beliefs, intentions, plans,
objectives, goals, strategies, future events or performance and underlying
assumptions and other statements other than statements of historical facts. In
some cases, you can identify forward-looking statements by the use of forward
looking terminology such as "may," "will," "anticipates," "expects," "believes,"
"intends," "should" or comparable terms or the negative thereof. These
statements are based on information available on the date of this report and
only speak as of the date hereof and no obligation to update such
forward-looking statements should be assumed. Our actual results may differ
materially from those reflected in such forward-looking statements as a result
of a variety of factors, including, among other things: (i) our ability to
dispose of assets held for sale on a timely basis and at appropriate prices;
(ii) uncertainties relating to the operation of our Owned and Operated Assets,
including those relating to reimbursement by third-party payors, regulatory
matters and occupancy levels; (iii) the ability of our operators in bankruptcy
to reject unexpired lease obligations, modify the terms of our mortgages, and
impede our ability 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) our ability to manage, re-lease or sell our 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 our debt
securities; and (xiv) the risk factors discussed in Note C - Concentration of
Risk and Related Issues.
Results of Operations
The following is a discussion of our consolidated results of operations,
financial position and liquidity and capital resources which should be read in
conjunction with the consolidated financial statements and accompanying notes.
See Note B - Properties and Note C - Concentration of Risk and Related Issues.
Revenues for the three- and six-month periods ending June 30, 2002 totaled
$34.4 million and $78.3 million, respectively, a decrease of $31.3 million and
$56.5 million from the same periods ending June 30, 2001. Excluding nursing home
revenues of Owned and Operated Assets, revenues were $22.2 million and $44.4
million, respectively, for the three- and six-month periods ending June 30,
2002, an increase of $0.3 million and a decrease of $0.7 million from the
comparable prior year periods.
Rental income for the three- and six-month periods ending June 30, 2002 was
$15.7 million and $31.1 million, respectively, an increase of $0.9 million and
$0.3 million over the same periods in 2001.The $0.9 million increase for the
three-month period is due to $0.2 million relating to contractual increases in
rents that became effective in 2002 and $2.1 million relating to leases on
assets previously classified as owned and operated, offset by a $1.3 million
reduction in lease revenue due to foreclosures, bankruptcies and restructurings
and $0.1 million from a property that was sold in 2001. The $0.3 million
increase in the six-month period is due to $0.4 million relating leases on to
contractual increases in rents that became effective in 2002 and $3.4 million
relating to assets previously classified as owned and operated, offset by a $3.4
million reduction in lease revenue due to foreclosures, bankruptcies and
restructurings and $0.1 million from a property that was sold in 2001.
Mortgage interest income for the three- and six-month periods ending June
30, 2002 totaled $5.2 million and $10.6 million, respectively, a decrease of
$0.3 million and $0.6 million from the same periods in 2001. The $0.3 million
decrease in the three-month period is due to reduced investments resulting from
the payoffs of mortgage notes ($0.4 million), reduction in interest due to
foreclosures, bankruptcies and restructurings of $0.1 million, and normal
amortization of $0.1 million, offset by $0.3 million of new investments placed
in 2001. The $0.6 million decrease in the six-month period is due to reduced
investments resulting from the payoffs of mortgage notes ($1.2 million), reduced
interest due to normal amortization of $0.1 million offset by $0.7 million of
new investments placed in 2001.
Nursing home revenues of owned and operated assets for the three- and
six-month periods ending June 30, 2002 totaled $12.2 million and $34.0 million,
respectively, a decrease of $31.6 million and $55.8 million from the same
periods in 2001. This is due to a significant decrease in the number of operated
facilities versus the same period in 2001 (13 at June 30, 2002 as compared to 63
at June 30, 2001).
Expenses for the three- and six-month periods ending June 30, 2002 totaled
$34.6 million and $74.1 million, respectively, a decrease of $47.5 million and
$73.5 million compared with expenses of $82.0 million and $147.6 million,
respectively, for the three- and six-month periods ending June 30, 2001.
Excluding nursing home expenses of owned and operated assets, expenses were
$21.1 million for the three-month period ending June 30, 2002 versus $38.4
million for the same period in 2001 and $36.9 million for the six-month period
ending June 30, 2002 versus $57.5 million for the same period in 2001.
