EXHIBIT 99.1
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth our selected financial and operating data
for Omega Healthcare Investors, Inc., on an historical basis, which has been
revised for disposition of properties during the period from January 1, 2003 to
September 30, 2003 which have been reclassified as discontinued operations.
Refer to Note 20 of the Consolidated Financial Statements. The following data
should be read in conjunction with our financial statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere herein. Our historical operating results may not
be comparable to our future operating results.
YEAR ENDED DECEMBER 31,
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2002 2001 2000 1999 1998
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA
Revenues from core operations................................... $ 92,801 $ 89,154 $ 99,914 $121,906 $109,314
Revenues from nursing home operations........................... 42,906 165,503 169,674 26,223 -
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Total revenues................................................ $135,707 $254,657 $269,588 $148,129 $109,314
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(Loss) income from continuing operations........................ $(10,957) $(16,793) $(42,399) $ 19,746 $ 76,209
Net (loss) income available to common........................... (34,761) (36,651) (66,485) 10,040 68,015
Per share amounts:
(Loss) income from continuing operations:
Basic......................................................... $ (0.89) $ (1.84) $ (2.96) $ 0.51 $ 3.39
Diluted....................................................... $ (0.89) $ (1.84) $ (2.96) $ 0.51 $ 3.39
Net (loss) income available to common:
Basic......................................................... $ (1.00) $ (1.83) $ (3.32) $ 0.51 $ 3.39
Diluted....................................................... $ (1.00) $ (1.83) $ (3.32) $ 0.51 $ 3.39
Dividends, Common Stock (1)..................................... - - 1.00 2.80 2.68
Dividends, Series A Preferred (1)............................... - - 2.31 2.31 2.31
Dividends, Series B Preferred (1)............................... - - 2.16 2.16 1.08
Dividends, Series C Preferred (2)............................... - - 0.25 - -
Weighted-average common shares outstanding, basic............... 34,739 20,038 20,052 19,877 20,034
Weighted-average common shares outstanding, diluted............. 34,739 20,038 20,052 19,877 20,041
DECEMBER 31,
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2002 2001 2000 1999 1998
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BALANCE SHEET DATA
Gross investments............................................... $882,313 $938,228 $974,507 $1,072,398 $1,069,646
Total assets.................................................... 802,620 890,839 948,451 1,038,731 1,037,207
Revolving lines of credit....................................... 177,000 193,689 185,641 166,600 123,000
Other long-term borrowings...................................... 129,462 219,483 249,161 339,764 342,124
Subordinated convertible debentures............................. - - 16,590 48,405 48,405
Stockholders equity............................................. 479,701 450,690 464,313 457,081 505,762
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(1) Dividends per share are those declared and paid during such period.
(2) Dividends per share are those declared during such period, based on the
number of shares of common stock issuable upon conversion of the
outstanding Series C.
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information below revises the information set forth in Item 7 of our
Form 10-K for the year ended December 31, 2002 to reflect the disposition of
properties during 2003 which have been reclassified as discontinued operations
and adoption of SEC Regulation G relating to the use of non-GAAP financial
measures effective March 28, 2003. Refer to Note 20 of the Consolidated
Financial Statements. No attempt has been made to update matters in the Form
10-K except to the extent expressly provided above.
This document contains forward-looking statements, including statements
regarding potential asset sales, potential future changes in reimbursement, the
future effect of the "Medicare cliff" on our operators and plans to refinance or
extend our upcoming debt maturity. These statements relate to our expectations,
beliefs, intentions, plans, objectives, goals, strategies, future events,
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 including "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 filing and only speak as to 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 the forward-looking statements
contained herein as a result of a variety of factors, including, among other
things: (i) those items discussed in Item 1 of our Form 10-K; (ii) regulatory
changes in the healthcare sector, including without limitation, changes in
Medicare reimbursement; (iii) changes in the financial position of our
operators; ( iv) the ability of 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 the pendency of a bankruptcy proceeding
and retain security deposits for the debtor's obligations; (v) our ability to
dispose of assets held for sale on a timely basis and at appropriate prices;
(vi) 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; (vii) our ability to manage, re-lease or sell
owned and operated assets; (viii) the availability and cost of capital; and (ix)
competition in the financing of healthcare facilities.
OVERVIEW
The long-term care industry changed dramatically following the Balanced
Budget Act of 1997, which introduced the prospective payment system for the
reimbursement of Medicare patients in skilled nursing facilities, implementing
an acuity-based reimbursement system in lieu of the cost-based reimbursement
system historically used. The prospective payment system significantly reduced
payments to nursing home operators. That reduction, in turn, has negatively
affected the revenues of our nursing home facilities and the ability of our
nursing home operators to service their capital costs to us. Many nursing home
operators, including a number of our large nursing home operators, have sought
protection under Chapter 11 of the Bankruptcy Act.
In response to the adverse impact of the prospective payment system
reimbursement cuts, the Federal government passed the Balanced Budget Refinement
Act of 1999 ("Balanced Budget Refinement Act") and the Benefits Improvement and
Protection Act of 2000 ("Benefits Improvement and Protection Act"), both of
which increased payments to nursing home operators on an interim basis. In prior
years these increases positively affected the revenues of our nursing home
facilities and the ability of our nursing home operators to service their
capital costs to us. In addition, the facilities that we own and currently
operate for our own account were positively affected in prior years by the
Balanced Budget Refinement Act and Benefits Improvement and Protection Act.
Certain of the increases in Medicare reimbursement for skilled nursing
facilities provided for under the Balanced Budget Refinement Act and the
Benefits Improvement and Protection Act ceased in October 2002. The partial
expiration of Balance Budget Relief Act and Benefits Improvement and Protection
Act increases as of October 1, 2002 has had an adverse impact on the revenues of
the operators of nursing facilities and has negatively impacted some operators'
ability to satisfy their monthly lease or debt payments to us. For further
discussion, see "Item 1-Overview-Government Healthcare Regulation Reimbursements
and Industry Concentration Risks." Unless Congress enacts additional
legislation, the loss of revenues associated with this occurrence will continue
to have an adverse effect on our operators. Due to the temporary nature of the
remaining payment increases, we cannot assure you that the federal reimbursement
will remain at levels comparable to present levels and that such reimbursement
will be sufficient for our lessees or mortgagors to cover all operating and
fixed costs necessary to care for Medicare and Medicaid patients. We also cannot
assure you that there will be any future legislation to increase payment rates
for skilled nursing facilities. If payment rates for skilled nursing facilities
are not increased in the future, some of our lessees and mortgagors may have
difficulty meeting their payment obligations to us.
In addition, each state has its own Medicaid program that is funded jointly
by the state and federal government. Federal law governs how each state manages
its Medicaid program, but there is wide latitude for states to customize
Medicaid programs to fit the needs and resources of its citizens. The Balanced
Budget Act repealed the federal payment standard, also known as the Boren
Amendment, for hospitals and nursing facilities under Medicaid, increasing
states' discretion over the administration of Medicaid programs. A number of
states are considering legislation designed to reduce their Medicaid
expenditures which could result in decreased revenues for our lessees and
mortgagors.
The initial impact of the prospective payment system negatively affected
our financial results and our access to capital sources to fund growth and
refinance existing indebtedness. To obtain sufficient liquidity to enable us to
address the maturity in July 2000 and February 2001 of indebtedness totaling
$129.8 million, we issued $100.0 million of Series C preferred stock to Explorer
Holdings, L.P. ("Explorer") in July 2000 as described in more detail in Note 10
- - Stockholders' Equity and Stock Options to our audited Consolidated Financial
Statements.
As a consequence of the financial difficulties encountered by a number of
our nursing home operators in the late 1990's, 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. Under normal circumstances, we would
seek to re-lease or otherwise dispose of such assets as promptly as practicable.
However, 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 these properties and for
potential buyers to obtain financing to acquire them. As a result, 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.
At December 31, 2001, we owned 33 long-term healthcare facilities that had
been recovered from customers and were operated for our own account. Due to
re-leasing and asset sales, we owned three such facilities at December 31, 2002.
During 2000 and 2001, we experienced a significant increase in nursing home
revenues attributable to the increase in owned and operated assets. During 2002,
these increases abated as we re-leased, sold or closed all but three of these
facilities. For the twelve months ended December 31, 2002, 32% of our revenues
were from owned and operated assets as compared to 65% for the same twelve-month
period in 2001. In addition, in connection with the recovery of these assets, we
often fund working capital and deferred capital expenditure needs for a
transitional period until license transfers and other regulatory matters are
completed and reimbursement from third-party payors recommences. Our management
intends to sell or re-lease these assets as promptly as possible, consistent
with achieving valuations that reflect our management's estimate of fair value
of the assets. We do not know, however, if, or when, the dispositions will be
completed or whether the dispositions will be completed on terms that will
enable us to realize the fair value of such assets.
In February 2001, we suspended dividends on all common and preferred stock.
We do not know when, or if, we will resume dividend payments on our common stock
or, if resumed, what the amount or timing of any dividend will be. 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 of the Internal Revenue Code of 1986 to maintain our REIT
status for 2001. For tax year 2002, we are currently projecting a tax loss;
therefore, we anticipate no distribution will be required to satisfy the 2002
REIT rules. However, if we have taxable income, we intend to make the necessary
distributions to satisfy the 2002 REIT requirements.
On February 6, 2002, we refinanced our investment in a Baltimore, Maryland
asset leased by the United States Postal Service ("USPS") 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 2002, we paid off the remaining $97.5 million of our 6.95% Notes
that matured in June 2002, resulting in a loss on early extinguishment of debt
of approximately $49,000. In addition, during 2002, as a result of foreclosure
proceedings, we relinquished title to certain properties with a net carrying
value of approximately $5.2 million in satisfaction of certain mortgage
obligations owed to the Department of Housing and Urban Development ("HUD") in
the amount of $5.2 million.
On June 21, 2000, we were named as a defendant in certain litigation
brought against us in the U.S. District Court for the Eastern District of
Michigan, Detroit Division, 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. Effective as of September 30, 2002, the parties settled all claims in
the suit in consideration of Madison's payment of 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 evidenced by the amendment of the existing promissory
note from Madison to us. The note reflects 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. Accordingly, a reserve of $1.25 million was recorded relating to this
note.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Our significant accounting policies are described
in Note 1 in the Notes to Consolidated Financial Statements. These policies were
followed in preparing the consolidated financial statements for all periods
presented. Actual results could differ from those estimates.
We have identified six significant accounting policies as critical
accounting policies. These critical accounting policies are those that have the
most impact on the reporting of our financial condition and those requiring
significant judgments and estimates. With respect to these critical accounting
policies, we believe the application of judgments and assessments is
consistently applied and produces financial information that fairly presents the
results of operations for all periods presented. The six critical accounting
policies are:
Owned and Operated Assets and Assets Held for Sale. When we acquire real
estate pursuant to a foreclosure proceeding, it is designated as "owned and
operated assets" and is recorded at the lower of cost or fair value and is
included in real estate properties on our Consolidated Balance Sheet. Operating
assets and operating liabilities for the owned and operated properties are shown
separately on the face of our Consolidated Balance Sheet and are detailed in
Note 16--Segment Information.
When a formal plan to sell real estate is adopted and we hold a contract
for sale, the real estate is classified as "assets held for sale," with the net
carrying amount adjusted to the lower of cost or estimated fair value, less cost
of disposal. Depreciation of the facilities is excluded from operations after
management has committed to a plan to sell the asset. Upon adoption of Financial
Accounting Standards Board ("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.
Impairment of Assets. We periodically evaluate our real estate investments
for impairment indicators. The judgment regarding the existence of impairment
indicators is based on factors such as market conditions, operator performance
and legal structure. If indicators of impairment are present, we evaluate the
carrying value of the related real estate investments in relationship to the
future undiscounted cash flows of the underlying facilities. Provisions for
impairment losses related to long-lived assets are recognized when expected
future cash flows are less than the carrying values of the assets. If the sum of
the expected future cash flow, including sales proceeds, is less than carrying
value, we then adjust the net carrying value of leased properties and other
long-lived assets to the present value of expected future cash flows.
Loan Impairment Policy. When management identifies an indication of
potential loan impairment, such as non-payment under the loan documents or
impairment of the underlying collateral, the loan is written down to the present
value of the expected future cash flows. In cases where expected future cash
flows cannot be estimated, the loan is written down to the fair value of the
collateral.
Accounts Receivable. Accounts receivable consists primarily of lease and
mortgage interest payments. Amounts recorded include estimated provisions for
loss related to uncollectible accounts and disputed items. On a monthly basis,
we review the contractual payment versus actual cash payment received and the
contractual payment due date versus actual receipt date. When management
identifies delinquencies, a judgment is made as to the amount of provision, if
any, that is needed.
Accounts Receivable--Owned and Operated Assets. Accounts receivable from
owned and operated assets consist of amounts due from Medicare and Medicaid
programs, other government programs, managed care health plans, commercial
insurance companies and individual patients. Amounts recorded include estimated
provisions for loss related to uncollectible accounts and disputed items.
Revenue Recognition. Rental income and mortgage interest income are
recognized as earned over the terms of the related Master Leases and mortgage
notes, respectively. Such income includes periodic increases based on
pre-determined formulas (i.e., such as increases in the CPI) as defined in the
Master Leases and mortgage loan agreements. Reserves are taken against earned
revenues from leases and mortgages when collection of amounts due become
questionable or when negotiations for restructurings of troubled operators lead
to lower expectations regarding ultimate collection. When collection is
uncertain, lease revenues are recorded as received, after taking into account
application of security deposits. Interest income on impaired mortgage loans is
recognized as received after taking into account application of security
deposits.
Nursing home revenues from owned and operated assets (primarily Medicare,
Medicaid and other third party insurance) are recognized as patient services are
provided.
RESULTS OF OPERATIONS
The following is our discussion of the consolidated results of operations,
financial position and liquidity and capital resources, which should be read in
conjunction with our consolidated financial statements and accompanying notes.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Our revenues for the year ended December 31, 2002 totaled $135.7 million, a
decrease of $119.0 million over 2001 revenues. Our revenues for the year ended
December 31, 2002 of $135.7 million included $42.9 million of nursing home
revenues of owned and operated assets, as compared to $165.5 million of nursing
home revenues of owned and operate assets included in 2001 revenues.
Our rental income for the year ended December 31, 2002 totaled $64.8
million, an increase of $3.6 million over 2001 rental income. The increase is
due to $8.0 million from new leases on assets previously classified as owned and
operated and $0.9 million of contractual rent increases on the existing
portfolio. This increase is partially offset by a reduction of revenues of $5.3
million due to bankruptcies and restructurings.
Our mortgage interest income for the year ended December 31, 2002 totaled
$20.9 million, increasing $0.4 million. The increase is due to $1.1 million for
new investments placed during 2001 and receipt in 2002 of $1.6 million of
interest due in 2001 and not received until 2002, offset by $1.5 million from
loans paid off, $0.7 million due to restructurings and bankruptcies and $0.1
million due to normal amortization of the portfolio.
Our expenses for the year ended December 31, 2002 totaled $149.2 million,
decreasing approximately $121.6 million from expenses of $270.8 million for
2001.
Our nursing home expenses for owned and operated assets decreased to $63.8
million from $173.4 million in 2001 due to the releasing, sale and/or closure of
30 owned and operated assets during the year. In 2002, nursing home expenses
included a $5.9 million provision for uncollectible accounts receivable and $4.3
million of expenses related to leasehold buy outs. Nursing home expenses in 2001
included a $7.3 million provision for uncollectible accounts receivable.
The 2002 provision for depreciation and amortization of real estate totaled
$21.3 million, decreasing $0.8 million from 2001. The decrease consists
primarily of $0.4 million of leasehold amortization expense for leaseholds
written down in 2001 or sold in 2002 and $0.6 million from properties sold,
impaired or reclassified to held for sale, offset by $0.2 million from
properties previously classified as mortgages.
Our interest expense for the year ended December 31, 2002 was approximately
$27.4 million, compared with $33.2 million for 2001. The decrease in 2002 is due
to the payoff of $97.5 million of 6.95% Notes that matured in June 2002 and
lower average borrowings on our credit facilities. For the year ending December
31, 2001, we repurchased $27.5 million of the same 6.95% Notes maturing in June
2002, recognizing a reduction of interest expense for the gain on early
extinguishment of debt of $3.1 million.
Our general and administrative expenses for 2002 totaled $6.3 million as
compared to $10.4 million for 2001, a decrease of $4.1 million. The decrease is
due to lower consulting costs, primarily related to the owned and operated
facilities and cost reductions due to reduced staffing, travel and other
employee-related expenses.
Our legal expenses for 2002 totaled $2.9 million as compared to $4.3
million in 2001. The decrease is largely attributable to a reduction of legal
costs associated with our owned and operated facilities due to the releasing,
sale and/or closure of 30 owned and operated assets during the year.
In the fourth quarter of 2002, we recognized a $7.0 million refinancing
expense as we were unable to complete a planned commercial mortgage-backed
securities ("CMBS") transaction due to the impact on our operators resulting
from reductions in Medicare reimbursement and concerns about potential Medicaid
rate reductions. We continue to actively pursue refinancing alternatives in
order to extend current debt maturities. Among other things, we are continuing
discussions to extend or refinance our $160 million Fleet credit facility,
currently scheduled to mature in December 2003. At this time, there can be no
assurance that we will be able to reach acceptable agreements with our bank
lenders and/or other capital sources to achieve the desired refinancing.
A provision for impairment of $12.2 million and $9.6 million is included in
expenses for 2002 and 2001, respectively. The 2002 provision consisted of $9.3
million to reduce the carrying value of five closed facilities to their fair
value less cost to dispose and $3.0 million related to owned and operated assets
that management determined were impaired. The 2001 provision included $8.3
million to reduce facilities recovered from operators and classified as held for
sale assets to fair value less cost to dispose, and $1.3 million related to
other real estate assets that management determined were impaired.
We recognized a provision for loss on uncollectible mortgages, notes and
accounts receivable of $8.8 million in 2002. The provision included $4.9 million
associated with the write down of two mortgage loans to bankrupt operators and
$3.5 million related to the restructuring of debt owed by Madison/OHI Liquidity
Investors, LLC ("Madison") as part of the compromise and settlement of a lawsuit
with Madison. (See Note 14 - Litigation to our audited Consolidated Financial
Statements). The 2002 provision also included $0.4 million to adjust accounts
receivable to their net realizable value. In 2001, we recognized a provision for
uncollectible mortgages, notes and accounts receivable of $0.7 million to adjust
the carrying value of accounts receivable to net realizable value.
In 2001, we recorded a $5.1 million charge for severance, moving and
consulting agreement costs. This charge was comprised of $4.6 million for
relocation of our corporate headquarters and $0.5 million for consulting and
severance payments to a former executive.
In 2001, we recorded a $10 million litigation settlement to settle a suit
brought by Karrington Health, Inc. in 1998. This settled all claims arising from
the suit, but without our admission of any liability or fault, which liability
is expressly denied. Based on the settlement, the suit was dismissed with
prejudice.
During 2002, we recorded a non-cash gain of $0.9 million related to the
maturity and payoff of two interest rate swaps with a notional amount of $32.0
million each. We recorded a non-cash charge of $1.3 million for 2001 related to
the adoption of FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, which was required to be adopted in years beginning
after June 15, 2000.
During 2002, we recognized a gain on assets sold of $2.5 million, primarily
from the sale of our investment in Omega Worldwide, Inc. ("Worldwide"). Pursuant
to a tender offer by Four Seasons Health Care Limited ("Four Seasons") for all
of the outstanding shares of common stock of Worldwide, we sold our investment,
which consisted of 1.2 million shares of common stock and 260,000 shares of
preferred stock, to Four Seasons for cash proceeds of approximately $7.4 million
(including $3.5 million for preferred stock liquidation preference and accrued
preferred dividends). In addition, we sold our investment in Principal
Healthcare Finance Limited, an Isle of Jersey company ("PHFL"), which consisted
of 990,000 ordinary shares and warrants to purchase 185,033 ordinary shares, to
an affiliate of Four Seasons for cash proceeds of $2.8 million. Both
transactions were completed in September 2002 and provided aggregate cash
proceeds of $10.2 million. We realized a gain from the sale of our investments
in Worldwide and PHFL of $2.2 million. We no longer own any interest in
Worldwide or PHFL. In addition, we sold certain other assets in 2002 realizing
cash proceeds of $7.5 million, resulting in a net accounting gain of $0.3
million. During 2001, we sold certain other assets realizing cash proceeds of
$3.9 million, resulting in an accounting loss of $0.7 million.
No provision for federal income taxes has been made since we qualify as a
real estate investment trust ("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.
For tax year 2002, we are currently projecting a tax loss; therefore, we
anticipate no distribution will be required to satisfy the 2002 REIT rules.
However, if we have taxable income, we intend to make the necessary
distributions to satisfy the 2002 REIT requirements.
Our funds from operations ("FFO") for the year ended December 31, 2002, on
a diluted basis was a deficit of $6.5 million, a decrease of $4.3 million as
compared to a deficit of $2.2 million for 2001 due to factors mentioned above.
Funds from operations is 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. Diluted funds from operations is the lower of funds from operations
and funds from operations adjusted for the assumed conversion of Series C
preferred stock and the exercise of in-the-money stock options. We consider
funds from operations 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 and to make
expenditures. Funds from operations in and of itself does not represent cash
generated from operating activities in accordance with generally accepted
accounting principles 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 generally accepted accounting principles
in the United States, as a measure of liquidity and is not necessarily
indicative of cash available to fund cash needs.
In October 2003, the National Association of Real Estate Investment Trusts
("NAREIT") informed its member companies that the Securities and Exchange
Commission ("SEC") has taken the position that asset impairment charges should
not be excluded in calculating FFO. The SEC's interpretation is that recurring
impairments on real property are not an appropriate adjustment. In the tables
below, we have applied the SEC's interpretation of FFO and have not added back
asset impairment charges. As a result, our basic FFO, diluted FFO and FFO per
diluted share set forth in the tables below are not comparable to similar
measures reported in previous disclosures.
The following table presents our FFO results reflecting the impact of asset
impairment charges (the SEC's interpretation) for the years ended December 31,
2002 and 2001:
YEAR ENDED DECEMBER 31,
-----------------------------
2002 2001
-----------------------------
NET LOSS AVAILABLE TO COMMON........................................... $(34,761) $(36,651)
(Deduct gain) add back loss from real estate dispositions............ (2,548) 677
-----------------------------
Sub-total.......................................................... (37,309) (35,974)
Elimination of non-cash items included in net loss:
Depreciation....................................................... 21,092 21,605
Amortization....................................................... 178 461
Adjustment of derivatives to fair value............................ (946) 1,317
-----------------------------
FUNDS FROM OPERATIONS, BASIC........................................... (16,985) (12,591)
Series C Preferred Dividends........................................... 10,484 10,363
-----------------------------
FUNDS FROM OPERATIONS, DILUTED......................................... $ (6,501) $ (2,228)
=============================
Weighted-average common shares outstanding, basic...................... 34,739 20,038
Assumed conversion of Series C Preferred Stock....................... 16,775 16,775
Assumed exercise of stock options.................................... 576 1,208
-----------------------------
Weighted-average common shares outstanding, diluted.................... 52,090 38,021
=============================
FFO PER SHARE, BASIC................................................... $ (0.49) $ (0.63)
=============================
FFO PER SHARE, DILUTED *............................................... $ (0.49) $ (0.63)
=============================
* Lower of basic or diluted FFO per share.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Our revenues for the year ended December 31, 2001 totaled $254.7 million, a
decrease of $14.9 million from 2000 revenues. Our revenues for the year ended
December 31, 2001 of $254.7 included $ 165.5 million of nursing home revenues of
owned and operated assets as compared to $169.7 million of nursing home revenues
of owned and operated assets included in 2000 revenues.
Our rental income for the year ended December 31, 2001 totaled $61.2
million, a decrease of $6.1 million over 2000 rental income. The decrease is due
to $6.3 million from reductions in lease revenue due to foreclosures,
bankruptcies, restructurings and reserve for non-payment of certain leases, and
$1.8 million from reduced investments caused by 2000 and 2001 asset sales. These
decreases are offset by $1.3 million relating to contractual increases in rents
that became effective in 2001 as defined under the related agreements and $0.7
million relating to assets previously classified as owned and operated.
Our mortgage interest income for the year ended December 31, 2001 totaled
$20.5 million, decreasing $3.3 million from 2000 mortgage interest income. The
decrease is due to $1.6 million from reductions due to foreclosures,
bankruptcies, restructurings and reserve for non-payment of certain mortgages
and $2.0 million from reduced investments caused by the payoffs of mortgages.
These decreases are partially offset by $0.2 million relating to contractual
increases in interest income that became effective in 2001 as defined under the
related agreements and $0.1 million relating to assets previously classified as
owned and operated.
Our nursing home revenues of owned and operated assets for the year ended
December 31, 2001 totaled $165.5 million, decreasing $4.2 million over 2000
nursing home revenues. The decrease is due to the sale and re-leasing of certain
owned and operated assets during the year.
Our expenses for the year ended December 31, 2001 totaled $270.8 million,
decreasing approximately $51.2 million over expenses of $322.0 million for 2000.
Our nursing home expenses for owned and operated assets decreased to $173.4
million from $173.2 million in 2000 due to the sale and re-leasing of certain
owned and operated assets during the year. In 2001, nursing home expenses
included a $7.3 million provision for uncollectible accounts receivable versus a
$1.0 million provision for uncollectible accounts receivable in 2000.
The 2001 provision for depreciation and amortization of real estate totaled
$22.0 million, decreasing $1.1 million from 2000. The decrease primarily
consists of $0.7 million depreciation expense for properties sold or held for
sale and a reduction in amortization of non-compete agreements of $0.7 million
offset by $0.3 million additional depreciation expense from properties
previously classified as mortgages and new investments placed in service in 2000
and 2001.
Our interest expense for the year ended December 31, 2001 was approximately
$33.2 million, compared with $42.4 million for 2000. The decrease in 2001 is due
to lower average interest rates and average borrowings during the 2001 period,
as well as a $3.1 million gain on early extinguishment of debt associated with
the repurchase of $27.5 million of the 6.95% Notes maturing in June 2002.
Our general and administrative expenses for 2001 totaled $10.4 million as
compared to $6.4 million for 2000, an increase of $4.0 million. The increase is
due primarily to increased consulting costs related to the foreclosures and
lease restructures.
Our legal expenses for 2001 totaled $4.3 million as compared to $2.5
million in 2000. The increase is largely attributable to legal costs associated
with operator bankruptcy filings and negotiations with our troubled operators.
A provision for impairment of $9.6 million is included in expenses for
2001. This provision included $8.3 million to reduce facilities recovered from
operators and now classified as held for sale assets to fair value less cost to
dispose, and $1.3 million related to other real estate assets our management has
determined is impaired.
We recognized a provision for loss on uncollectible accounts of $0.7
million in 2001, adjusting the carrying value of accounts receivable to net
realizable value. In 2000, we recognized a provision for loss on mortgages and
notes receivable of $11.2 million, adjusting the carrying value of mortgages to
the estimated value of their collateral and notes receivable to their net
realizable value.
We recorded a $10 million litigation settlement expense in 2001 to settle a
suit brought by Karrington Health, Inc. in 1998. This settled all claims arising
from the suit, but without our admission of any liability or fault, which
liability is expressly denied. Based on the settlement, the suit was dismissed
with prejudice.
In 2001, we recorded a $5.1 million charge for severance, moving and
consulting agreement costs. This charge was comprised of $4.6 million for
relocation of our corporate headquarters and $0.5 million for consulting and
severance payments to our former Senior Vice President and General Counsel. In
2000, we recognized a $4.7 million charge for severance and consulting payments
to our former Chief Executive Officer and former Chief Financial Officer.
We recorded a non-cash charge of $1.3 million for 2001 related to the
adoption of FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which was required to be adopted in years beginning after
June 15, 2000. No such charge was recorded in 2000, as we adopted this new
statement effective January 1, 2001.
During 2001, we sold certain of our core and other assets realizing
proceeds of $3.9 million, resulting in a net loss of $0.7 million. During 2000,
we completed asset sales yielding net proceeds of $34.7 million, resulting in a
net gain of $10.0 million.
During 2001, we repurchased $27.5 million of our 6.95% Notes maturing in
June 2002, recognizing a gain on early extinguishment of debt of $3.1 million.
No provision for federal income taxes has been made since we 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, as we have distributed at
least 95% of our REIT taxable income for taxable years before 2001 and have met
certain other conditions. In 2001, and future taxable years, we are required to
distribute at least 90% of our REIT taxable income.
Our funds from operations for the year ended December 31, 2001 on a diluted
basis was a deficit of $2.2 million, an increase of $40.2 million as compared to
the $42.5 million deficit for 2000 due to factors mentioned above. Funds from
operations is 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. Diluted
funds from operations is the lower of funds from operations and funds from
operations adjusted for the assumed conversion of Series C preferred stock and
Subordinated Convertible Debentures and the exercise of in-the-money stock
options. We consider funds from operations 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 and
to make expenditures. Funds from operations in and of itself does not represent
cash generated from operating activities in accordance with generally accepted
accounting principles 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 generally accepted accounting principles
in the United States, as a measure of liquidity and is not necessarily
indicative of cash available to fund cash needs.
In October 2003, the National Association of Real Estate Investment Trusts
("NAREIT") informed its member companies that the Securities and Exchange
Commission ("SEC") has taken the position that asset impairment charges should
not be excluded in calculating FFO. The SEC's interpretation is that recurring
impairments on real property are not an appropriate adjustment. In the tables
below, we have applied the SEC's interpretation of FFO and have not added back
asset impairment charges. As a result, our basic FFO, diluted FFO and FFO per
diluted share set forth in the table below are not comparable to similar
measures reported in previous disclosures.
The following table presents our FFO results reflecting the impact of asset
impairment charges (the SEC's interpretation) for the years ended December 31,
2001 and 2000:
YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000
-----------------------------
NET LOSS AVAILABLE TO COMMON........................................... $(36,651) $(66,485)
Add back loss (deduct gain) from real estate dispositions 677 (9,989)
-----------------------------
Sub-total.......................................................... (35,974) (76,474)
Elimination of non-cash items included in net loss:
Depreciation....................................................... 21,605 22,609
Amortization....................................................... 461 656
Adjustment of derivatives to fair value............................ 1,317 -
-----------------------------
FUNDS FROM OPERATIONS, BASIC........................................... (12,591) (53,209)
Interest and amortization on Subordinate Convertible Debentures........ - 3,456
Series C Preferred Dividends........................................... 10,363 7,297
-----------------------------
FUNDS FROM OPERATIONS, DILUTED......................................... $ (2,228) $(42,456)
=============================
Weighted-average common shares outstanding, basic...................... 20,038 20,052
Assumed conversion of Convertible Debentures......................... - 1,309
Assumed conversion of Series C Preferred Stock....................... 16,775 7,321
Assumed exercise of stock options.................................... 1,208 -
-----------------------------
Weighted-average common shares outstanding, diluted.................... 38,021 28,682
=============================
FFO PER SHARE, BASIC................................................... $ (0.63) $ (2.65)
=============================
FFO PER SHARE, DILUTED *............................................... $ (0.63) $ (2.65)
=============================
* Lower of basic or diluted FFO per share.
PORTFOLIO DEVELOPMENTS
The partial expiration of certain Medicare rate increases has had an
adverse impact on the revenues of the operators of nursing home facilities and
has negatively impacted some operators' ability to satisfy their monthly lease
or debt payment to us. In several instances we hold security deposits that can
be applied in the event of lease and loan defaults, subject to applicable
limitations under bankruptcy law with respect to operators seeking protection
under Chapter 11 of the Bankruptcy Act. (See Item 1 - Business of the Company -
Overview).
Alterra Healthcare Corporation. On January 14, 2003, we were notified by
Alterra Healthcare Corporation ("Alterra") that it did not intend to pay January
rent and that a restructuring of its Master Lease was necessary. We currently
lease eight assisted living facilities (325 units) located in seven states to
subsidiaries of Alterra. The Master Lease requires annual rent for 2003 of
approximately $3.2 million. On January 14, 2003, we declared an "Event of
Default" under its Master Lease and demanded payment under its Alterra
guarantee.
On January 22, 2003, Alterra announced that, in order to facilitate and
complete its on-going restructuring initiatives, they had filed a voluntary
petition with the U.S. Bankruptcy Court for the District of Delaware to
reorganize under Chapter 11 of the U.S. Bankruptcy Code. We intend to
aggressively pursue all avenues afforded us in order to enforce the terms and
conditions under the lease.
Integrated Health Services, Inc. Integrated Health Services, Inc. ("IHS")
filed for Chapter 11 bankruptcy protection in February 2000. With the exception
of a small portion of prepetition interest (approximately $63,000), IHS paid its
contractual mortgage interest from its bankruptcy filing in February 2000 until
October 2001. In November 2001, IHS informed us that it did not intend to pay
future rent and mortgage interest due. In January, 2002, IHS resumed making
payments to us. Revenue has been recorded as payments were received. At December
31, 2002, we held three mortgages on properties owned by IHS: a $35.6 million
mortgage collateralized by six facilities located in Florida and Texas; a $12
million mortgage collateralized by two facilities located in Georgia; and a $4.9
million mortgage collateralized by one facility located in Florida. Annual
contractual interest income on each of the mortgages is approximately $4.11
million, $1.28 million and $0.55 million, respectively. We also have a lease
with IHS for one property in the state of Washington, representing an investment
of $10.0 million and annualized contractual revenue of $1.49 million. IHS
rejected this lease on November 9, 2001.
In December 2002, an agreement was approved by the United States Bankruptcy
Court in Wilmington, Delaware between IHS and us, whereby upon notice provided
by us, IHS will convey ownership of eight skilled nursing facilities (five in
Florida, two in Georgia, and one in Texas) to one of our affiliates and transfer
the operations to our designee. Current appraisals of the properties underlying
the $12.0 million and $35.6 million mortgage loans indicate collateral value
supporting our mortgage loan balances. Accordingly, we do not expect to record
any reserves relative to these loans at this time. The amount of the $4.9
million mortgage has been fully reserved.
On February 1, 2003, we entered into a Master Lease, to re-lease a 130-bed
Texas facility, formerly operated by IHS, with Senior Management Services of
Treemont, Inc. The initial term is ten years with rent culminating at $0.4
million annually by the end of the third year. We are in the process of
negotiating lease arrangements on each of the remaining seven properties. (See
Note 19 - Subsequent Events to our audited Consolidated Financial Statements).
Lyric Healthcare LLC. We entered into a forbearance agreement with Lyric
Healthcare LLC ("Lyric") through August 31, 2001, whereby we received $541,266
of the $0.9 million monthly rent due under the Lyric leases through November
2001. On November 7, 2001, we were notified by Lyric that we would no longer be
receiving payments. In January, 2002, Lyric resumed making payments to us.
Revenue has been recorded as received. Our original investment in the ten
facilities covered under the lease is $95.4 million.
Effective January 1, 2003, we completed a restructured transaction with
Claremont Health Care Holdings, Inc. (formerly Lyric Health Care, LLC) whereby
nine facilities formerly leased under two Master Leases were combined into one
new ten year Master Lease. Annual rent under the new lease is $6.0 million, the
same amount of rent recognized in 2002 for these properties. As part of the
restructure, one facility located in Sarasota, Florida was closed and is
currently being marketed for sale. As a result of this closure, we recorded a
non-cash impairment of approximately $6.8 million in the fourth quarter of 2002.
In anticipation of this restructure, on November 1, 2002, Trans Health
Management replaced IHS as manager of these nine properties. (See Note 19 -
Subsequent Events to our audited Consolidated Financial Statements).
Mariner and Professional Healthcare Settlement. Effective September 1,
2001, we entered into a comprehensive settlement with Mariner Post-Acute
Network, Inc. ("Mariner") resolving all outstanding issues relating to our 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 1,679 operating beds. PHCM
remained 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 paid us our 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.
On February 1, 2001, four Michigan facilities, previously operated by PHCM
and subject to our pre-petition mortgage, were transferred by PHCM to Ciena
Health Care Management ("Ciena") who paid for the facilities by execution of a
promissory note that was assigned to us. 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 us. The $8.7 million balance of the promissory note, which
was secured by a first mortgage on the four facilities, was paid in full during
2002.
Following the closing under the settlement agreement, the outstanding
principal balance on the PHCM loan is approximately $59.7 million. The PHCM loan
term is nine years, with PHCM having the option to extend for an additional
eleven years. PHCM has the option to prepay the PHCM loan between February 1,
2005 and July 31, 2005.
Sun Healthcare Group, Inc. On February 4, 2003, Sun Healthcare Group, Inc.
("Sun") remitted rent of $1.6 million versus the contractual amount of $2.1
million. We have agreed with Sun to use a letter of credit (posted by Sun as a
security deposit) in the amount of $0.5 million to make up the difference in
rent and agreed to temporarily forebear in declaring a default under the lease
caused by Sun's failure to restore the $0.5 million letter of credit. The letter
of credit was otherwise expiring on February 28, 2003 and was not being renewed.
We hold additional security deposits (in the form of cash and letters of credit)
of $2.3 million.
On February 7, 2003, Sun announced "that it has opened dialogue with many
of its landlords concerning the portfolio of properties leased to Sun and
various of its consolidated subsidiaries (collectively, the `Company'). The
Company is seeking a rent moratorium and/or rent concessions with respect to
certain of its facilities and is seeking to transition its operations of certain
facilities to new operators while retaining others." To this end, Sun has
initiated conversations with us regarding a restructure of our lease. At this
stage, it is too early to predict the outcome of those conversations. (See Note
19 - Subsequent Events to our audited Consolidated Financial Statements).
As of December 31, 2002, we have an original investment balance of $219.0
million relating to the Sun portfolio under agreements providing for annual
rental income of $25.1 million in 2002 and $25.7 million in 2003.
Other Operators. In April 2001, we were informed by TLC Healthcare, Inc.