Nursing home expenses for owned and operated assets for the three- and
six-month periods ending June 30, 2002 were $13.5 million and $37.2 million,
respectively, a decrease of $30.2 million and $52.9 million from the same
periods in 2001. This is due to 50 fewer facilities in 2002 versus the same
period in 2001.
The provision for depreciation and amortization totaled $5.4 million and
$10.7 million, respectively, for the three- and six-month periods ending June
30, 2002. This $0.2 million and $0.4 million decrease versus the same periods in
2001 is primarily due to assets sold in 2001 and lower depreciable values due to
impairment charges on owned and operated properties recorded during 2001.
Interest expense for the three- and six-month periods ending June 30, 2002
was $7.1 million and $15.3 million, respectively, compared with $9.2 million and
$18.9 million for the same periods in 2001. This decrease is primarily due to
$87.8 million of reduced total outstanding debt and lower average interest rates
versus the same periods in 2001.
General and administrative and legal expenses for the three- and six-month
periods ending June 30, 2002, totaled $2.6 million and $5.1 million,
respectively, compared to $3.9 million and $7.2 million, respectively, for the
same periods in 2001. The decrease is due to a reduction in staffing, as well as
a reduction in consulting costs primarily related to our owned and operated
facilities.
During the three-month period ended June 30, 2001, we recorded a $10.0
million litigation settlement expense related to a suit brought against us by
Karrington Health, Inc. On December 29, 1998, Karrington brought suit against us
alleging that we repudiated and ultimately breached a financing contract and was
seeking recovery of approximately $34.0 million in damages it alleges to have
incurred as a result of the breach. On August 13, 2001, we paid Karrington $10.0
million to settle all claims arising from the suit, but without admission of any
liability or fault by us, which liability is expressly denied. Based on the
settlement, the suit was dismissed with prejudice.
A provision for impairment of $2.5 million for the three- and six-month
periods ending June 30, 2002 and $8.4 million for the three- and six-month
periods ending June 30, 2001 is included in expenses. The $2.5 million provision
was to reduce the carrying value of three owned and operated buildings that were
closed during the quarter to their fair value less costs to dispose. These
buildings are being actively marketed for sale. The $8.4 million provision in
2001 was to reduce the cost basis of assets recovered from a defaulting operator
to their fair value less cost to dispose.
A charge of $3.7 million for provision for uncollectible mortgages, notes
and accounts receivable was recognized during the three-month period ending June
30, 2002. This charge was primarily related to the restructuring and reduction
of debt owed by Madison/OHI Liquidity Investors, LLC ("Madison"), as part of the
compromise and settlement of a lawsuit with Madison. On June 21, 2000, we were
named as a defendant in certain litigation brought against us by Madison, for
the breach and/or anticipatory breach of a revolving loan commitment. We filed
counterclaims against Madison and its guarantors seeking repayment of
approximately $7.4 million of unpaid principal on the loan, plus accrued
interest. After the trial began on July 22, 2002, the parties agreed to settle
all claims in the suit in consideration of the payment to us by Madison of the
sum of $5.4 million, consisting of $0.4 million in cash and a $5.0 million note.
See Note G - Litigation. In addition, the $3.7 million charge includes $0.1
million related to HUD's foreclosure proceedings on two closed North Carolina
facilities. See Note B - Properties, Purchase / Leaseback. A charge of $0.7
million was taken during the three-month period ending June 30, 2001 relating to
write-off of rents due from a defaulting operator.
Severance and consulting agreement costs of $0.5 million were recognized
during the three-month period ended June 30, 2001 related to the termination of
an employment contract with an officer of our company.
During the three-month period ending June 30, 2002, we sold one building,
realizing proceeds of $1.0 million, net of closing costs, resulting in a loss of
$0.3 million. There were no real estate dispositions during the three-month
period ending June 30, 2001.
During the three- and six-month periods ending June 30, 2002, we recorded a
loss of $0.1 million related to the early retirement of $63.1 million of our
6.95% Notes due June, 2002. See Liquidity and Capital Resources. We recorded a
gain of $2.5 million and $2.7 million, respectively, for the three- and
six-month periods ending June 30, 2001 related to the early retirement of $19.5
million and $21.5 million, respectively, of these same 6.95% bonds.
Funds from operations ("FFO") for the three- and six-month periods ending
June 30, 2002 were $2.4 million and $6.8 million, respectively, an increase of
$9.9 million and $9.5 million, as compared with a deficit of $7.5 million and a
deficit of $2.7 million for the same periods in 2001 due to the results
described above. Fully diluted FFO was $5.1 million and $12.0 million,
respectively, for the three- and six-month periods ending June 30, 2002, an
increase of $9.9 million and $9.6 million, as compared with the deficit of $4.8
million and positive $2.4 million for the same periods in 2001. FFO is defined
as net earnings available to common stockholders, excluding any gains or losses
from debt restructuring, the effects of asset dispositions and impairments, plus
depreciation and amortization associated with real estate investments. Diluted
FFO is adjusted for the assumed conversion of Series C Preferred Stock and the
exercise of in-the-money stock options. We consider 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 our ability to incur and
service debt, to make capital expenditures and to pay dividends to our
stockholders. 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 we continue to
qualify as a REIT under the provisions of Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended. Accordingly, we have not been subject
to federal income taxes on amounts distributed to stockholders, since we have
distributed at least 90% of our REIT taxable income for taxable year 2001 (95%
prior to 2001) and have met certain other conditions.
Portfolio Developments
During the quarter, we entered into a Master Lease to lease three
facilities in Colorado to Conifer Care Communities. The initial term of the
lease is 4.7 years with three options to renew for four years each. The initial
annual rent payment is approximately $375,000. As a result of the three
re-leased facilities and the three announced facility closings, the total number
of Owned and Operated Assets declined by six, leaving 13 remaining facilities as
of quarter end. See Note J - Subsequent Events.
We are continuing our negotiations with Integrated Health Services, Inc.
and its affiliate, Lyric Health Care LLC, to reach a permanent restructuring
agreement or to transition the facilities to a new operator or operators.
Liquidity and Capital Resources
At June 30, 2002, we had total assets of $857.4 million, stockholders'
equity of $500.2 million and debt of $337.9 million, representing approximately
40.3% of total capitalization.
We have two secured revolving credit facilities, providing up to $225.0
million of financing. At June 30, 2002, $207.7 million was outstanding and $12.8
million was utilized for the issuance of letters of credit, leaving availability
of $4.5 million.
On December 21, 2001, we reached amended agreements with the bank groups
under both of our revolving credit facilities. The amendments became effective
as of the closing of the rights offering and private placement to Explorer
Holdings, L.P. on February 21, 2002. The amendments included modifications
and/or eliminations to certain financial covenants.
The amendment regarding our $175.0 million revolving credit facility
included a one-year extension in maturity from December 31, 2002 to December 31,
2003 and a reduction in the total commitment from $175.0 million to $160.0
million.
As part of the amendment regarding our $75.0 million revolving credit
facility, we prepaid $10.0 million in December 2001, originally scheduled to
mature in March 2002. This voluntary prepayment resulted in a permanent
reduction in the total commitment, thereby reducing the credit facility to $65.0
million. Our $65.0 million line of credit facility expires on June 30, 2005. See
Note H - Borrowing Arrangements.
In prior years, we have historically distributed to stockholders a large
portion of the cash available from operations. Our historical policy has been to
make distributions on common stock of approximately 80% of FFO, but on February
1, 2001, we announced the suspension of all common and preferred dividends. This
action was intended to preserve cash to facilitate our ability to obtain
financing to fund the 2002 debt maturities. Additionally, on March 30, 2001, we
exercised our option to pay the accrued $4,666,667 Series C dividend from
November 15, 2000 and the associated waiver fee by issuing 48,420 Series C
preferred shares to Explorer on April 2, 2001, which is convertible into 774,720
shares of our common stock at $6.25 per share.