("TLC") that it could no longer meet its payroll and other operating
obligations. We had leases and mortgages with TLC representing eight properties
with 1,049 beds and an initial investment of $27.5 million. As a result of this
action, one facility in Texas with an initial investment of $2.5 million was
leased to a new operator, Lamar Healthcare, Inc. and four properties in
Illinois, Indiana and Ohio, with an initial investment of $13.5 million, were
taken back and placed under management agreements. Two of these properties are
currently operated for our own account and classified as owned and operated
assets. The other two properties were leased to Hickory Creek Healthcare
Foundation, Inc. on August 1, 2002. The remaining three properties, located in
Texas, were closed. These three facilities were classified as assets held for
sale and were reduced to their fair value, less cost of disposal. Two of these
properties were sold in December of 2001. The remaining property was sold in
June, 2002 generating a loss on sale of $0.25 million. Amounts due from TLC that
were not collected were written off as uncollectible during 2001.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, we had total assets of $802.6 million, stockholders'
equity of $479.7 million and long-term debt of $306.5 million, representing
approximately 39.0% of total capitalization. In addition, as of December 31,
2002, we had an aggregate of $113.1 million of outstanding debt which matures in
2003, including $112.0 million on our $160.0 million credit facility.
BANK CREDIT AGREEMENTS
We have two secured revolving credit facilities, providing up to $225.0
million of financing. At December 31, 2002, $177.0 million was outstanding and
$12.5 million was utilized for the issuance of letters of credit, leaving
availability of $35.5 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. Borrowings bear interest at 2.5% to 3.25% over LIBOR through December
31, 2002 and 3.00% to 3.25% over LIBOR after December 31, 2002, based on our
leverage ratio. Borrowings of $112.0 million are outstanding at December 31,
2002. Additionally, $12.5 million of letters of credit are outstanding against
this credit facility at December 31, 2002. These letters of credit are
collateral for certain long-term borrowings and collateral for insurance
programs associated with certain owned and operated assets. LIBOR-based
borrowings under this facility bear interest at a weighted-average rate of 4.42%
at December 31, 2002 and 5.49% at December 31, 2001. Cost for the letters of
credit range from 2.5% to 3.25%, based on our leverage ratio. Real estate
investments with a gross book value of approximately $239.0 million are pledged
as collateral for this revolving line of credit facility at December 31, 2002.
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.
Borrowings under the facility bear interest at 2.5% to 3.75% over LIBOR, based
on our leverage ratio and collateral assigned. Borrowings of $65.0 million are
outstanding at December 31, 2002. LIBOR-based borrowings under this facility
bear interest at a weighted-average rate of 4.66% at December 31, 2002 and 5.65%
at December 31, 2001. 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 December 31, 2002.
We are required to meet certain financial covenants, including prescribed
leverage and interest coverage ratios on our long-term borrowings. We are also
required to fix a certain portion of our interest rate. We utilize interest rate
caps to fix interest rates on variable rate debt and reduce certain exposures to
interest rate fluctuations (See Note 8 - Financial Instruments to our audited
Consolidated Financial Statements).
Dividends. In order to qualify as a 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. 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. For tax year 2002, we are projecting a tax loss; therefore, we
anticipate no distribution will be required to satisfy the 2002 REIT rules.
However, if we have taxable income, we intend to make the necessary
distributions to satisfy the 2002 REIT requirements. The accumulated and unpaid
dividends relating to all series of preferred stocks total $40.0 million as of
December 31, 2002. In aggregate, preferred dividends continue to accumulate at
approximately $5.0 million per quarter.
No common cash dividends were paid during 2002 and 2001. Cash dividends
paid totaled $1.00 per common share for 2000. The dividend payout ratio, that is
the ratio of per common share amounts for dividends paid to the diluted per
common share amounts of funds from operations, was approximately 238% for 2000.
Excluding the provision for loss on mortgages and notes receivable and severance
and consulting agreement costs, the dividend payout ratio for 2000 was
approximately 73.0%. 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.
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. 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) continue to 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.
The table below sets forth information regarding arrearages in payment of
preferred stock dividends:
ANNUAL
DIVIDEND ARREARAGE AS OF
TITLE OF CLASS PER SHARE DECEMBER 31, 2002
- ----------------------------------------------------------------------------
9.25% Series A Cumulative
Preferred Stock...................... $2.3125 $10,637,500
8.625% Series B Cumulative
Preferred Stock...................... $2.1563 8,625,000
Series C Convertible
Preferred Stock...................... $10.0000 20,765,743
---------------------------------
Total................................ $40,028,243
=================
Liquidity. We believe our liquidity and various sources of available
capital, including funds from operations, expected proceeds from planned asset
sales and our ability to negotiate an extension of our current debt maturities
are adequate to finance operations, meet recurring debt service requirements and
fund future investments through the next twelve months. As a result of the
October 1, 2002 Medicare rate reductions and potential reductions in certain
state Medicaid reimbursements, refinancing our current debt maturity has become
more difficult. We continue to actively pursue refinancing alternatives in order
to extend current debt maturities and provide greater financial flexibility.
Among other things, we will continue discussions to extend or refinance our
$160.0 million credit facility, currently scheduled to mature in December 2003.
At this time, there can be no assurance that we will be able to reach acceptable
agreements with our bank lenders and/or other capital sources to achieve the
desired refinancing, or the terms of any such refinancing.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and report of independent auditors
are filed as part of this report beginning on page F-1. The summary of unaudited
quarterly results of operations for the years ended December 31, 2002 and 2001
is included in Note 17 to the financial statements, which is incorporated herein
by reference in response to Item 302 of Regulation S-K.
ITEM 15 - EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a)(1) Listing of Consolidated Financial Statements
PAGE
TITLE OF DOCUMENT NUMBER
- ----------------- -------
Report of Independent Auditors....................................... F-1
Consolidated Balance Sheets as of December 31, 2002 and 2001......... F-2
Consolidated Statements of Operations for the years ended
December 31, 2002, 2001 and 2000................................... F-3
Consolidated Statements of Stockholders Equity for the years ended
December 31, 2002, 2001 and 2000.................................. F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000................................... F-5
Notes to Consolidated Financial Statements........................... F-6
(a)(2) Listing of Financial Statement Schedules. The following consolidated
financial statement schedules are included herein:
Schedule III-- Real Estate and Accumulated Depreciation.............. F-34
Schedule IV-- Mortgage Loans on Real Estate.......................... F-37
(a)(3) Listing of Exhibits -- See Index to Exhibits beginning on Page I-1
of this report.
(b) Reports on Form 8-K -- None.
(c) Exhibits -- See Index to Exhibits to Form 10-K beginning on Page I-1
of this report.
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Omega Healthcare Investors, Inc.
We have audited the accompanying consolidated balance sheets of Omega
Healthcare Investors, Inc. and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 2002.
Our audit also included the financial statement schedules listed in the Index
under Item 15 (a). These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Omega
Healthcare Investors, Inc. and subsidiaries at December 31, 2002 and 2001, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedules, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
As discussed in Note 20 to the consolidated financial statements, in 2002
Omega Healthcare Investors, Inc. adopted the provisions of Statements of
Financial Standards No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" and No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections."
/s/ Ernst & Young LLP
Chicago, Illinois
February 10, 2003, except
for the seventh paragraph
of Note 19, as to which the
date is February 28, 2003
and Note 20, as to which
the date is February 4, 2004.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
2002 2001
-----------------------------------
ASSETS
Real estate properties
Land and buildings at cost................................................... $ 669,188 $ 684,848
Less accumulated depreciation................................................ (117,986) (100,038)
-----------------------------------
Real estate properties--net............................................... 551,202 584,810
Mortgage notes receivable--net............................................... 173,914 195,193
-----------------------------------
725,116 780,003
Other investments--net.......................................................... 36,887 50,791
-----------------------------------
762,003 830,794
Assets held for sale--net....................................................... 2,324 7,396
-----------------------------------
Total investments............................................................ 764,327 838,190
Cash and cash equivalents....................................................... 15,178 11,445
Accounts receivable--net........................................................ 2,766 4,565
Interest rate cap............................................................... 7,258 -
Other assets.................................................................... 4,208 6,732
Operating assets for owned properties........................................... 8,883 29,907
-----------------------------------
Total assets.............................................................. $ 802,620 $ 890,839
===================================
LIABILITIES AND STOCKHOLDERS EQUITY
Liabilities:
Revolving lines of credit.................................................... $ 177,000 $ 193,689
6.95% unsecured notes due 2007............................................... 100,000 100,000
Other long-term borrowings................................................... 29,462 21,957
6.95% unsecured notes due 2002............................................... - 97,526
Accrued expenses and other liabilities....................................... 13,234 16,790
Operating liabilities for owned properties................................... 3,223 10,187
-----------------------------------
Total liabilities......................................................... 322,919 440,149
-----------------------------------
Stockholders equity:
Preferred stock $1.00 par value; authorized--10,000 shares:
Issued and outstanding--2,300 shares Class A with an aggregate
liquidation preference of $57,500........................................ 57,500 57,500
Issued and outstanding--2,000 shares Class B with an aggregate
liquidation preference of $50,000........................................ 50,000 50,000
Issued and outstanding--1,048 shares Class C with an aggregate
liquidation preference of $104,842....................................... 104,842 104,842
Common stock $.10 par value; authorized--100,000 shares
Issued and outstanding--37,141 shares in 2002 and 19,999 shares in 2001.... 3,714 2,000
Additional paid-in capital................................................... 481,052 438,071
Cumulative net earnings...................................................... 151,245 165,891
Cumulative dividends paid.................................................... (365,654) (365,654)
Unamortized restricted stock awards.......................................... (116) (142)
Accumulated other comprehensive loss......................................... (2,882) (1,818)
-----------------------------------
Total stockholders equity................................................. 479,701 450,690
-----------------------------------
Total liabilities and stockholders equity................................. $ 802,620 $ 890,839
===================================
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
2002 2001 2000
-----------------------------------------
REVENUES
Rental income................................................................ $ 64,821 $ 61,189 $ 67,308
Mortgage interest income..................................................... 20,921 20,478 23,806
Other investment income--net................................................. 5,302 4,845 6,594
Nursing home revenues of owned and operated assets........................... 42,906 165,503 169,674
Miscellaneous................................................................ 1,757 2,642 2,206
-----------------------------------------
135,707 254,657 269,588
-----------------------------------------
EXPENSES
Nursing home expenses of owned and operated assets........................... 63,796 173,387 173,215
Depreciation and amortization................................................ 21,255 22,039 23,128
Interest..................................................................... 27,381 33,204 42,400
General and administrative................................................... 6,285 10,383 6,425
Legal........................................................................ 2,869 4,347 2,467
State taxes.................................................................. 490 739 195
Refinancing expenses......................................................... 7,000 - -
Provisions for impairment.................................................... 12,238 9,608 58,296
Provisions for uncollectible mortgages, notes and accounts receivable........ 8,844 683 11,185
Severance, moving and consulting agreement costs............................. - 5,066 4,665
Litigation settlement expense................................................ - 10,000 -
Adjustment of derivatives to fair value...................................... (946) 1,317 -
-----------------------------------------
149,212 270,773 321,976
-----------------------------------------
Loss before gain (loss) on assets sold.......................................... (13,505) (16,116) (52,388)
Gain (loss) on assets sold--net................................................. 2,548 (677) 9,989
-----------------------------------------
Loss from continuing operations................................................. (10,957) (16,793) (42,399)
(Loss) income from discontinued operations...................................... (3,689) 136 (7,158)
-----------------------------------------
Net loss........................................................................ (14,646) (16,657) (49,557)
Preferred stock dividends....................................................... (20,115) (19,994) (16,928)
-----------------------------------------
Net loss available to common.................................................... $(34,761) $(36,651) $(66,485)
=========================================
Income (Loss) per common share:
Basic:
Income (Loss) from continuing operations................................... $ (0.89) $ (1.84) $ (2.96)
=========================================
Net loss .................................................................. $ (1.00) $ (1.83) $ (3.32)
=========================================
Diluted:
Income (Loss) from continuing operations................................... $ (0.89) $ (1.84) $ (2.96)
=========================================
Net loss .................................................................. $ (1.00) $ (1.83) $ (3.32)
=========================================
Dividends declared and paid per common share.................................... $ - $ - $ 1.00
=========================================
Weighted-average shares outstanding, basic...................................... 34,739 20,038 20,052
=========================================
Weighted-average shares outstanding, diluted.................................... 34,739 20,038 20,052
=========================================
Components of other comprehensive income (loss):
Unrealized gain (loss) on Omega Worldwide, Inc............................... $ 969 $ (939) $ (2,580)
=========================================
Unrealized loss on hedging contracts......................................... $ (2,033) $ (849) $ -
=========================================
Total comprehensive loss........................................................ $(15,710) $(18,445) $(52,137)
=========================================
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK ADDITIONAL PREFERRED CUMULATIVE
PAR VALUE PAID-IN CAPITAL STOCK NET EARNINGS
--------------------------------------------------------------------
Balance at December 31, 1999 (19,877 shares).................. $ 1,988 $447,304 $107,500 $232,105
Issuance of common stock:
Grant of restricted stock (187 shares at an average of
$6.378 per share) and amortization of deferred stock
compensation.......................................... 19 1,179 - -
Dividend Reinvestment Plan (74 shares).................. 7 487 - -
Shares surrendered for stock option loan cancellation
(100 shares).......................................... (10) (579) - -
Issuance of preferred stock................................ - (9,839) 100,000 -
Net loss for 2000.......................................... - - - (49,557)
Common dividends paid ($1.000 per share)................... - - - -
Preferred dividends paid and/or declared (Series A of
$2.313 per share, Series B of $2.156 per share and
Series C of $0.25 per share)............................ - - - -
Unrealized loss on Omega Worldwide, Inc.................... - - - -
--------------------------------------------------------------------
Balance at December 31, 2000 (20,038 shares).................. 2,004 438,552 207,500 182,548
Issuance of common stock:
Grant of restricted stock (50 shares at an average of
$2.320 per share) and amortization of deferred stock
compensation.......................................... 5 111 - -
Cancellation of restricted stock (52 shares)............ (5) (325) - -
Dividend Reinvestment Plan (10 shares).................. 1 28 - -
Grant of stock as payment of director fees (37 shares
at an average of $2.454 per share).................... 4 86 - -
Cancellation of stock held as collateral for note
receivable (84 shares)................................ (9) (336) - -
Issuance of Series C preferred stock (in lieu of November
2000 dividends)......................................... - (45) 4,842 -
Net loss for 2001.......................................... - - - (16,657)
Unrealized loss on Omega Worldwide, Inc.................... - - - -
Unrealized loss on hedging contracts....................... - - - -
--------------------------------------------------------------------
Balance at December 31, 2001 (19,999 shares).................. 2,000 438,071 212,342 165,891
Issuance of common stock:
Release of restricted stock and amortization of
deferred stock compensation........................... - - - -
Dividend Reinvestment Plan (1 shares)................... - 5 - -
Rights Offering (17,123 shares)......................... 1,712 42,888 - -
Grant of stock as payment of directors fees (18 shares
at an average of $5.129 per share).................... 2 88 - -
Net loss for 2002.......................................... - - - (14,646)
Unrealized gain on Omega Worldwide, Inc.................... - - - -
Realized gain on sale of Omega Worldwide, Inc.............. - - - -
Unrealized gain on hedging contracts....................... - - - -
Unrealized loss on interest rate cap....................... - - - -
--------------------------------------------------------------------
Balance at December 31, 2002 (37,141 shares).................. $ 3,714 $481,052 $212,342 $151,245
====================================================================
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAMORTIZED STOCK ACCUMULATED OTHER
CUMULATIVE RESTRICTED OPTION COMPREHENSIVE
DIVIDENDS STOCK AWARDS LOANS INCOME
--------------------------------------------------------------------
Balance at December 31, 1999 (19,877 shares).................. $(331,341) $ (526) $(2,499) $ 2,550
Issuance of common stock:
Grant of restricted stock (187 shares at an average of
$6.378 per share) and amortization of deferred stock
compensation.......................................... - (81) - -
Dividend Reinvestment Plan (74 shares).................. - - - -
Shares surrendered for stock option loan cancellation
(100 shares).......................................... - - 2,499 -
Issuance of preferred stock................................ - - - -
Net loss for 2000.......................................... - - - -
Common dividends paid ($1.000 per share)................... (20,015) - - -
Preferred dividends paid and/or declared (Series A of
$2.313 per share, Series B of $2.156 per share and
Series C of $0.25 per share)............................ (14,298) - - -
Unrealized loss on Omega Worldwide, Inc.................... - - - (2,580)
--------------------------------------------------------------------
Balance at December 31, 2000 (20,038 shares).................. (365,654) (607) - (30)
Issuance of common stock:
Grant of restricted stock (50 shares at an average of
$2.320 per share) and amortization of deferred stock
compensation.......................................... - 135 - -
Cancellation of restricted stock (52 shares)............ - 330 - -
Dividend Reinvestment Plan (10 shares).................. - - - -
Grant of stock as payment of director fees (37 shares
at an average of $2.454 per share).................... - - - -
Cancellation of stock held as collateral for note
receivable (84 shares)................................ - - - -
Issuance of Series C preferred stock (in lieu of November
2000 dividends)......................................... - - - -
Net loss for 2001.......................................... - - - -
Unrealized loss on Omega Worldwide, Inc.................... - - - (939)
Unrealized loss on hedging contracts....................... - - - (849)
--------------------------------------------------------------------
Balance at December 31, 2001 (19,999 shares).................. (365,654) (142) - (1,818)
Issuance of common stock:
Release of restricted stock and amortization of
deferred stock compensation........................... - 26 - -
Dividend Reinvestment Plan (1 shares)................... - - - -
Rights Offering (17,123 shares)......................... - - - -
Grant of stock as payment of directors fees (18 shares
at an average of $5.129 per share).................... - - - -
Net loss for 2002.......................................... - - - -
Unrealized gain on Omega Worldwide, Inc.................... - - - 558
Realized gain on sale of Omega Worldwide, Inc.............. - - - 411
Unrealized gain on hedging contracts....................... - - - 849
Unrealized loss on interest rate cap....................... - - - (2,882)
--------------------------------------------------------------------
Balance at December 31, 2002 (37,141 shares).................. $(365,654) $ (116) $ - $(2,882)
====================================================================
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
2002 2001 2000
---------------------------------------------------
Operating activities
Net loss........................................................................ $(14,646) $(16,657) $(49,557)
Adjustment to reconcile net loss to cash provided by operating activities:
Depreciation and amortization............................................. 21,270 22,066 23,265
Provision for impairment.................................................. 15,366 9,608 61,690
Provision for uncollectible mortgages, notes and accounts receivable...... 8,844 683 15,257
(Gain) loss on assets sold--net........................................... (2,548) 677 (9,989)
Adjustment of derivatives to fair value................................... (946) 1,317 -
Other..................................................................... 1,732 (552) 3,283
Net change in accounts receivable for owned and operated assets--net............ 19,630 2,909 (20,442)
Net change in accounts payable for owned and operated assets.................... (4,427) (3,820) 4,674
Net change in other owned and operated assets and liabilities................... (1,142) 3,254 (8,709)
Net change in operating assets and liabilities.................................. (1,588) (3,577) 20
---------------------------------------------------
Net cash provided by operating activities....................................... 41,545 15,908 19,492
---------------------------------------------------
Cash flows from financing activities
(Payments on) proceeds from revolving lines of credit-- net..................... (16,689) 8,048 19,041
Proceeds from long-term borrowings - net........................................ 13,293 - -
Payments of long-term borrowings................................................ (98,111) (46,268) (122,418)
Payments for derivative instruments............................................. (10,140) - -
Receipts from Dividend Reinvestment Plan........................................ 5 29 495
Dividends paid.................................................................. - - (29,646)
Proceeds from preferred stock offering.......................................... - - 100,000
Proceeds from rights offering and private placement - net ...................... 44,600 - -
Deferred financing costs paid................................................... (1,650) (2,688) (9,839)
Other........................................................................... - (45) (5,071)
---------------------------------------------------
Net cash used in financing activities........................................... (68,692) (40,924) (47,438)
---------------------------------------------------
Cash flow from investing activities
Proceeds from sale of real estate investments--net.............................. 1,246 5,216 35,792
Capital improvements and funding of other investments--net...................... (727) (2,254) (7,865)
Proceeds from sale of other investements........................................ 16,027 2,252 1,050
Collection of mortgage principal................................................ 14,334 23,956 2,036
Other........................................................................... - 119 -
---------------------------------------------------
Net cash provided by investing activities....................................... 30,880 29,289 31,013
---------------------------------------------------
Increase in cash and cash equivalents........................................... 3,733 4,273 3,067
Cash and cash equivalents at beginning of year.................................. 11,445 7,172 4,105
---------------------------------------------------
Cash and cash equivalents at end of year........................................ $ 15,178 $ 11,445 $ 7,172
===================================================
See accompanying notes.