No preferred or common cash dividends were paid during the first six months
ending June 30, 2002 and 2001, respectively. See Note D - Dividends. We can give
no assurance as to when or if the dividends will be reinstated on the preferred
stock or common stock, or the amount of the dividends if and when such payments
are recommenced. Prior to recommencing the payment of dividends on our common
stock, all accrued and unpaid dividends on our Series A, B and C preferred stock
must be paid in full. We have made sufficient distributions to satisfy the
distribution requirements under the REIT rules to maintain its REIT status for
2001 and intend to satisfy such requirements under the REIT rules for 2002.
On February 6, 2002, we refinanced our investment in a Baltimore, Maryland
asset leased by the United States Postal Service resulting in $13.0 million of
net cash proceeds. The new, fully-amortizing mortgage has a 20-year term with a
fixed interest rate of 7.26%. This transaction is cash neutral to us on a
monthly basis, as lease payments due from USPS equal debt service on the new
loan.
On February 21, 2002, we raised gross proceeds of $50.0 million through the
completion of a rights offering and simultaneous private placement to Explorer.
The proceeds from the rights offering and private placement were used to repay
outstanding indebtedness and for working capital and general corporate purposes.
During the three-month period ended June 30, 2002, we paid off the
remaining $61.9 million of our 6.95% Notes maturing in June 2002. In addition,
during the quarter our HUD obligation of $5.2 million was removed from our
Consolidated Balance Sheet as a result of the foreclosure proceedings. See Note
B - Properties, Purchase / Leaseback.
We believe our 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.
Item 3 - Quantitative and Qualitative Disclosure About Market Risk
We are exposed to various market risks, including the potential loss
arising from adverse changes in interest rates. We do not enter into derivatives
or other financial instruments for trading or speculative purposes, but we seek
to mitigate the effects of fluctuations in interest rates by matching the term
of new investments with new long-term fixed rate borrowing to the extent
possible.
The market value of our long-term fixed rate borrowings and mortgages are
subject to interest rate 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 our total long-term borrowings
at June 30, 2002 was $319.0 million. A one-percent increase in interest rates
would result in a decrease in the fair value of long-term borrowings by
approximately $3.8 million.
We are subject to risks associated with debt or preferred equity financing,
including the risk that existing indebtedness may not be refinanced or that the
terms of such refinancing may not be as favorable as the terms of current
indebtedness. See Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources.
We utilize interest rate swaps to fix interest rates on variable rate debt
and reduce certain exposures to interest rate fluctuations. In June 1998, the
Financial Accounting Standards Board issued Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities, which was required to be adopted
in years beginning after June 15, 2000. We adopted the new Statement effective
January 1, 2001. The Statement requires us to recognize all derivatives on the
balance sheet at fair value. Derivatives that are not hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the nature
of the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedge item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
At June 30, 2002, we had two interest rate swaps with notional amounts of
$32.0 million each, based on 30-day LIBOR. Under the terms of the first
agreement, which expires in December 2003, we receive payments when LIBOR
exceeds 6.35% and pay the counterparty when LIBOR is less than 6.35%. At June
30, 2002, 30-day LIBOR was 1.84%. This interest rate swap was extended to
December 2003 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 June 30,
2002 and December 31, 2001 was a liability of $0.7 million and $1.3 million,
respectively.
The initial liability at January 1, 2001 was recorded as a transition
adjustment in other comprehensive income and was recognized over the initial
term of the swap ending December 31, 2001. As such, the liability was fully
amortized by 2001. The amortization for the three- and six-month period ending
June 30, 2001 was $0.1 million and $0.2 million, respectively. The change in
fair value of $0.2 million and $0.6 million for the three- and six-month periods
ending June 30, 2002 and the change in the fair value of $0 and $0.4 million for
the three- and six-month periods ending June 30, 2001, respectively, along with
the amortization are included in charges for derivative accounting in our
Consolidated Statement of Operations.
Under the second agreement, which expires December 31, 2002, we receive
payments when LIBOR exceeds 4.89% and pay the counterparty when LIBOR is less
than 4.89%. The fair value of this interest rate swap at June 30, 2002 and
December 31, 2001 was a liability of $0.5 million and $0.8 million,
respectively. The change in fair value of $0.1 million and $0.4 million for the
three- and six-month periods ending June 30, 2002 and the change in the fair
value of $0.3 million for both the three- and six-month periods ending June 30,
2001, respectively are included in other comprehensive income as required under
FASB No. 133 for fully effective cash flow hedges.