OMEGA HEALTHCARE INVESTORS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Omega Healthcare Investors, Inc., a Maryland corporation, is a
self-administered real estate investment trust ("REIT"). From the date that we
commenced operations in 1992, we have invested primarily in long-term care
facilities, which include nursing homes, assisted living facilities and
rehabilitation hospitals. Our company currently has investments in 222
healthcare facilities located in the United States.
CONSOLIDATION
The consolidated financial statements include the accounts of our company
and our wholly-owned subsidiaries after elimination of all material intercompany
accounts and transactions. Due to changes in the market conditions affecting the
long-term care industry, we have begun to operate a portfolio of our foreclosure
assets for our own account until such time as these facilities' operations are
stabilized and are re-leasable or saleable at lease rates or sales prices that
maximize the value of these assets to us. As a result, these facilities and
their respective operations are presented on a consolidated basis in our
financial statements.
REAL ESTATE INVESTMENTS
Investments in leased real estate properties and mortgage notes are
recorded at cost and original mortgage amount, respectively. The cost of the
properties acquired is allocated between land and buildings based generally upon
independent appraisals. Depreciation for buildings is recorded on the
straight-line basis, using estimated useful lives ranging from 20 to 39 years.
Leasehold interests are amortized over the initial term of the lease, with lives
ranging from four to seven years.
OWNED AND OPERATED ASSETS AND ASSETS HELD FOR SALE
When we acquire real estate pursuant to a foreclosure proceeding, it is
designated as "owned and operated assets" and is recorded at the lower of cost
or fair value and is included in real estate properties on our Consolidated
Balance Sheet. Operating assets and operating liabilities for the owned and
operated properties are shown separately on the face of our Consolidated Balance
Sheet and are detailed in Note 16--Segment Information.
When a formal plan to sell real estate is adopted and we hold a contract
for sale, the real estate is classified as "assets held for sale," with the net
carrying amount adjusted to the lower of cost or estimated fair value, less cost
of disposal. Depreciation of the facilities is excluded from operations after
management has committed to a plan to sell the asset. Upon adoption of Financial
Accounting Standards Board ("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 for all periods presented.
Properties sold in 2002 were classified as assets held for sale in 2001.
Accordingly, they are subject to FASB 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed and have not been
reported as discontinued operations in our financial statements.
IMPAIRMENT OF ASSETS
We periodically evaluate our real estate investments for impairment
indicators. The judgment regarding the existence of impairment indicators are
based on factors such as market conditions, operator performance and legal
structure. If indicators of impairment are present, we evaluate the carrying
value of the related real estate investments in relationship to the future
undiscounted cash flows of the underlying facilities. Provisions for impairment
losses related to long-lived assets are recognized when expected future cash
flows are less than the carrying values of the assets. If the sum of the
expected future cash flow, including sales proceeds, is less than carrying
value, we then adjust the net carrying value of leased properties and other
long-lived assets to the present value of expected future cash flows.
LOAN IMPAIRMENT POLICY
When management identifies an indication of potential loan impairment, such
as non-payment under the loan documents or impairment of the underlying
collateral, the loan is written down to the present value of the expected future
cash flows. In cases where expected future cash flows cannot be estimated, the
loan is written down to the fair value of the collateral.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity date
of three months or less when purchased. These investments are stated at cost,
which approximates fair value.
DERIVATIVE INSTRUMENTS
Effective January 1, 2001, we adopted the Financial Accounting Standards
Board Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended, which requires that all derivatives are recognized 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.
ACCOUNTS RECEIVABLE
Accounts receivable consists primarily of lease and mortgage interest
payments. Amounts recorded include estimated provisions for loss related to
uncollectible accounts and disputed items. On a monthly basis, we review the
contractual payment versus actual cash payment received and the contractual
payment due date versus actual receipt date. When management identifies
delinquencies, a judgment is made as to the amount of provision, if any, that is
needed. A provision of $0.3 million and $0.7 million was recorded in 2002 and
2001, respectively. No other activity has occurred during the periods presented.
ACCOUNTS RECEIVABLE - OWNED AND OPERATED ASSETS
Accounts receivable from owned and operated Assets consists of amounts due
from Medicare and Medicaid programs, other government programs, managed care
health plans, commercial insurance companies and individual patients. Amounts
recorded include estimated provisions for loss related to uncollectible accounts
and disputed items. A provision of $5.9 million, $7.3 million and $1.0 million
was recorded in 2002, 2001 and 2000, respectively.
INVESTMENTS IN EQUITY SECURITIES
Marketable securities held as available-for-sale are stated at fair value
with unrealized gains and losses for the securities reported in accumulated
other comprehensive income. Realized gains and losses and declines in value
judged to be other-than-temporary on securities held as available-for-sale are
included in investment income. The cost of securities sold is based on the
specific identification method. Interest and dividends on securities
available-for-sale are included in investment income.
DEFERRED FINANCING COSTS
Deferred financing costs are amortized on a straight-line basis over the
terms of the related borrowings. Amortization of financing costs totaling $2.8
million, $2.5 million and $1.9 million in 2002, 2001 and 2000, respectively, is
classified as interest expense in our Consolidated Statements of Operations.
Amounts paid for financings that are not ultimately completed are expensed at
the time the determination is made that such financings are not viable. In 2002,
$7.0 million of such costs were expensed and were classified as refinancing
expenses in our Consolidated Statements of Operations.
NON-COMPETE AGREEMENTS AND GOODWILL
Non-compete agreements and the excess of the purchase price over the value
of tangible net assets acquired (i.e., goodwill) are amortized on a
straight-line basis over periods ranging from five to ten years. Due to the
diminished value of the related real estate assets, management determined that
the goodwill was entirely impaired and wrote off the balance of $2.36 million in
2000.
REVENUE RECOGNITION
Rental income and mortgage interest income are recognized as earned over
the terms of the related Master Leases and mortgage notes, respectively. Such
income includes periodic increases based on pre-determined formulas (i.e., such
as increases in the Consumer Price Index ("CPI")) as defined in the Master
Leases and mortgage loan agreements. Reserves are taken against earned revenues
from leases and mortgages when collection of amounts due become questionable or
when negotiations for restructurings of troubled operators lead to lower
expectations regarding ultimate collection. When collection is uncertain, lease
revenues are recorded as received, after taking into account application of
security deposits. Interest income on impaired mortgage loans is recognized as
received after taking into account application of security deposits.
Nursing home revenues from owned and operated assets (primarily Medicare,
Medicaid and other third party insurance) are recognized as patient services are
provided.
FEDERAL AND STATE INCOME TAXES
As a qualified REIT, we will not be subject to Federal income taxes on our
income, and no provisions for Federal income taxes have been made. To the extent
that we have foreclosure income from our owned and operated assets, we will
incur federal tax at a rate of 35%. To date our owned and operated assets have
generated losses, and therefore, no provision for federal income tax is
necessary. The reported amounts of our assets as of December 31, 2002 are less
than the tax basis of assets by approximately $32.1 million.
STOCK BASED COMPENSATION
Our company grants stock options to employees and directors with an
exercise price equal to the fair value of the shares at the date of the grant.
In accordance with the provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, compensation expense is not recognized for these stock
option grants.
Expense related to Dividend Equivalent Rights is recognized as dividends
are declared, based on anticipated vesting.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
EFFECTS OF RECENTLY ISSUED ACCOUNTING STANDARDS
Our company has adopted Financial Accounting Standards Board issued
Statement No.145: Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections which requires that gains and
losses from the extinguishment of debt are no longer presented as an
extraordinary item in our consolidated statement of operations. The accompanying
consolidated financial statements present gains or losses arising from the
extinguishment of debt as interest expense within income from continuing
operations and the effects of extinguishments in prior periods have been
reclassified to conform to the prescribed presentation.
RISKS AND UNCERTAINTIES
Our company is subject to certain risks and uncertainties affecting the
healthcare industry as a result of healthcare legislation and growing regulation
by federal, state and local governments. Additionally, we are subject to risks
and uncertainties as a result of changes affecting operators of nursing home
facilities due to the actions of governmental agencies and insurers to limit the
growth in cost of healthcare services. (See Note 5 - Concentration of Risk).
NOTE 2 - PROPERTIES
LEASED PROPERTY
Our leased real estate properties, represented by 146 long-term care
facilities and two rehabilitation hospitals at December 31, 2002, are leased
under provisions of Master Leases with initial terms typically ranging from 10
to 16 years, plus renewal options. Substantially all of the Master Leases
provide for minimum annual rentals which are subject to annual increases based
upon increases in the Consumer Price Index or increases in revenues of the
underlying properties, with certain maximum limits. Under the terms of the
leases, the lessee is responsible for all maintenance, repairs, taxes and
insurance on the leased properties.
A summary of our investment in leased real estate properties is as follows:
December 31,
2002 2001
-----------------------
(In thousands)
Buildings................................ $628,764 $576,897
Land..................................... 30,774 27,880
-----------------------
659,538 604,777
Less accumulated depreciation............ (115,529) (91,391)
-----------------------
Total................................. $544,009 $513,386
=======================
The future minimum contractual rentals for the remainder of the initial
terms of the leases are as follows:
(In thousands)
2003........................................ $ 74,236
2004........................................ 73,986
2005........................................ 73,274
2006........................................ 68,533
2007........................................ 65,201
Thereafter.................................. 235,460
--------------
$ 590,690
==============
Below is a summary of the lease transactions which occurred in 2002.
During the first quarter of 2002, we leased 13 properties, previously
classified as owned and operated assets, to new operators. We entered into
agreements to lease four Arizona facilities to subsidiaries of Infinia Health
Care Companies ("Infinia") and to sublease four other Arizona facilities to the
same party. The terms for the four Arizona leases and four subleases are ten
years and three years, respectively, with an initial combined annual net rent
payment of $1.02 million. On March 1, 2002, we leased four facilities in
Massachusetts to subsidiaries of Harborside Healthcare Corporation. The initial
lease term for the four properties is ten years with an initial annual rent
payment of $1.675 million. We leased one additional facility on March 1, 2002,
for an initial annual rent of $0.38 million. Additionally, on February 1, 2002,
the leasehold interest in one facility was terminated by the landlord.
During the second quarter of 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.
During the third quarter of 2002, we leased two properties, previously
classified as owned and operated assets, to Hickory Creek Healthcare Foundation,
Inc. The initial term for the Master Lease is for ten years and includes an
option to renew for an additional ten years. The initial annual base rent is
$0.4 million. Additionally, we closed three buildings that were previously
leased to USA Healthcare, Inc. under a Master Lease and recorded a provision for
impairment of $1.9 million. The Master Lease was amended to remove the three
buildings with no reduction in rental income. We intend to sell these closed
facilities as soon as practicable; however, there can be no assurance if or when
these sales will be completed.
During the fourth quarter of 2002, we leased two facilities, previously
classified as owned and operated assets, to two separate limited liability
companies for initial annual rent of $0.54 million and sub-leased one facility
to another limited liability company for approximately $0.15 million per year
less than our rental obligation. However, if we are still the tenant under the
prime lease after year one, then the annual rental payment under the other two
leases permanently increases $40,000 per annum beginning in the second lease
year. Also in the fourth quarter of 2002, we entered into an agreement to buy
out the leasehold interest in two owned and operated assets in Colorado subject
to a change of ownership and licensure. This transfer is expected to close in
March 2003.
As a result of our 2002 re-leasing efforts, our owned and operated
portfolio has decreased from 33 at December 31, 2001 to three at December 31,
2002. (See Note 19-Subsequent Events).
OWNED AND OPERATED ASSETS
Our owned and operated real estate assets include three long-term care
facilities at December 31, 2002, of which two are owned directly by us and one
is subject to a leasehold interest. There were 33 owned and operated real estate
assets at December 31, 2001 (21 owned and 12 subject to leasehold interests) and
69 owned and operated real estate properties at December 31, 2000 (57 owned and
12 subject to leasehold interests). Impairment charges of $3.0 million,
including $2.0 million for a property that was sold, were taken on these assets
for the year ended December 31, 2002. Impairment charges of $1.3 million and
$41.3 million were taken on these assets during the years ended December 31,
2001 and 2000, respectively.
A summary of our investment in the two and 21 owned and operated real
estate assets at December 31, 2002 and 2001, respectively, is as follows:
December 31,
2002 2001
--------------------
(In thousands)
Buildings.................................. $ 5,251 $ 76,220
Land....................................... 320 3,851
--------------------
5,571 80,071
Less accumulated depreciation.............. (675) (8,647)
--------------------
Total................................... $ 4,896 $ 71,424
====================
A summary of our investment in the one and 12 facilities included in Other
Investments subject to leasehold interests at December 31, 2002 and 2001 is as
follows:
December 31,
2002 2001
--------------------
(In thousands)
Leasehold interest......................... $ 286 $ 1,215
Less accumulated amortization.............. (101) (554)
--------------------
Total................................... $ 185 $ 661
====================
The future minimum operating lease payments on the one leasehold facility
are as follows:
(In thousands)
2003....................................... $ 338
2004....................................... 339
2005....................................... 339
2006....................................... 310
--------------
$1,326
==============
CLOSED FACILITIES
At December 31, 2002, there are eight closed properties that are not
currently under contract for sale. We recorded a $12.4 million provision for
impairment on these facilities for the year ended December 31, 2002. These
properties are included in real estate in our Consolidated Balance Sheet. A
summary of our investment in closed real estate properties is as follows:
December 31,
2002 2001
--------------------
(In thousands)
Buildings.................................. $ 3,875 $ -
Land....................................... 204 -
--------------------
4,079 -
Less accumulated depreciation.............. (1,782) -
--------------------
Total................................... $ 2,297 $ -
====================
ASSETS SOLD OR HELD FOR SALE
In 2000, management initiated a plan to dispose of certain properties
judged to have limited long-term potential and to re-deploy the proceeds.
During 2000, we recorded a $14.4 million provision for impairment related
to assets held for sale and reclassified $24.3 million of assets held for sale
to "owned and operated assets" as the timing and strategy for sale or,
alternatively, re-leasing were revised in light of prevailing market conditions.
During 2000, we realized disposition proceeds of $1.1 million on assets held for
sale. Additionally, we received proceeds of $34.7 million from sales of certain
core and other assets, resulting in a gain of $9.9 million.
During 2001, we recorded a provision of $8.3 million for impairment of
assets transferred to assets held for sale. We realized disposition proceeds of
$1.4 million during 2001.
During 2002, we realized gross disposition proceeds of $1.7 million
associated with the sale of two facilities and miscellaneous beds. These
facilities were classified as assets held for sale in 2001. Accordingly, they
are subject to FASB 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed and have not been reported as discontinued
operations in our financial statements. Additionally, we received gross proceeds
of $16.4 million from sales of certain other assets, resulting in a net gain of
$2.5 million.
Following is a summary of the impairment reserve:
Impairment balance at December 31, 1999................ $ 21,733
Provision charged...................................... 14,415
Converted to owned and operated........................ (17,339)
Provision applied...................................... (10,060)
----------
Impairment balance at December 31, 2000................ 8,749
Provision charged...................................... 8,344
Provision applied...................................... (6,515)
----------
Impairment balance at December 31, 2001................ 10,578
Converted to closed facilities......................... (4,447)
Provision applied...................................... (3,284)
----------
Impairment balance at December 31, 2002................ $ 2,847
==========
NOTE 3 - MORTGAGE NOTES RECEIVABLE
The following table summarizes the mortgage notes balances for the years
ended December 31, 2002 and 2001:
2002 2001
-----------------------
(In thousands)
Gross mortgage notes--unimpaired................. $171,514 $194,030
Gross mortgage notes--impaired................... 11,086 4,903
Reserve for uncollectible loans.................. (8,686) (3,740)
------------------------
Net mortgage notes at December 31................ $173,914 $195,193
========================
Mortgage notes receivable relate to 63 long-term care facilities. The
mortgage notes are secured by first mortgage liens on the borrowers' underlying
real estate and personal property. The mortgage notes receivable relate to
facilities located in 11 states, operated by 12 independent healthcare operating
companies.
We monitor compliance with mortgages and when necessary have initiated
collection, foreclosure and other proceedings with respect to certain
outstanding loans.
In 2001, two facilities, which were to be sold, were given back to us and
re-leased. Based on provisions of the new lease, the initial reserve for
uncollectible loans of $3.7 million taken prior to 2001 was reversed in 2001.
Additionally, we determined that a mortgage loan was impaired and we recorded a
reserve for uncollectible loans of $3.7 million to reduce the carrying value of
the mortgage loan to its net realizable value. Income recognized on the loan was
$0.5 million and $0.6 million in 2001 and 2000, respectively.
During 2002, we determined two mortgages were impaired and we recorded a
reserve for uncollectible loans of $4.9 million to reduce the carrying value of
the mortgage loans to the estimated value of their related collateral. Income
recognized on these loans was $0.6 million, $0.8 million and $1.0 million in
2002, 2001 and 2000, respectively.
The following are the three primary mortgage structures that we currently
use:
Convertible Participating Mortgages are secured by first mortgage liens on
the underlying real estate and personal property of the mortgagor. Interest
rates are usually subject to annual increases based upon increases in the CPI or
increases in revenues of the underlying long-term care facilities, with certain
maximum limits. Convertible Participating Mortgages afford us an option to
convert the mortgage into direct ownership of the property, generally at a point
six to nine years from inception; they are then subject to a leaseback to the
operator for the balance of the original agreed term and for the original agreed
participation in revenues or CPI adjustments. This allows us to capture a
portion of the potential appreciation in value of the real estate. The operator
has the right to buy out our option at formula prices.
Participating Mortgages are secured by first mortgage liens on the
underlying real estate and personal property of the mortgagor. Interest rates
are usually subject to annual increases based upon increases in the CPI or
increases in revenues of the underlying long-term care facilities, with certain
maximum limits.
Fixed-Rate Mortgages, with a fixed interest rate for the mortgage term, are
also secured by first mortgage liens on the underlying real estate and personal
property of the mortgagor.