The fair values of these interest rate swaps are included in accrued
expenses and other liabilities in our Consolidated Balance Sheet at June 30,
2002 and December 31, 2001.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note G - Litigation to the 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, we 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 our
preferred stock are cumulative: therefore, all accrued and unpaid
dividends on our Series A, B and C Preferred Stock must be paid in
full prior to recommencing the payment of cash dividends on our Common
Stock. The table below sets forth information regarding arrearages in
payment of preferred stock dividends:
(c)
-----------------------------------------------------------------------
Annual Dividend
Per Share Arrearage as of
Title of Class June 30, 2002
-----------------------------------------------------------------------
9.25% Series A Cumulative
Preferred Stock $ 2.3125 $ 7,978,125
-----------------------------------------------------------------------
8.625% Series B Cumulative
Preferred Stock $ 2.1563 $ 6,468,750
-----------------------------------------------------------------------
Series C Convertible
Preferred Stock $ 10.0000 $ 15,523,643
-----------------------------------------------------------------------
TOTAL $ 29,970,518
-----------------------------------------------------------------------
Since dividends on the Series A and Series B Preferred Stock have been in
arrears for more than 18 months, the holders of the Series A and Series B
Preferred Stock (voting together as a single class) have the right to elect two
additional directors to our Board of Directors in accordance with the terms of
the Series A and Series B Preferred Stock and our Bylaws. Explorer, the sole
holder of the Series C Preferred Stock, also has the right to elect two other
additional directors to our Board of Directors in accordance with the terms of
the Series C Preferred Stock and our Bylaws. Explorer, without waiving its
rights under the terms of the Series C Preferred Stock or the Stockholders
Agreement, has advised us that it is not currently seeking the election of the
two additional directors resulting from the Series C dividend arrearage unless
the holders of the Series A and Series B Preferred Stock seek to elect
additional directors.
Item 4. Submission of Matters to a Vote of Security Holders
(a) An Annual Meeting of Stockholders was held on May 30, 2002.
(b) The following directors were elected at the meeting for a three-year
term: Thomas W. Erickson, Harold J. Kloosterman, Donald J. McNamara
and C. Taylor Pickett. The following directors were not elected at the
meeting but their term of office continued after the meeting: Daniel
A. Decker, Thomas F. Franke, Bernard J. Korman, Edward Lowenthal,
Christopher W. Mahowald and Stephen D. Plavin. The results of the vote
were as follows:
Manner of Thomas W. Harold J. Donald J. McNamara C. Taylor
Vote Cast Erickson Kloosterman Pickett
For * 52,477,917 52,476,012 52,622,730 52,448,141
Withheld 557,251 559,156 412,438 587,027
Abstentions and broker
non-votes -- -- -- --
* Includes 16,774,720 votes represented by Series C Preferred Stock.
(c) At the meeting, the stockholders also approved an amendment to our
Articles of Incorporation and Bylaws to increase the maximum size of
our Board of Directors. The results of the vote were as follows:
Manner of Votes
Vote Cast Represented
-----------------------------------------------------
For * 51,710,894
Against 1,191,916
Abstentions 133,439
Broker non-votes --
* Includes votes 16,774,720 represented by Series C Preferred Stock.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit - The following Exhibits are filed herewith:
Exhibit Description
3.(i) Articles of Amendment to the Articles of Incorporation of
Omega Healthcare Investors, Inc. as of June 3, 2002.
3.(ii) Amended and Restated Bylaws of Omega Healthcare Investors,
Inc. as of May 30, 2002.
99.1 Certification of the Chief Executive Officer under Section
906 of the Sarbanes - Oxley Act of 2002.
99.2 Certification of the Chief Financial Officer under Section
906 of the Sarbanes - Oxley Act of 2002.
(b) Reports on Form 8-K - none were filed.
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 13, 2002 By: /s/ C. TAYLOR PICKETT
--------------------------------
C. Taylor Pickett
Chief Executive Officer
Date: August 13, 2002 By: /s/ ROBERT O. STEPHENSON
--------------------------------
Robert O. Stephenson
Chief Financial