The outstanding principal amount of mortgage notes receivable, net of
allowances, are as follows:
December 31,
2002 2001
------------------------
(In thousands)
Mortgage note due 2010; interest at 11.57% payable monthly.................................. $ 59,688 $ 59,688
Participating mortgage note due 2003; interest at 11.55% payable monthly.................... 35,571 37,500
Mortgage notes due 2015; monthly payments of $189,004, including interest at 11.01%......... 15,120 15,689
Mortgage note due 2010; monthly payment of $124,826, including interest at 11.50%........... 12,748 12,778
Participating mortgage note due 2008; interest at 10.69% payable monthly.................... 12,000 12,000
Mortgage note due 2006; monthly payment of $107,382, including interest at 11.50%........... 10,971 10,997
Mortgage note due 2004; interest at 7.62% payable monthly................................... 10,112 10,500
Other mortgage notes........................................................................ 15,304 17,840
Other convertible participating mortgage notes.............................................. 2,400 7,346
Other participating mortgage notes.......................................................... - 2,000
Participating mortgage note due 2016; monthly payments of $106,797, including
interest at 12.40%........................................................................ - 8,855
------------------------
Total mortgages--net................................................................... $173,914 $195,193
========================
Mortgage notes are shown net of allowances of $8.7 million and $3.7 million
in 2002 and 2001, respectively.
Effective September 1, 2001, we entered into a comprehensive settlement
with Mariner Post-Acute Network, Inc. ("Mariner") resolving all outstanding
issues relating to our 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 1,679
operating beds. PHCM remained 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 paid us our 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.
On February 1, 2001, four Michigan facilities, previously operated by PHCM
and subject to our pre-petition mortgage, were transferred by PHCM to Ciena
Health Care Management ("Ciena") who paid for the facilities by execution of a
promissory note that was assigned to us. 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 us. The $8.7 million balance of the promissory note, which
was secured by a first mortgage on the four facilities, was paid in full during
2002.
Following the closing under the settlement agreement, the outstanding
principal balance on the PHCM loan is approximately $59.7 million. The PHCM loan
term is nine years, with PHCM having the option to extend for an additional
eleven years. PHCM has the option to prepay the PHCM loan between February 1,
2005 and July 31, 2005.
The estimated fair value of our mortgage loans at December 31, 2002 is
approximately $183.6 million. Fair value is based on the estimates by management
using rates currently prevailing for comparable loans.
NOTE 4 - OTHER INVESTMENTS
A summary of our other investments is as follows:
At December 31,
----------------------
2002 2001
----------------------
Assets leased by United States Postal Service-net............................... $16,931 $22,294
Notes receivable................................................................ 14,236 17,213
Allowance for loss on notes receivable.......................................... (2,804) (2,935)
Equity securities of Principal Healthcare Finance Trust......................... 1,266 1,266
Other........................................................................... 7,258 6,842
Equity securities of Omega Worldwide Inc........................................ - 4,496
Equity securities of Principal Healthcare Finance Limited....................... - 1,615
----------------------
Total other investments................................................... $36,887 $50,791
=======================
NOTE 5 - CONCENTRATION OF RISK
As of December 31, 2002, our portfolio of domestic investments consisted of
222 healthcare facilities, located in 28 states and operated by 34 third-party
operators. Our gross investment in these facilities, net of impairments and
before reserve for uncollectible loans, totaled $852.1 million at December 31,
2002, with 97.2% 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 63 long-term healthcare
facilities and two long-term healthcare facilities that were recovered from
customers and are currently operated through third-party management contracts
for our own account and eight long-term healthcare facilities that were
recovered from customers and are currently closed. In addition, one facility is
subject to a leasehold interest and is included in Other investments in our
audited Consolidated Financial Statements. At December 31, 2002, we also held
miscellaneous investments and assets held for sale of approximately $39.2
million, including $16.9 million related to a non-healthcare facility leased by
the United States Postal Service, a $1.3 million investment in Principal
Healthcare Finance Trust, and $11.4 million of notes receivable, net of
allowance.
Approximately 55.8% of our real estate investments are operated by five
public companies, including Sun Healthcare Group, Inc. ("Sun") (25.7%), Advocat,
Inc. ("Advocat") (12.5%), Integrated Health Services, Inc. ("IHS") (7.3%),
Mariner Post-Acute Network ("Mariner") (7.0%), and Alterra Healthcare
Corporation ("Alterra") (3.3%). The two largest private operators represent
10.1% and 3.7%, respectively, of our investments. No other operator represents
more than 2.7% of our investments. The three states in which we have our highest
concentration of investments are Florida (16.2%), California (7.8%) and Illinois
(7.7%).
NOTE 6 - LEASE AND MORTGAGE DEPOSITS
Our company obtains liquidity deposits and letters of credit from most
operators pursuant to its leases and mortgages. These generally represent the
monthly rental and mortgage interest income for periods ranging from three to
six months with respect to certain of its investments. The liquidity deposits
may be applied in the event of lease and loan defaults, subject to applicable
limitations under bankruptcy law with respect to operators filing under Chapter
11 of the United States Bankruptcy Code. At December 31, 2002, we held $3.7
million in such liquidity deposits and $7.6 million in letters of credit.
Additional security for rental and mortgage interest revenue from operators is
provided by covenants regarding minimum working capital and net worth, liens on
accounts receivable and other operating assets of the operators, provisions for
cross default, provisions for cross-collateralization and by corporate/personal
guarantees.
On February 4, 2003, Sun remitted rent of $1.6 million versus the
contractual amount of $2.1 million. We have agreed with Sun to use a letter of
credit (posted by Sun as a security deposit) in the amount of $0.5 million to
make up the difference in rent. The letter of credit was otherwise expiring on
February 28, 2003 and was not being renewed. We hold additional security
deposits (in the form of cash and letters of credit) of $2.3 million. (See Note
19 - Subsequent Events).
NOTE 7 - BORROWING ARRANGEMENTS
We have two secured revolving credit facilities, providing up to $225.0
million of financing. At December 31, 2002, $177.0 million was outstanding and
$12.5 million was utilized for the issuance of letters of credit, leaving
availability of $35.5 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. Borrowings bear interest at 2.50% to 3.25% over LIBOR through December
31, 2002 and 3.00% to 3.25% over LIBOR after December 31, 2002, based on our
leverage ratio. Borrowings of $112.0 million are outstanding at December 31,
2002. Additionally, $12.5 million of letters of credit are outstanding against
this credit facility at December 31, 2002. These letters of credit are
collateral for certain long-term borrowings and collateral for insurance
programs for certain owned and operated assets. LIBOR-based borrowings under
this facility bear interest at a weighted-average rate of 4.42% at December 31,
2002 and 5.49% at December 31, 2001. 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 $239.0 million are pledged as collateral for
this revolving line of credit facility at December 31, 2002.
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.
Borrowings under the facility bear interest at 2.50% to 3.75% over LIBOR, based
on our leverage ratio and collateral assigned. Borrowings of $65.0 million are
outstanding at December 31, 2002. LIBOR-based borrowings under this facility
bear interest at a weighted-average rate of 4.66% at December 31, 2002 and 5.65%
at December 31, 2001. 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 December 31, 2002.
We are required to meet certain financial covenants, including prescribed
leverage and interest coverage ratios on our long-term borrowings. We are also
required to fix a certain portion of our interest rate. We utilize interest rate
swaps or caps to fix interest rates on variable rate debt and reduce certain
exposures to interest rate fluctuations (See Note 8 - Financial Instruments).
The following is a summary of our long-term borrowings:
December 31,
2002 2001
------------------------
(In thousands)
Unsecured borrowings:
6.95% Notes due August 2007.................. $100,000 $100,000
Other long-term borrowings................... 3,850 4,160
6.95% Notes due June 2002.................... - 97,526
------------------------
103,850 201,686
------------------------
Secured borrowings:
Revolving lines of credit.................... 177,000 193,689
Industrial Development Revenue Bonds......... 7,855 8,130
Mortgage notes payable to banks.............. 17,757 4,464
HUD loans.................................... - 5,203
------------------------
202,612 211,486
------------------------
$306,462 $413,172
========================
On February 6, 2002, we refinanced our investment in a Baltimore, Maryland
asset leased by the United States Postal Service ("USPS") resulting in $13.0
million of net cash proceeds. The new, fully-amortizing mortgage note payable
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 2002, we paid off the remaining $97.5 million of our 6.95% Notes
that matured in June 2002, resulting in a loss on early extinguishment of debt
of approximately $49,000. In addition, during 2002, as a result of foreclosure
proceedings, we relinquished title to certain properties with a net carrying
value of approximately $5.2 million in satisfaction of certain mortgage
obligations owed to the Department of Housing and Urban Development ("HUD") in
the amount of $5.2 million.
During 2001, we repurchased $27.5 million of our 6.95% Notes due June 2002,
resulting in a gain on early extinguishment of debt of $3.1 million.
The balance of our Subordinated Convertible Debentures ("Debentures") was
paid in full on February 1, 2001. The Debentures were convertible into shares of
common stock at a conversion price of $26.962 per share. The Debentures were
unsecured obligations of our company and were subordinate in right and payment
to our senior unsecured indebtedness.
Real estate investments with a gross book value of approximately $389.8
million are pledged as collateral for outstanding secured borrowings at December
31, 2002, including $356.1 million for our revolving lines of credit and $33.7
million for other long-term borrowings. Other long-term secured borrowings are
payable in aggregate monthly installments of approximately $0.24 million,
including interest at rates ranging from 7.3% to 10.0%.
Assuming none of our borrowing arrangements are refinanced, converted or
prepaid prior to maturity, required principal payments for each of the five
years following December 31, 2002 and the aggregate due thereafter are set forth
below:
(In thousands)
2003........................................ $113,124
2004........................................ 1,209
2005........................................ 66,306
2006........................................ 1,401
2007........................................ 101,514
Thereafter.................................. 22,908
---------
$306,462
=========
The estimated fair value of our long-term borrowings is approximately
$296.7 million at December 31, 2002 and $396.4 million at December 31, 2001.
Fair values are based on the estimates by management using rates currently
prevailing for comparable loans.
NOTE 8 - FINANCIAL INSTRUMENTS
At December 31, 2002 and 2001, the carrying amounts and fair values of our
financial instruments are as follows:
2002 2001
-------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------
(In thousands)
Assets:
Cash and cash equivalents.................................................... $ 15,178 $ 15,178 $ 11,445 $ 11,445
Mortgage notes receivable - net.............................................. 173,914 183,618 195,193 203,181
Other investments............................................................ 36,887 37,419 50,791 51,300
Derivative instruments...................................................... 7,258 7,258 - -
-------------------------------------------------
Totals.................................................................... $233,237 $243,473 $257,429 $265,926
=================================================
Liabilities:
Revolving lines of credit.................................................... $177,000 $177,000 $193,689 $193,689
6.95% Notes.................................................................. 100,000 90,413 197,526 181,936
Other long-term borrowings................................................... 29,462 29,320 21,957 20,787
Derivative instruments...................................................... - - 2,166 2,166
-------------------------------------------------
Totals.................................................................... $306,462 $296,733 $415,338 $398,578
=================================================
Fair value estimates are subjective in nature and are dependent on a number
of important assumptions, including estimates of future cash flows, risks,
discount rates and relevant comparable market information associated with each
financial instrument. (See Note 1 - Organization and Significant Accounting
Policies, Risks and Uncertainties). The use of different market assumptions and
estimation methodologies may have a material effect on the reported estimated
fair value amounts. Accordingly, the estimates presented above are not
necessarily indicative of the amounts we would realize in a current market
exchange.
We utilize interest rate swaps and caps to fix interest rates on variable
rate debt and reduce certain exposures to interest rate fluctuations. We do not
use derivatives for trading or speculative purposes. We have a policy of only
entering into contracts with major financial institutions based upon their
credit ratings and other factors. When viewed in conjunction with the underlying
and offsetting exposure that the derivatives are designed to hedge, we have not
sustained a material loss from those instruments nor do we anticipate any
material adverse effect on our net income or financial position in the future
from the use of derivatives.
To manage interest rate risk, we may employ options, forwards, interest
rate swaps, caps and floors or a combination thereof depending on the underlying
exposure. We may employ swaps, forwards or purchased options to hedge qualifying
forecasted transactions. Gains and losses related to these transactions are
deferred and recognized in net income as interest expense in the same period or
periods that the underlying transaction occurs, expires or is otherwise
terminated. 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.
In September 2002, we entered into a 61-month, $200.0 million interest rate
cap with a strike of 3.50% that has been designated as a cash flow hedge. Under
the terms of the cap agreement, when LIBOR exceeds 3.50%, the counterparty will
pay us $200.0 million multiplied by the difference between LIBOR and 3.50% times
the number of days when LIBOR exceeds 3.50%. The unrealized gain/loss in the
fair value of cash flow hedges are reported on the balance sheet with
corresponding adjustments to accumulated Other Comprehensive Income. On December
31, 2002, the derivative instrument was reported at its fair value of $7.3
million. An adjustment of $2.9 million to Other Comprehensive Income was made
for the change in fair value of this cap during 2002. Over the term of the
interest rate cap, the $10.1 million cost will be amortized to earnings based on
the specific portion of the total cost attributed to each monthly settlement
period. Over the next twelve months, $0.1 million is expected to be reclassified
to earnings from Other Comprehensive Income.
As of September 2002, we terminated two interest rate swaps with notional
amounts of $32.0 million each. Under the terms of the first swap agreement,
which would have expired on December 2002, we received payments when LIBOR
exceeded 6.35% and paid the counterparty when LIBOR was less than 6.35%. This
interest rate swap was extended in December 2001 to December 2002 at the option
of the counterparty and therefore did not qualify for hedge accounting under
FASB No. 133. The fair value of this swap at December 31, 2002 and December 31,
2001 was a liability of $0 and $1.3 million, respectively.
The fair value of the first swap agreement at January 1, 2001 was recorded
as a liability and a transition adjustment in Other Comprehensive Income, which
was amortized over the initial term of the swap ending December 31, 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 swap agreement, which was scheduled to expire December 31,
2002, we received payments when LIBOR exceeded 4.89% and paid the counterparty
when LIBOR was less than 4.89%. The fair value of this interest rate swap at
December 31, 2002 and December 31, 2001 was a liability of $0 and $0.8 million,
respectively. The change in fair value in 2001 was 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 December 31,
2002 and December 31, 2001.
NOTE 9 - RETIREMENT ARRANGEMENTS
Our company has a 401(k) Profit Sharing Plan covering all eligible
employees. Under this plan, employees are eligible to make contributions, and
we, at our discretion, may match contributions and make a profit sharing
contribution.
We have a Deferred Compensation Plan which is an unfunded plan under which
we can award units that result in participation in the dividends and future
growth in the value of our common stock. There are no outstanding units as of
December 31, 2002.
Provisions charged to operations with respect to these retirement
arrangements totaled approximately $38,800, $33,500 and $181,000 in 2002, 2001
and 2000, respectively.
NOTE 10 - STOCKHOLDERS EQUITY AND STOCK OPTIONS
SERIES C PREFERRED STOCK
On July 14, 2000, Explorer Holdings, L.P., an affiliate of Hampstead
Investment Partners III, L.P. ("Hampstead"), a private equity investor,
completed an investment (the "Equity Investment") of $100.0 million in our
company in exchange for 1,000,000 shares of our Series C preferred stock. We
used a portion of the proceeds from the Equity Investment to repay $81 million
of maturing debt on July 17, 2000.
Shares of the Series C preferred stock are convertible into common stock at
any time by the holder at an initial conversion price of $6.25 per share of
common stock. The shares of Series C preferred stock are entitled to receive
dividends at the greater of 10% per annum or the dividend payable on shares of
common stock, with the Series C preferred stock participating on an "as
converted" basis. Dividends on the Series C preferred stock are cumulative from
the date of original issue and are payable quarterly.
The Series C preferred stock votes (on an "as converted" basis) together
with our common stock on all matters submitted to stockholders. The original
terms of the Series C preferred stock provided that if dividends on the Series C
preferred stock were in arrears for four quarters, the holders of the Series C
preferred stock, voting separately as a class (and together with the holder of
Series A and Series B preferred if and when dividends on such series are in
arrears for six or more quarters and special class voting rights are in effect
with respect to the Series A and Series B preferred), would be entitled to elect
directors who, together with the other directors designated by the holders of
Series C preferred stock, would constitute a majority of our Board of Directors.
The general terms of the Equity Investment are set forth in the Investment
Agreement.
In connection with Explorer's Equity Investment, we entered into a
stockholders agreement with Explorer dated July 14, 2000 ("Stockholders
Agreement") pursuant to which Explorer was initially entitled to designate up to
four members of our Board of Directors depending on the percentage of total
voting securities (consisting of common stock and Series C preferred stock)
acquired from time to time by Explorer pursuant to the documentation entered
into by Explorer in connection with the Equity Investment. Under the original
Stockholders Agreement, Explorer was entitled to designate at least one director
of our Board of Directors as long as it owned at least five percent (5%) of the
total voting power of our company and to approve one "independent director" as
long as it owned at least twenty-five percent (25%) of the shares it acquired at
the time it completed the Equity Investment (or common stock issued upon the
conversion of the Series C preferred stock acquired by Explorer at such time).
The Stockholders Agreement has been subsequently amended as described below.
We agreed to indemnify Explorer, its affiliates and the individuals that
will serve as directors of our company against any losses and expenses that may
be incurred as a result of the assertion of certain claims, provided that the
conduct of the indemnified parties meets certain required standards. In
addition, we agreed to pay Explorer an advisory fee of up to $3.1 million for
Explorer's assistance in connection with financing matters. We agreed to
reimburse Explorer for Explorer's out-of-pocket expenses, up to a maximum of
$2.5 million, incurred in connection with the Equity Investment. We reimbursed
Explorer approximately $1.77 million of such expenses through December 31, 2002.
FEBRUARY 2002 RIGHTS OFFERING AND CONCURRENT PRIVATE PLACEMENT
In February 2002, we completed a registered rights offering and
simultaneous private placement to Explorer. Stockholders exercised subscription
rights to purchase a total of 6.4 million shares of common stock at a
subscription price of $2.92 per share, raising gross proceeds of $18.7 million.
In the private placement with Explorer, we issued a total of 10.7 million shares
of common stock at a price of $2.92 per share, raising gross proceeds of $31.3
million. Proceeds from the rights offering and private placement were used to
repay outstanding indebtedness and for working capital and general corporate
purposes.
On February 21, 2002, we filed Articles of Amendment amending the terms of
our Series C Convertible Preferred Stock to: (i) remove the restriction that
prevents the voting or conversion of the Series C preferred stock in excess of
49.9% of our voting securities owned by Explorer; (ii) provide that whenever
dividends owed upon the Series C preferred stock are in arrears for four or more
dividend periods, the holders of the Series C preferred stock will be entitled
to designate two additional directors to our Board of Directors; and (iii)
provide that the subscription price in the rights offering will not result in an
adjustment to the conversion price of our Series C preferred stock.
In connection with Explorer's February 2002 investment, we amended the
Stockholders Agreement with Explorer to provide that Explorer will be entitled
to designate to our Board of Directors that number of directors that would
generally be proportionate to Explorer's ownership of voting securities in our
company, not to exceed five directors (or six directors upon the increase in the
size of the Board of Directors to ten directors). The Stockholders Agreement has
been further amended to provide that Explorer shall be entitled to designate a
majority of the total number of directors so long as Explorer owns a majority of
our issued and outstanding voting securities. Explorer currently beneficially
owns a majority of our voting securities and therefore would be entitled to
designate a majority of our directors. Explorer has agreed to vote its shares in
favor of three independent directors as defined under the rules of the New York
Stock Exchange who are not affiliates of Explorer, so long as Explorer owns at
least 15% of our voting securities. By letter dated January 21, 2003, Explorer
advised us that they do not currently intend to designate additional directors
at this time, although reserving its rights under the Stockholders Agreement and
under the terms of the Series C preferred stock to do so. The Stockholders
Agreement as amended terminates February 20, 2007. Amounts reimbursed to
Explorer as of December 31, 2002 for the February 2002 investment were $0.4
million.
SERIES A AND SERIES B CUMULATIVE PREFERRED STOCK
On April 28, 1998, we received gross proceeds of $50.0 million from the
issuance of 2 million shares of 8.625% Series B Cumulative Preferred Stock
("Series B preferred stock") at $25 per share. Dividends on the Series B
preferred stock are cumulative from the date of original issue and are payable
quarterly. On April 7, 1997, we received gross proceeds of $57.5 million from
the issuance of 2.3 million shares of 9.25% Series A Cumulative Preferred Stock
("Series A preferred stock") at $25 per share. Dividends on the Series A
preferred stock are cumulative from the date of original issue and are payable
quarterly. At December 31, 2002, the aggregate liquidation preference of Series
A and Series B preferred stock issued is $107.5 million. (See Note 12 -
Dividends).
STOCKHOLDER RIGHTS PLAN
On May 12, 1999, our Board of Directors authorized the adoption of a
stockholder rights plan ("Stockholder Rights Plan"). The plan is designed to
require a person or group seeking to gain control of our company to offer a fair
price to all our stockholders. The rights plan will not interfere with any
merger, acquisition or business combination that our Board of Directors finds is
in the best interest of our company and its stockholders.
In connection with the adoption of the rights plan, our Board of Directors
declared a dividend distribution of one right for each common share outstanding
on May 24, 1999. The rights will not become exercisable unless a person acquires
10% or more of our common stock, or begins a tender offer that would result in
the person owning 10% or more of our common stock. At that time, each right
would entitle each stockholder other than the person who triggered the rights
plan to purchase either our common stock or stock of an acquiring entity at a
discount to the then market price. The plan was not adopted in response to any
specific attempt to acquire control of our company.
We amended our Stockholder Rights Plan in 2000 to exempt Explorer and any
of its transferees that become parties to the standstill as Acquiring Persons
under such plan. In October 2001, we further amended our Stockholder Rights Plan
to exempt Explorer and its affiliates and transferees generally.
STOCK OPTIONS AND STOCK PURCHASE ASSISTANCE PLAN
We account for stock options using the intrinsic value method as defined by
APB 25: Accounting for Stock Issued to Employees. Under the terms of the 2000
Stock Incentive Plan ("Incentive Plan"), we reserved 3,500,000 shares of common
stock for grants to be issued during a period of up to ten years. Options are
exercisable at the market price at the date of grant, expire five years after
date of grant for over 10% owners and ten years from the date of grant for less
than 10% owners. Directors' shares vest over three years while other grants vest
over five years or as defined in an employee's contract. Directors, officers and
employees are eligible to participate in the Incentive Plan. At December 31,
2002, there were 2,374,501 outstanding options granted to 19 eligible
participants. Additionally, 327,121 shares of restricted stock have been granted
under the provisions of the Incentive Plan. The market value of the restricted
shares on the date of the award was recorded as unearned compensation-restricted
stock, with the unamortized balance shown as a separate component of
stockholders equity. Unearned compensation is amortized to expense generally
over the vesting period, with charges to operations of $0.15 million, $0.37
million and $0.54 million in 2002, 2001 and 2000, respectively.
During 2000, 1,040,000 Dividend Equivalent Rights were granted to eligible
employees. A Dividend Equivalent Right entitles the participant to receive
payments from us in an amount determined by reference to any cash dividends paid
on a specified number of shares of stock to our stockholders of record during
the period such rights are effective. We recorded $0, $8,750 and $502,500 of
expense related to the Dividend Equivalent Rights in 2002, 2001 and 2000,
respectively. During 2001, payments of $502,500 were made in settlement of
Dividend Equivalent Rights in connection with cancellation of options on
1,005,000 shares.
At December 31, 2002, options currently exercisable (302,325) have a
weighted-average exercise price of $5.208, with exercise prices ranging from
$2.15 to $37.20. There are 618,489 shares available for future grants as of
December 31, 2002.
The following is a summary of activity under the plan.
Stock Options
----------------------------------------------------
Number of Exercise Price Weighted-
Shares Average
Price
----------------------------------------------------
Outstanding at December 31, 1999............................................ 365,263 $15.250 - $37.205 $28.542
Granted during 2000....................................................... 1,109,500 5.688 - 7.750 6.268
Canceled.................................................................. (307,699) 6.125 - 37.205 28.885
----------------------------------------------------
Outstanding at December 31, 2000............................................ 1,167,064 5.688 - 37.205 7.276
Granted during 2001....................................................... 2,245,000 2.150 - 3.813 2.780
Canceled.................................................................. (1,012,833) 6.250 - 36.617 4.798
----------------------------------------------------
Outstanding at December 31, 2001............................................ 2,399,231 2.150 - 37.205 3.413
Granted during 2002....................................................... 9,000 6.020 - 6.020 6.020
Canceled.................................................................. (33,730) 19.866 - 25.038 22.836
----------------------------------------------------
Outstanding at December 31, 2002............................................ 2,374,501 $ 2.150 - $37.205 $ 3.150
====================================================
In 1995, the Financial Accounting Standards Board issued the Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." This standard prescribes a fair value-based method of accounting
for employee stock options or similar equity instruments and requires certain
pro forma disclosures. For purposes of the pro forma disclosures required under
Statement 123, the estimated fair value of the options is amortized to expense
over the option's vesting period. Based on our company's option activity, net
earnings would have decreased in 2002 by approximately $70,400 and increased in
2001 and 2000 by approximately $16,000 and $1,064,000, respectively. Net
earnings per basic and diluted common share on a pro forma basis would have been
unchanged in 2002 and 2001, and would have increased in 2000 by approximately
$0.06, under SFAS No. 123. The estimated weighted-average fair value of options
granted in 2002, 2001 and 2000 was approximately $8,600, $998,000 and $407,000,
respectively. In determining the estimated fair value of our stock options as of
the date of grant, a Black-Scholes option pricing model was used with the
following assumptions: risk-free interest rates of 2.5% in 2002 and 2001 and
5.2% in 2000; a dividend yield of 5.0% in 2002 and 2001 and 10.0% in 2000;
volatility factors of the expected market price of our common stock based on 30%
volatility in 2002, 2001 and 2000; and a weighted-average expected life of the
options of 4.0 years in 2002 and 2001 and 8.0 years for 2000.
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because our employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
In January 1998, our company adopted a stock purchase assistance plan,
whereby we extended credit to directors and employees to purchase our company's
common stock through the exercise of stock options. During 2000, we terminated
this borrowing program and forgave the outstanding stock option loans in
exchange for the surrender of the underlying stock certificates and payment of
all outstanding interest on the loans. We recorded a charge of $1.9 million
related to these loans, which is included in the provision for loss on mortgages
and notes receivable in our Consolidated Statements of Operations for 2000.
NOTE 11 - RELATED PARTY TRANSACTIONS
EXPLORER HOLDINGS, L.P.
Hampstead, through its affiliate Explorer, indirectly owned 1,048,420
shares of Series C preferred stock and 12,539,078 shares of our common stock,
representing 54.4% of our outstanding voting power as of December 31, 2002.
Daniel A. Decker, our Chairman of the Board, is a partner of Hampstead. Donald
J. McNamara, the Chairman of Hampstead, is one of our directors. Christopher W.
Mahowald is one of our directors and holds an equity investment in Explorer.
Series C Investment Agreement. Under the terms of an investment agreement
dated May 11, 2000 between us and Explorer in connection with Explorer's
purchase of Series C preferred stock and an investment agreement dated October
25, 2001 between us and Explorer in connection with Explorer's additional
investment, we agreed to reimburse Explorer for its out-of-pocket expenses, up
to a maximum amount of $2.5 million, incurred in connection with the Series C
investment. As of December 31, 2002, we have reimbursed Explorer for
approximately $2.2 million of these expenses, including $0.4 million during
2002.
Advisory Agreement. Under the terms of an amended and restated advisory
agreement dated October 4, 2000 between us and Hampstead, we agreed to pay
Explorer an advisory fee if Hampstead provided assistance to us in connection
with the evaluation of growth opportunities or other financing matters. On June
1, 2001, in connection with Hampstead's agreement to provide certain specified
financial advisory, consulting and operational services, including but not
limited to assistance in our efforts to refinance, repay or extend certain
indebtedness and assist in efforts to manage our capitalization and liquidity,
we agreed to pay Hampstead a fee equal to 1% of the aggregate amount of our
indebtedness that was refinanced, repaid or extended, based on the maximum
amount available to be drawn in the case of revolving credit facilities, up to a
maximum fee of $3.1 million. Upon the closing of the rights offering and
Explorer's investment in February 2002, Hampstead had fulfilled all of its
obligations under the agreement. The fee was paid in the third quarter of 2002.
Direct Expenses. In addition to the Series C investment costs and the
Advisory Fee costs of $3.1 million, we agreed to reimburse Explorer for
Explorer's direct expenses. As of December 31, 2002, we have reimbursed Explorer
for approximately $0.6 million of such direct expenses, including $12,000 during
2002.
Dividend and Governance Right Deferral. We entered into a dividend deferral
letter agreement with Explorer dated November 15, 2000 relating to the extension
of the dividend payment payable in connection with our Series C preferred stock
for the dividend period ended October 31, 2000. The deferral period expired on
April 2, 2001. The amount of the deferred dividend payment was $4.667 million
representing the total unpaid preferential cumulative dividend for the October
2000 dividend. In exchange for the deferral, we also agreed to pay Explorer a
fee equal to 10% of the daily unpaid principal balance of the unpaid dividend
amount from November 15, 2000 until the dividend was paid. We issued 48,420
shares of Series C preferred stock to Explorer on April 2, 2001 in full payment
of our obligations under the dividend deferral letter agreement. Shares of
Series C preferred stock issued pursuant to this agreement are valued at $100
per share, the stated per share liquidation preference, and are convertible into
our common stock at $6.25 per share.
By letter dated January 21, 2003, 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.
OMEGA WORLDWIDE
In 1995, we sponsored the organization of Principal Healthcare Finance
Limited ("Principal"), an Isle of Jersey company, whose purpose is to invest in
nursing homes and long-term care facilities in the United Kingdom. In November
1997, we formed Omega Worldwide, Inc. ("Worldwide"), a company which provides
asset management services and management advisory services, as well as equity
and debt capital to the healthcare industry, particularly residential healthcare
services to the elderly. On April 2, 1998, we contributed substantially all of
our Principal assets to Worldwide in exchange for approximately 8.5 million
shares of Worldwide common stock and 260,000 shares of Series B preferred stock
of which approximately 5.2 million shares were distributed on April 2, 1998 to
our stockholders and 2.3 million shares were sold by us on April 3, 1998. In
April 1999, in conjunction with an acquisition by Worldwide, we acquired an
interest in Principal Healthcare Finance Trust (the "Trust"), an Australian Unit
Trust, which owns 47 nursing home facilities and 446 assisted living units in
Australia and New Zealand.
During 2002, we sold our investment in Worldwide. Pursuant to a tender
offer by Four Seasons Health Care Limited ("Four Seasons") for all of the
outstanding shares of common stock of Worldwide, we sold our investment, which
consisted of 1.2 million shares of common stock and 260,000 shares of preferred
stock, to Four Seasons for cash proceeds of approximately $7.4 million
(including $3.5 million for preferred stock liquidation preference and accrued
preferred dividends). In addition, we sold our investment in Principal, which
consisted of 990,000 ordinary shares and warrants to purchase 185,033 ordinary
shares, to an affiliate of Four Seasons for cash proceeds of $2.8 million. Both
transactions were completed in September 2002 and provided aggregate cash
proceeds of $10.2 million. We realized a gain from the sale of our investments
in Worldwide and Principal of $2.2 million which was recorded in Gain (loss) on
assets sold in our audited Consolidated Financial Statements. We no longer own
any interest in Worldwide or Principal.
As of December 31, 2002, we hold a $1.3 million investment in the Trust.
Services Agreement. We entered into a services agreement with Worldwide
which provided for the allocation of indirect costs incurred by us to Worldwide.
The allocation of indirect costs was based on the relationship of assets under
our management to the combined total of those assets and assets under
Worldwide's management. Upon expiration of this agreement on June 30, 2000, we
entered into a new agreement requiring quarterly payments from Worldwide of
$37,500 for the use of offices and administrative and financial services
provided by us. Upon the reduction of our accounting staff, the services
agreement was renegotiated again on November 1, 2000 requiring quarterly
payments from Worldwide of $32,500. Costs allocated to Worldwide for 2001 and
2000 were approximately $130,000 and $404,000, respectively. The former services
agreement expired in November of 2001.
NOTE 12 - DIVIDENDS
In order to qualify as a real estate investment trust, 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. 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. For tax year 2002, we are projecting a tax loss; therefore, we
anticipate no distribution will be required to satisfy the 2002 REIT rules.
However, if we have taxable income, we intend to make the necessary
distributions to satisfy the 2002 REIT requirements. The accumulated and unpaid
dividends relating to all series of preferred stocks total $40.0 million as of
December 31, 2002. In aggregate, preferred dividends continue to accumulate at
approximately $5.0 million per quarter.
No common cash dividends were paid during 2002 and 2001. Cash dividends
paid totaled $1.00 per common share for 2000. 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.
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. 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) continue to 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.
The table below sets forth information regarding arrearages in payment of
preferred stock dividends:
ANNUAL
DIVIDEND ARREARAGE AS OF
TITLE OF CLASS PER SHARE DECEMBER 31, 2002
- ----------------------------------------------------------------------------
9.25% Series A Cumulative
Preferred Stock...................... $2.3125 $10,637,500
8.625% Series B Cumulative
Preferred Stock...................... $2.1563 8,625,000
Series C Convertible
Preferred Stock...................... $10.0000 20,765,743
---------------------------------
Total................................ $40,028,243
=================
Per share distributions by our company were characterized in the following
manner for income tax purposes:
2002 2001 2000
-------------------------------
Common
Ordinary income............................. $ - $ - $ -
Return of capital........................... - - 1.000
Long-term capital gain...................... - - -
-------------------------------
Total dividends paid..................... $ - $ - $1.000
===============================
Series A Preferred
Ordinary income............................. $ - $ - $2.313
===============================
Series B Preferred
Ordinary income............................. $ - $ - $2.156
===============================
Series C Preferred Non-Cash (1)
Return of capital........................... $ - $4.842 $ -
===============================
(1) Per share of Series C preferred stock. On an as-converted basis, non-cash
dividends were $0.25 per common share equivalent, plus accrued interest.
NOTE 13 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Following are details of changes in operating assets and liabilities
(excluding the effects of non-cash expenses), and other cash flow information:
For the year ended December 31,
--------------------------------------------------
2002 2001 2000
--------------------------------------------------
(In thousands)
(Decrease) increase in cash from changes in operating assets and liabilities:
Operating assets........................................................... $ (385) $ (248) $ 1,306
Accrued interest........................................................... (1,488) (448) (3,751)
Other liabilities......................................................... 285 (2,881) 2,465
--------------------------------------------------
$(1,588) $(3,577) $ 20
==================================================
Other cash flow transactions:
Interest paid during the period................................................. $26,036 $34,236 $44,221
NOTE 14 - 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, 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 our consolidated
financial position or results of operations.
On June 21, 2000, we were named as a defendant in certain litigation
brought against us in the U.S. District Court for the Eastern District of
Michigan, Detroit Division, 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. Effective as of September 30, 2002 the parties settled all claims in
the suit in consideration of Madison's payment of 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 evidenced by the amendment of the existing promissory
note from Madison to us. The note reflects 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. Accordingly, a reserve of $1.25 million was recorded in 2002 relating
to this note. As of December 31, 2002, we have received the $0.4 million cash
payment and payments of principal and interest on the note equal to $2.7
million. The financial statements have been adjusted to reflect the
restructuring and reduction of our investment in connection with the settlement
of this matter.
On December 29, 1998, Karrington Health, Inc. ("Karrington") brought suit
against us 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 we 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, we paid Karrington $10 million to settle all claims arising from the suit,
but without our admission of any liability or fault, 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 15 - SEVERANCE, MOVING AND CONSULTING AGREEMENT COSTS
We entered into several consulting and severance agreements in 2001 and
2000 related to the resignation of certain of our company's senior managers. In
addition, we incurred certain relocation costs in 2001 associated with our
corporate office move from Michigan to Maryland, effective January 2002. Costs
incurred for these items total $5.1 million and $4.7 million for the years ended
December 31, 2001 and 2000, respectively. These costs are included in our
Consolidated Statements of Operations in 2001 and 2000.
NOTE 16 - SEGMENT INFORMATION
The following tables set forth the reconciliation of operating results and
total assets for our reportable segments for the years ended December 31, 2002,
2001 and 2000.
FOR THE YEAR ENDED DECEMBER 31, 2002
------------------------------------------------------------------
OWNED AND
OPERATED AND
CORE ASSETS HELD CORPORATE
OPERATIONS FOR SALE AND OTHER CONSOLIDATED
-----------------------------------------------------------------
(IN THOUSANDS)
Operating revenues..................................... $ 85,742 $ 42,906 $ - $ 128,648
Operating expenses..................................... - (57,904) - (57,904)
-----------------------------------------------------------------
Net operating income (loss)......................... 85,742 (14,998) - 70,744
Adjustments to arrive at net income:
Other revenues...................................... - - 7,059 7,059
Depreciation and amortization....................... (19,360) (861) (1,034) (21,255)
Interest expense.................................... - - (27,381) (27,381)
General and administrative.......................... - - (6,285) (6,285)
Legal............................................... - - (2,869) (2,869)
State taxes......................................... - - (490) (490)
Refinancing expense................................. - - (7,000) (7,000)
Provisions for impairment........................... (9,261) (2,977) - (12,238)
Provisions for uncollectible mortgages, notes and
accounts receivable............................... (8,844) (5,892) - (14,736)
Adjustment of derivatives to fair value............. - - 946 946
-----------------------------------------------------------------
(37,465) (9,730) (37,054) (84,249)
-----------------------------------------------------------------
Income (loss) before (loss) gain on assets sold........ 48,277 (24,728) (37,054) (13,505)
(Loss) gain on assets sold - net....................... - (75) 2,623 2,548
-----------------------------------------------------------------
Income (loss) from continuing operations............... 48,277 (24,803) (34,431) (10,957)
Loss from discontinued operations...................... - - (3,689) (3,689)
-----------------------------------------------------------------
Net income (loss)...................................... 48,277 (24,803) (38,120) (14,646)
Preferred dividends.................................... - - (20,115) (20,115)
-----------------------------------------------------------------
Net income (loss) available to common.................. $ 48,277 $(24,803) $(58,235) $ (34,761)
=================================================================
Total assets........................................... $720,220 $ 16,941 $ 65,459 $ 802,620
=================================================================
FOR THE YEAR ENDED DECEMBER 31, 2001
-----------------------------------------------------------------
OWNED AND
OPERATED AND
CORE ASSETS HELD CORPORATE
OPERATIONS FOR SALE AND OTHER CONSOLIDATED
-----------------------------------------------------------------
(IN THOUSANDS)
Operating revenues..................................... $ 81,667 $165,503 $ - $ 247,170
Operating expenses..................................... - (173,387) - (173,387)
-----------------------------------------------------------------
Net operating income (loss)......................... 81,667 (7,884) - 73,783
-----------------------------------------------------------------
Adjustments to arrive at net income:
Other revenues...................................... - - 7,487 7,487
Depreciation and amortization....................... (17,397) (3,743) (899) (22,039)
Interest expense.................................... - - (33,204) (33,204)
General and administrative.......................... - - (10,383) (10,383)
Legal............................................... - - (4,347) (4,347)
State taxes......................................... - - (739) (739)
Litigation settlement expense....................... - - (10,000) (10,000)
Provisions for impairment........................... - (9,608) - (9,608)
Provisions for uncollectible mortgages, notes and
accounts receivable............................... (683) - - (683)
Severance, moving and consulting agreements costs... - - (5,066) (5,066)
Adjustment of derivatives to fair value............. - - (1,317) (1,317)
-----------------------------------------------------------------
(18,080) (13,351) (58,468) (89,899)
-----------------------------------------------------------------
Income (loss) before gain (loss) on assets sold........ 63,587 (21,235) (58,468) (16,116)
Gain (loss) on assets sold - net....................... 189 (866) - (677)
------------------------------------------------------------------
Income (loss) from continuing operations............... 63,776 (22,101) (58,468) (16,793)
Gain from discontinued operations...................... - - 136 136
------------------------------------------------------------------
Net income (loss)...................................... 63,776 (22,101) (58,332) (16,657)
Preferred dividends.................................... - - (19,994) (19,994)
-----------------------------------------------------------------
Net income (loss) available to common.................. $ 63,776 $(22,101) $(78,326) $ (36,651)
=================================================================
Total assets........................................... $708,579 $115,276 $ 66,984 $ 890,839
================================================================
FOR THE YEAR ENDED DECEMBER 31, 2000
-----------------------------------------------------------------
OWNED AND
OPERATED AND
CORE ASSETS HELD CORPORATE
OPERATIONS FOR SALE AND OTHER CONSOLIDATED
-----------------------------------------------------------------
(IN THOUSANDS)
Operating revenues..................................... $ 91,114 $ 169,674 $ - $ 260,788
Operating expenses..................................... - (172,215) - (172,215)
-----------------------------------------------------------------
Net operating income (loss)......................... 91,114 (2,541) - 88,573
-----------------------------------------------------------------
Adjustments to arrive at net income:
Other revenues...................................... - - 8,800 8,800
Depreciation and amortization....................... (17,978) (3,660) (1,490) (23,128)
Interest expense.................................... - - (42,400) (42,400)
General and administrative.......................... - - (6,425) (6,425)
Legal............................................... - - (2,467) (2,467)
State taxes......................................... - - (195) (195)
Provisions for impairment........................... (1,939) (54,001) (2,356) (58,296)
Provisions for uncollectible mortgages, notes and
accounts receivable............................... (799) (1,000) (10,386) (12,185)
Severance, moving and consulting agreements costs... - - (4,655) (4,665)
-----------------------------------------------------------------
(20,716) (58,661) (61,584) (140,961)
-----------------------------------------------------------------
Income (loss) before gain on assets sold............... 70,398 (61,202) (61,584) (52,388)
Gain on assets sold - net.............................. 9,989 - - 9,989
------------------------------------------------------------------
Income (loss) from continuing operations............... 80,387 (61,202) (61,584) (42,399)
Loss from discontinued operations...................... - - (7,158) (7,158)
------------------------------------------------------------------
Net income (loss)...................................... 80,387 (61,202) (68,742) (49,557)
Preferred dividends.................................... - - (16,928) (16,928)
-----------------------------------------------------------------
Net income (loss) available to common.................. $ 80,387 $ (61,202) $(85,670) $ (66,485)
=================================================================
Total assets........................................... $724,338 $ 159,105 $ 65,008 $ 948,451
=================================================================
Nursing home revenues and expenses in our consolidated financial
statements which relate to our owned and operated assets are as follows:
YEAR ENDED DECEMBER 31,
2002 2001 2000
---------------------------------
(IN THOUSANDS)
NURSING HOME REVENUES(1)(2)
Medicaid................................. $ 25,576 $ 98,887 $102,197
Medicare................................. 9,307 40,178 31,459
Private & other.......................... 8,023 26,438 36,018
---------------------------------
Total nursing home revenues........... 42,906 165,503 169,674
---------------------------------
NURSING HOME EXPENSES(2)
Patient care expenses.................... 31,237 114,955 114,684
Administration........................... 13,463 26,825 33,264
Property & related....................... 3,861 10,960 11,701
Leasehold buyout expense................. 4,342 - -
Management fees.......................... 2,465 8,840 8,778
Rent..................................... 2,536 4,516 3,788
Provisions for uncollectible accounts.... 5,892 7,291 1,000
---------------------------------
Total nursing home expenses........... $ 63,796 $173,387 $173,215
---------------------------------
(1) Nursing home revenues from these owned and operated assets are recognized
as services are provided.
(2) The nursing home revenues and nursing home expenses above exclude the
revenues and expenses of the facilities sold during the period from January
1, 2003 to September 30, 2003, which are classified as discontinued
operations. (See Note 20 - Financial Revisions).
Accounts receivable for owned and operated assets is net of an allowance
for doubtful accounts of approximately $12.2 million at December 31, 2002 and
$8.3 million at December 31, 2001. The following is a summary of allowance for
doubtful accounts:
2002 2001 2000
---------------------------------
(In thousands)
Beginning balance...................... $ 8,335 $1,200 $ 200
Provision charged...................... 5,892 7,291 1,000
Provision applied...................... (2,056) (156) -
---------------------------------
Ending balance......................... $12,171 $8,335 $1,200
=================================
Nursing home assets and liabilities in our consolidated financial
statements which relate to our owned and operated assets are as follows:
December 31,
2002 2001
------------------
(In thousands)
ASSETS
Cash......................................... $ 838 $ 6,549
Accounts receivable - net.................... 7,491 27,121
Other current assets......................... 1,207 2,125
-------------------
Total current assets...................... 9,536 35,795
-------------------
Investment in leasehold - net................ 185 661
Land and buildings........................... 5,571 80,071
Less accumulated depreciation................ (675) (8,647)
-------------------
Land and buildings - net..................... 4,896 71,424
-------------------
Assets held for sale - net................... 2,324 7,396
-------------------
Total assets................................. $16,941 $115,276
===================
LIABILITIES
Accounts payable............................. $ 389 $ 4,816
Other current liabilities.................... 2,834 5,371
-------------------
Total current liabilities................. 3,223 10,187
-------------------
Total liabilities............................ $ 3,223 $ 10,187
===================
NOTE 17 - SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summarizes quarterly results of operations for the quarters
ended
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE)
2002
Revenues............................................................... $42,947 $ 33,991 $ 30,876 $ 27,893
Income (loss) from continuing operations............................... 4,611 (174) (7,430) (7,964)
Net loss available to common........................................... (572) (5,569) (12,891) (15,729)
Loss from continuing operations per share:
Basic loss from continuing operations................................ $ (0.02) $ (0.14) $ (0.34) $ (0.35)
Diluted loss from continuing operations.............................. (0.02) (0.14) (0.34) (0.35)
Net loss available to common per share:
Basic net loss....................................................... $ (0.02) $ (0.15) $ (0.35) $ (0.42)
Diluted net loss .................................................... (0.02) (0.15) (0.35) (0.42)
Cash dividends paid on common stock.................................... - - - -
2001
Revenues............................................................... $68,437 $ 64,914 $ 66,095 $ 55,211
Loss from continuing operations........................................ (4,459) (13,947) (1,890) (5,415)
Net loss available to common........................................... (415) (18,942) (6,885) (10,409)
Loss from continuing operations per share:
Basic loss from continuing operations................................ $ (0.02) $ (0.95) $ (0.34) $ (0.52)
Diluted loss from continuing operations.............................. (0.02) (0.95) (0.34) (0.52)
Net loss available to common per share:
Basic net loss....................................................... $ (0.02) $ (0.95) $ (0.34) $ (0.52)
Diluted net loss .................................................... (0.02) (0.95) (0.34) (0.52)
Cash dividends paid on common stock.................................... - - - -
Note:2002 - During the three-month period ended June 30, 2002, we recognized a
$2.1 million provision for impairment and a $3.7 million charge for
uncollectible mortgages, notes and accounts receivable. In addition, we
recognized a $0.3 million loss on sale of a property. During the
three-month period ended September 30, 2002, we recognized a $2.4 million
provision for impairment. Also, during the third quarter, we incurred a
$5.2 million charge for uncollectible mortgages, notes and accounts
receivable and recognized a gain on sale of $2.2 million on a
non-healthcare investment. During the three-month period ended December 31,
2002, we recorded a $7.0 million refinancing expense, a $7.8 million
provision for impairment and a $0.7 million gain on asset sales.
2001 - During the three-month period ended March 31, 2001, we recognized a
gain on sale of assets of $0.6 million. During the three-month period ended
June 30, 2001, we recognized a litigation settlement expense of $10.0
million, impairment of $8.4 million. During the three-month period ended
September 30, 2001, we recognized a loss on asset sales of $1.5 million.
During the three-month period ended December 31, 2002, we recognized a
provision of $7.3 million for uncollectible accounts on our owned and
operated accounts receivable, a provision for impairment of $1.2 million,
gain on asset sales of $0.2 million. Additionally, during the three-month
periods ended September 30, 2001 and December 31, 2002, we recognized
charges related to the relocation of our corporate office of $4.3 million
and $0.3 million, respectively. (See Note 2--Properties, Note 3 - Mortgage
Notes Receivable and Note 16 - Segment Information).
NOTE 18 - EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share:
YEAR ENDED DECEMBER 31,
2002 2001 2000
-----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Numerator:
Loss from continuing operations............................................... $(10,957) $(16,793) $(42,399)
Preferred stock dividends..................................................... (20,115) (19,994) (16,928)
-----------------------------------------
Numerator for loss available to common from continuing operations - basic
and diluted................................................................. (31,072) (36,787) (59,327)
(Loss) income from discontinued operations.................................... (3,689) 136 (7,158)
-----------------------------------------
Numerator for net loss available to common per share - basic and
diluted...................................................................... $(34,761) $(36,651) $(66,485)
=========================================
Denominator:
Denominator for net loss per share - basic.................................... 34,739 20,038 20,052
Effect of dilutive securities:
Stock option incremental shares............................................. - - -
-----------------------------------------
Denominator for net loss per share - diluted.................................. 34,739 20,038 20,052
=========================================
YEAR ENDED DECEMBER 31,
2002 2001 2000
-----------------------------------------
Net loss per share - basic:
Loss available to common from continuing operations........................... $ (0.89) $ (1.84) $ (2.96)
(Loss) income from discontinued operations.................................... (0.11) 0.01 (0.36)
-----------------------------------------
Net loss per share - basic.................................................... $ (1.00) $ (1.83) $ (3.32)
=========================================
Net loss per share - diluted:
Loss available to common from continuing operations........................... $ (0.89) $ (1.84) $ (2.96)
(Loss) income from discontinued operations.................................... (0.11) 0.01 (0.36)
-----------------------------------------
Net loss per share - diluted.................................................. $ (1.00) $ (1.83) $ (3.32)
=========================================
NOTE 19 - SUBSEQUENT EVENTS
Effective January 1, 2003, we completed a restructured transaction with
Claremont Health Care Holdings, Inc. (formerly Lyric Health Care, LLC) whereby
nine facilities formerly leased under two Master Leases were combined into one
new ten year Master Lease. Annual rent under the new lease is $6.0 million, the
same amount of rent recognized in 2002 for these properties. As part of the
restructure, one facility located in Sarasota, Florida was closed in 2002 and is
currently being marketed for sale.
Separately, in December 2002, an agreement was approved by the United
States Bankruptcy Court in Wilmington, Delaware between us and IHS, whereby upon
notice provided by us, IHS will convey ownership of eight skilled nursing
facilities (five in Florida, two in Georgia, and one in Texas) to an affiliate
of us and transfer the operations to our designee. On February 1, 2003, we
entered into a Master Lease, to re-lease a 130-bed facility, formerly operated
by IHS, with Senior Management Services of Treemont, Inc. The initial term is
ten years with rent culminating at $0.4 million annually by the end of the third
year. We are in the process of negotiating lease arrangements on each of the
remaining seven IHS properties.
On January 14, 2003, we were notified by Alterra that it did not intend to
pay January rent and that a restructuring of its Master Lease was necessary. We
currently lease eight assisted living facilities (325 units) located in seven
states to subsidiaries of Alterra. The Master Lease requires annual rent for
2003 of approximately $3.2 million. On January 14, 2003, we declared an "Event
of Default" under its Master Lease and demanded payment under its Alterra
guarantee. On January 22, 2003, Alterra announced that, in order to facilitate
and complete its on-going restructuring initiatives, they had filed a voluntary
petition with the U.S. Bankruptcy Court for the District of Delaware to
reorganize under Chapter 11 of the U.S. Bankruptcy Code. We intend to
aggressively pursue all avenues afforded us in order to enforce the terms and
conditions under the lease.
On February 4, 2003, Sun remitted rent of $1.6 million versus the
contractual amount of $2.1 million. We have agreed with Sun to use a letter of
credit (posted by Sun as a security deposit) in the amount of $0.5 million to
make up the difference in rent and agreed to temporarily forebear in declaring a
default under the lease caused by Sun's failure to restore the $0.5 million
letter of credit. The letter of credit was otherwise expiring on February 28,
2003 and was not being renewed. We hold additional security deposits (in the
form of cash and letters of credit) of $2.3 million.
On February 7, 2003, Sun announced "that it has opened dialogue with many
of its landlords concerning the portfolio of properties leased to Sun and
various of its consolidated subsidiaries (collectively, the `Company'). The
Company is seeking a rent moratorium and/or rent concessions with respect to
certain of its facilities and is seeking to transition its operations of certain
facilities to new operators while retaining others." To this end, Sun has
initiated conversations with us regarding a restructure of our lease. At this
stage, it is too early to predict the outcome of those conversations. As of
December 31, 2002, our investment balance was $219.0 million relating to the Sun
portfolio under agreements provided for annual rental income of $25.1 million in
2002 and $25.7 million in 2003.
On February 5, 2003, we entered into a binding agreement to buy out our
last remaining leasehold interest in one facility in Indiana for $0.35 million.
The expected closing date for this transaction is March 1, 2003 subject to
change of ownership and licensure with the state of Indiana. In addition, we
decided to close one facility in Illinois. Upon completion of these two
transactions, our owned and operated portfolio will be reduced from three
facilities at December 31, 2002 to one facility.
In December 2000, we filed suit against a title company (later adding a law
firm as a defendant), seeking damages based on claims of breach of contract and
negligence, among other things, as a result of the alleged failure to file
certain UCC financing statements in our favor. We filed a subsequent suit
seeking recovery under title insurance policies written by the title company.
The defendants denied the allegations made in the lawsuits. In settlement of our
claims against the defendants, we agreed on February 20, 2003 to accept a lump
sum cash payment of $3.2 million, which was paid on February 28, 2003.
NOTE 20 - FINANCIAL REVISIONS
Upon adoption of Statement of Financial Accounting Standards 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, 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.
Properties sold in 2002 were classified as assets held for sale in 2001.
Accordingly, they are subject to SFAS 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed and have not been
reported as discontinued operations in our financial statements.
The implementation of SFAS No. 144 resulted in the presentation of the net
operating results on four closed facilities sold during the period from January
1, 2003 to September 30, 2003 as income from discontinued operations for all
periods presented. In addition, SFAS No. 144 resulted in a net income (loss)
from discontinued operations of $3.7 million, $136 thousand and $7.2 million for
2002, 2001 and 2000, respectively, in the accompanying consolidated statements
of operations. The adoption of SFAS No. 144 did not have an impact on net income
available to common shareholders.
The following table summarizes the results of operations of the sold and
held for sale facilities for the years ended December 31, 2002, 2001 and 2000,
respectively.
YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------------------------------------------
(IN THOUSANDS)
REVENUES
Nursing home revenue.......................... $ 1,371 $ 2,655 $ 5,885
Mortgage interest income...................... 33 306 320
------------------------------------------
1,404 2,961 6,205
------------------------------------------
EXPENSES
Operating..................................... (1,950) (2,798) (5,760)
Depreciation and amortization................. (15) (27) (137)
Provisions for impairment..................... (3,128) - (3,394)
Provisions for uncollectible mortgages, notes
and accounts receivable..................... - - (4,072)
------------------------------------------
(5,093) 2,825 13,363
------------------------------------------
(Loss) income before loss on sale of assets...... (3,689) 136 (7,158)
Loss on assets sold - net........................ - - -
------------------------------------------
(LOSS) INCOME FROM DISCONTINUED OPERATIONS....... $(3,689) $ 136 $(7,158)
==========================================
Our company has adopted Financial Accounting Standards Board issued
Statement No.145: Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections which requires that gains and
losses from the extinguishment of debt are no longer presented as an
extraordinary item in our consolidated statement of operations. The accompanying
consolidated financial statements present gains or losses arising from the
extinguishment of debt as interest expense within income from continuing
operations and the effects of extinguishments in prior periods have been
reclassified to conform to the prescribed presentation.
SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION
OMEGA HEALTHCARE INVESTORS, INC.
December 31, 2002
(6)
Gross Amount at
Which Carried at
Initial Cost Close of Period
to Company Cost Capitalized --------------- Life on Which
----------- Subsequent to Buildings Depreciation in
Buildings Acquisition and Land (7) Latest Income
and Land --------------------- Improvements Accumulated Date of Date Statements
Description (1) Encumbrances Improvements Improvements Impairment Total Depreciation Renovation Acquired is Computed
- ------------------------------------------------------------------------------------------------------------------------------------
Sun Healthcare
Group, Inc.: 1964-1995
Alabama (LTC) (4) $ 23,584,957 $23,584,957 $ 3,908,329 March 31, 1997 33 years
California (LTC, RH) (3)(4) 65,912,924 65,912,924 9,719,198 October 8, 1997 33 years
Florida (LTC) (3) 10,700,000 10,700,000 1,798,646 February 28, 1997 33 years
Florida (LTC) (4) 10,796,688 10,796,688 1,789,150 March 31, 1997 33 years
Idaho (LTC) 600,000 600,000 100,859 February 28, 1997 33 years
Illinois (LTC) (4) 4,900,000 4,900,000 983,781 August 30, 1996 30 years
Illinois (LTC) (4) 3,942,726 3,942,726 653,361 March 31, 1997 33 years
Indiana (LTC) (4) 3,000,000 3,000,000 602,315 August 30, 1996 30 years
Louisiana (LTC) (4) 4,602,574 4,602,574 762,705 March 31, 1997 33 years
Massachusetts (LTC) 8,300,000 8,300,000 1,395,211 February 28, 1997 33 years
North Carolina (LTC) (3) 19,970,418 19,970,418 5,179,099 June 4, 1994 39 years
North Carolina (LTC) (4) 2,739,021 2,739,021 408,306 October 8, 1997 33 years
Ohio (LTC) (3)(4) 11,884,567 11,884,567 1,756,585 October 8, 1997 33 years
Tennessee (LTC) (2) 7,942,374 7,942,374 2,067,945 September 30, 1994 30 years
Texas (LTC) (4) 9,415,056 9,415,056 1,560,196 March 31, 1997 33 years
Washington (LTC) 5,900,000 5,900,000 990,045 March 31, 1997 33 years
West Virginia (LTC) (3)(4) 24,793,441 24,793,441 3,623,823 October 8, 1997 33 years
-----------------------------------------------------------------
218,984,746 218,984,746 37,299,554
Advocat, Inc.: 1966-1994
Alabama (LTC) (3) 11,638,797 707,998 12,346,795 3,766,899 August 14, 1992 31.5 years
Arkansas (LTC) (3) 37,887,832 1,437,249 39,325,081 12,288,495 August 14, 1992 31.5 years
Florida (LTC) 2,000,000 2,000,000 75,472 August 14, 1992 31.5 years
Kentucky (LTC) (3) 14,897,402 1,816,000 16,713,402 3,808,516 July 1, 1994 33 years
Ohio (LTC) (3) 5,854,186 5,854,186 1,335,054 July 1, 1994 33 years
Tennessee (LTC) (2) 9,542,121 9,542,121 3,035,604 August 14, 1992 31.5 years
West Virginia (LTC) (3) 5,283,525 502,338 5,785,863 1,321,394 July 1, 1994 33 years
-----------------------------------------------------------------
87,103,863 4,463,585 91,567,448 25,631,434
Alterra Healthcare
Corporation:
Colorado (AL) 2,583,440 2,583,440 263,874 June 14, 1999 33 years
Indiana (AL) 5,446,868 5,446,868 556,345 June 14, 1999 33 years
Kansas (AL) 3,418,670 3,418,670 349,184 June 14, 1999 33 years
Ohio (AL) 3,520,747 3,520,747 359,610 June 14, 1999 33 years
Oklahoma (AL) 3,177,993 3,177,993 324,601 June 14, 1999 33 years
Tennessee (AL) 4,068,652 4,068,652 415,574 June 14, 1999 33 years
Washington (AL) 5,673,693 5,673,693 579,513 June 14, 1999 33 years
-----------------------------------------------------------------
27,890,063 27,890,063 2,848,701
Integrated Health
Services, Inc.: 1986
Washington (LTC) 10,000,000 10,000,000 3,116,583 September 1, 1996 20 years
Claremont Health Care
Holdings, Inc.: 1980-1993
Florida (LTC) 5,700,000 5,700,000 814,923 January 13, 1998 33 years
Florida (LTC) 20,000,000 20,000,000 2,738,434 March 31, 1998 33 years
Illinois (LTC) 14,700,000 14,700,000 2,044,456 January 13, 1998 33 years
New Hampshire (LTC) 5,800,000 5,800,000 829,220 January 13, 1998 33 years
Ohio (LTC) 4,300,000 4,300,000 614,766 January 13, 1998 33 years
Ohio (LTC) 16,000,000 16,000,000 2,190,748 March 31, 1998 33 years
Pennsylvania (LTC) 14,400,000 14,400,000 2,058,752 January 13, 1998 33 years
Pennsylvania (LTC) 5,500,000 5,500,000 753,069 March 31, 1998 33 years
-----------------------------------------------------------------
86,400,000 86,400,000 12,044,368
Alden Management
Services, Inc.: 1978
Illinois (LTC) 31,000,000 645,756 31,645,756 8,436,667 September 30, 1994 30 years
Harborside Healthcare
Corporation: 1995-1998
Massachusetts (LTC) 30,459,900 665,395 (8,257,521) 22,867,774 2,508,065 July 14, 1999 33 years
Haven Healthcare: 1986-1998
Connecticut (LTC) (3) 24,183,164 372,599 (2,168,854) 22,386,909 2,274,420 July 14, 1999 33 years
StoneGate Senior Care LP:
Texas (LTC) 21,436,143 344,681 21,780,824 3,317,396 December 31, 1993 39 years
Infinia Properties of
Arizona, LLC: 1998
Arizona (LTC) 24,029,032 426,712 (6,603,745) 17,851,999 2,330,553 December 31, 1998 33 years
USA Healthcare, Inc.: 1974-1997
Iowa (LTC) 12,040,044 168,000 12,208,044 1,779,171 October 7, 1997 33 years
Iowa (LTC) 2,670,844 2,670,844 540,900 August 30, 1996 30 years
-----------------------------------------------------------------
14,710,888 168,000 14,878,888 2,320,071
Conifer Care
Communites, Inc.: 1974
Colorado (LTC) 14,170,968 193,652 14,364,620 1,644,196 December 31, 1998 33 years
Washington N&R, LLC.:
Missouri (LTC) (4) 12,152,174 12,152,174 1,389,707 January 7, 1999 33 years
Peak Medical of
Idaho, Inc.:
Idaho (LTC) (4) 10,500,000 10,500,000 1,148,606 March 26, 1999 33 years
HQM of Floyd
County, Inc.:
Kentucky (LTC) (4) 10,250,000 10,250,000 948,384 June 30, 1997 33 years
Corum Healthcare
Management, LLC: 1984
Florida (LTC) 8,150,000 866 8,150,866 1,788,382 September 13, 1993 39 years
Hickory Creek
Healthcare
Foundation:
Indiana (LTC) 4,349,076 66,616 4,415,692 229,005 September 30, 1994 25 years
Ohio (LTC) 2,804,347 30,092 2,834,439 318,358 January 7, 1999 33 years
-----------------------------------------------------------------
7,153,423 96,708 7,250,131 547,363
Mark Ide, LLC: 1986-1994
Indiana (LTC) 8,383,671 322,279 (1,820,624) 6,885,326 2,378,832 December 23, 1992 31.5 years
American Senior
Care Communities:
Indiana (AL) 6,194,937 6,194,937 632,753 June 14, 1999 33 years
Liberty Assisted
Living Center:
Florida (AL) 5,994,730 760 5,995,490 1,880,697 September 30, 1994 27 years
Nexion 1972
Illinois (LTC) 1,274,703 33,993 (1,000,000) 308,696 146,449 January 7, 1999 33 years
Illinois (LTC) 5,118,775 144,044 5,262,819 528,827 June 1, 1999 33 years
-----------------------------------------------------------------
6,393,478 178,037 (1,000,000) 5,571,515 675,276
Eldorado Care Center,
Inc. & Magnolia
Manor, Inc.: 1995-1998
Illinois (LTC) 5,100,000 5,100,000 569,598 February 1, 1999 33 years
LandCastle
Diversified LLC: 1984-1990
Florida (LTC) 3,900,000 3,900,000 129,235 August 14, 1992 31.5 years
Lamar Healthcare, Inc. 1996
Texas (LTC) (4) 2,442,858 97,109 2,539,967 343,402 March 4, 1998 33 years
Closed Buildings: 1991-1997
Connecticut (LTC) 4,300,000 (4,050,000) 250,000 - July 14, 1999 33 years
Florida (LTC) 9,000,000 (6,767,704) 2,232,296 1,232,295 March 31, 1998 33 years
Iowa (LTC) 2,171,488 (1,871,794) 299,694 299,694 October 7, 1997 33 years
Massachusetts (LTC) 4,100,000 200,259 (3,253,840) 1,046,419 249,852 July 14, 1999 33 years
Texas (LTC) 7,100,000 (6,850,000) 250,000 - August 30, 1996 30 years
-----------------------------------------------------------------
26,671,488 200,259 (22,793,338) 4,078,409 1,781,841
-----------------------------------------------------------------
$703,655,526 $8,176,398 ($42,644,082) $669,187,842 $117,986,084
=================================================================
(1) The real estate included in this schedule are being used in either the
operation of long-term care facilities (LTC), assisted living facilities
(AL) or rehabilitation hospitals (RH) located in the states indicated,
except for those buildings which are designated as "closed".
(2) Certain of the real estate indicated are security for Industrial
Development Revenue bonds totaling $7,855,000 at December 31, 2002.
(3) Certain of the real estate indicated are security for the Provident line of
credit borrowings totaling $65,000,000 at December 31, 2002.
(4) Certain of the real estate indicated are security for the Fleet line of
credit borrowings totaling $112,000,000 at December 31, 2002.
Year Ended December 31,
(5) 2000 2001 2002
--------------------------------------------------------------
Balance at beginning of period $746,914,941 $710,542,017 $684,848,012
Additions during period:
Conversion from mortgage - 8,249,076 2,000,000
Impairment (a) (37,456,499) (8,344,205) (13,388,521)
Improvements 1,302,828 2,418,873 674,899
Disposals/other (219,253) (28,017,749) (4,946,548)
--------------------------------------------------------------
Balance at close of period $710,542,017 $684,848,012 $669,187,842
==============================================================
(a) The variance in impairment in the table shown above relates to assets
previously classified as held for sale which were reclassified to owned and
operated assets during 2000, impairment on leasehold investments in 2001
and impairment on assets sold in 2002.
(6) 2000 2001 2002
--------------------------------------------------------------
Balance at beginning of period $ 67,929,407 $ 89,869,907 $100,037,825
Additions during period:
Provisions for depreciation 21,683,180 20,705,770 20,167,144
Dispositions/other 257,320 (10,537,852) (2,218,885)
--------------------------------------------------------------
Balance at close of period $ 89,869,907 $100,037,825 $117,986,084
==============================================================
The reported amount of our real estate at December 31, 2002 is less than the tax
basis of the real estate by approximately $32.1 million.
SCHEDULE IV MORTGAGE LOANS ON REAL ESTATE
OMEGA HEALTHCARE INVESTORS, INC.
December 31, 2002
Principal Amount
Carrying of Loans
Face Amount of Subject to
Interest Final Periodic Prior Amount of Mortgages(2) Delinquent
Description (1) Rate Maturity Date Payment Terms Liens Mortgages (3) Interest
- -----------------------------------------------------------------------------------------------------------------------------------
Michigan
(9 LTC facilities) and
North Carolina
(3 LTC facilities) 11.57% August 31, 2010 Interest payable at None $ 59,688,448 $ 59,688,448
11.57% payable monthly
Florida
(4 LTC facilities) 11.50% February 28, 2010 Interest plus $2,800 None 12,891,500 12,748,272
of principal payable
monthly
Florida
(2 LTC facilities) 11.50% June 4, 2006 Interest plus $2,400 None 11,090,000 10,971,424
of principal payable
monthly
Texas
(3 LTC facilities) 11.00% to 11.50% 2006 to 2011 Interest plus $43,000 None 5,733,104 3,777,503
of principal payable
monthly
Indiana
(16 LTC facilities) 7.62% October 31, 2004 Interest payable None 10,500,000 10,111,877
monthly
Ohio
(6 LTC facilities) 11.01% January 1, 2015 Interest plus $53,000 None 18,238,752 15,119,512
of principal payable
monthly
Georgia
(2 LTC facilities) 10.69% March 13, 2008 Interest payable None 12,000,000 12,000,000 (4)
monthly
Florida
(5 LTC facilities) and
Texas
(1 LTC facility) 11.55% December 3, 2003 Interest payable None 37,500,000 35,571,206 (4)
monthly
Other Mortgage Notes:
Various 9.00% to 13.00% 2004 to 2011 Interest plus $55,000 None 24,967,095 13,925,838 $11,085,724
of principal payable ---------------------------
monthly $192,608,899 $173,914,080
===========================
(1) Mortgage loans included in this schedule represent first mortgages on
facilities used in the delivery of long-term healthcare, such facilities
are located in the states indicated.
(2) The aggregate cost for federal income tax purposes is equal to the carrying
amount.
Year Ended December 31,
(3) 2000 2001 2002
--------------------------------------------------------
Balance at beginning of period $213,616,645 $206,709,570 $195,193,424
Deductions during period - Collection of principal (2,035,825) (23,956,355) (14,333,620)
Allowance for loss on mortgage loans (4,871,250) - (4,945,724)
Conversion to purchase leaseback/other changes - 12,440,209 (2,000,000)
--------------------------------------------------------
Balance at close of period $206,709,570 $195,193,424 $173,914,080
========================================================
(4) A mortgagor with a mortgage on six facilities located in Florida and Texas
and a mortgage on two facilities located in Georgia filed for Chapter 11
bankruptcy protection in February 2000. In November 2001, the mortgagor
informed us that it did not intend to pay future mortgage interest due. In
January 2002, the mortgagor resumed making payments to us. Revenue has been
recorded as payments were received.
INDEX TO EXHIBITS TO 2002 FORM 10-K
Exhibit
Number Description
3.1 Articles of Incorporation, as amended (Incorporated by reference to the
Registrant's Form 10-Q for the quarterly period ended March 31, 1995)
3.2 Articles of Amendment to the Company's Articles of Incorporation, as
amended (Incorporated by reference to Exhibit 3(i) of the Company's Form
10-Q for the quarterly period ended June 30, 2002)
3.3 Amended and Restated Bylaws, as amended as of May 2002 (Incorporated by
reference to Exhibit 3(ii) to the Company's Form 10-Q/A for the quarterly
period ended June 30, 2002)
3.4 Form of Articles Supplementary for Series A Preferred Stock (Incorporated
by reference to Exhibit 4.1 of the Company's Form 10-Q for the quarterly
period ended March 31, 1997)
3.5 Articles Supplementary for Series B Preferred Stock (Incorporated by
reference to Exhibit 4 to the Company's Form 8-K dated April 27, 1998)
3.6 Articles of Amendment amending and restating the terms of the Company's
Series C Convertible Preferred Stock (Incorporated by reference to Exhibit
4.1 to the Company's Form 8-K dated March 4, 2002)
4.0 See Exhibits 3.1 to 3.6
4.1 Form of Indenture (Incorporated by reference to Exhibit 4.2 to the
Company's Form S-3 dated February 3, 1997)
4.2 Rights Agreement, dated as of May 12, 1999, between Omega Healthcare
Investors, Inc. and First Chicago Trust Company, as Rights Agent, including
Exhibit A thereto (Form of Articles Supplementary relating to the Series A
Junior Participating Preferred Stock) and Exhibit B thereto (Form of Rights
Certificate) (Incorporated by reference to Exhibit 4 to the Company's Form
8-K dated April 20, 1999)
4.3 Amendment No. 1, dated May 11, 2000 to Rights Agreement, dated as of May
12, 1999, between Omega Healthcare Investors, Inc. and First Chicago Trust
Company, as Rights Agent (Incorporated by reference to Exhibit 4.1 to the
Company's Form 10-Q for the quarterly period ended March 31, 2000)
4.4 Amendment No. 2 to Rights Agreement between Omega Healthcare Investors,
Inc. and First Chicago Trust Company, as Rights Agent (Incorporated by
reference to Exhibit F to the Schedule 13D filed by Explorer Holdings, L.P.
on October 30, 2001 with respect to the Company)
10.1 Amended and Restated Investment Agreement, by and among Omega Healthcare
Investors, Inc. and Explorer Holdings, L.P., dated as of May 11, 2000
(Incorporated by reference to Exhibit A of the Company's Proxy Statement
dated June 16, 2000)
10.2 Indemnification Agreement between Omega Healthcare Investors, Inc. and
Explorer Holdings, L.P., dated as of July 14, 2000 (Incorporated by
reference to Exhibit 10.12 to the Company's Form 10-Q for the quarterly
period ended June 30, 2000)
10.3 Letter Agreement between Omega Healthcare Investors, Inc. and The Hampstead
Group, L.L.C. dated as of June 1, 2001 (Incorporated by reference to
Exhibit 10.1 to the Company's Form 10-Q for the quarterly period ended June
30, 2001)
10.4 Amended and Restated Advisory Agreement between Omega Healthcare Investors,
Inc. and The Hampstead Group, L.L.C., dated October 4, 2000 (Incorporated
by reference to Exhibit 10.1 to the Company's Form 10-Q for the quarterly
period ended September 30, 2000)
10.5 Letter Agreement between Omega Healthcare Investors, Inc. and Explorer
Holdings, L.P. regarding deferral of dividends and waiver of certain
provisions of Articles Supplementary pertaining to Series C Preferred Stock
(Incorporated by reference to Exhibit 10.5 to the Company's Form 10-Q/A for
the quarterly period ended September 30, 2000)
10.6 Investment Agreement, dated as of October 30, 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 30, 2001 with respect to the Company)
10.7 Letter Agreement between Omega Healthcare Investors, Inc. and Explorer
Holdings, L.P. dated January 15, 2002 amending the Investment Agreement
dated October 30, 2001 by and between Omega Healthcare Investors, Inc. and
Explorer Holdings, L.P. (Incorporated by reference to Exhibit 10.44 to the
Company's Amendment No. 3 to Form S-11 dated January 18, 2002)
10.8 Amended and Restated Stockholders Agreement between Explorer Holdings, L.P.
and Omega Healthcare Investors, Inc., dated as of February 21, 2002
(Incorporated by reference to Exhibit 10.1 to the Company's Form 8-K dated
March 4, 2002)
10.9 Second Amended and Restated Stockholders Agreement between Explorer
Holdings, L.P. and Omega Healthcare Investors, Inc., dated as of April 30,
2002 (Incorporated by reference to Exhibit 10.1 to the Company's Form 10-Q
for the quarterly period ended March 31, 2002)
10.10 Amended and Restated Registration Rights Agreement between Explorer
Holdings, L.P. and Omega Healthcare Investors, Inc., dated as of February
21, 2002 (Incorporated by reference to Exhibit 10.2 to the Company's Form
8-K dated March 4, 2002)
10.11 Advisory Letter from the Hampstead Group, L.L.C. to Omega Healthcare
Investors, Inc., dated February 21, 2002 (Incorporated by reference to
Exhibit 10.3 to the Company's Form 8-K dated March 4, 2002)
10.12 Loan Agreement by and among Omega Healthcare Investors, Inc. and certain
of its subsidiaries, the banks signatory hereto and Fleet Bank, N.A., as
agent for such banks, dated June 15, 2000 (Incorporated by reference to
Exhibit 10.2 to the Company's Form 10-Q for the quarterly period ended June
30, 2000)
10.13 Amendment No. 1 to Loan Agreement by and among Omega Healthcare Investors,
Inc. and certain of its subsidiaries, the banks signatory hereto and Fleet
Bank, N.A., as agent for such banks (Incorporated by reference to Exhibit
10.11 of the Company's Form 10-K for the year ended December 31, 2000)
10.14 Amendment No. 2 to Loan Agreement by and among Omega Healthcare Investors,
Inc. and certain of its subsidiaries, the banks signatory hereto and Fleet
Bank, N.A., as agent for such banks (Incorporated by reference to Exhibit
10.12 of the Company's Form 10-K for the year ended December 31, 2000)
10.15 Amendment No.3 to Loan Agreement by and among Omega Healthcare Investors,
Inc. and certain of its subsidiaries, the banks signatory hereto and Fleet
Bank, N.A., as agent for such banks (Incorporated by reference to Exhibit
10.13 of the Company's Form 10-K for the year ended December 31, 2000)
10.16 Amendment No.4 to Loan Agreement by and among Omega Healthcare Investors,
Inc. and certain of its subsidiaries, the banks signatory hereto and Fleet
Bank, N.A., as agent for such banks (Incorporated by reference to Exhibit
10.42 of the Company's Amendment No. 2 to Form S-11 dated January 11, 2002)
10.17 Loan Agreement by and among Omega Healthcare Investors, Inc., Sterling
Acquisition Corp. and Delta Investors I, LLC, The Provident Bank, Agent and
Various Lenders Described Herein, dated August 16, 2000 (Incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the quarterly
period ended September 30, 2000)
10.18 Amendment No.1 to Loan Agreement by and among Omega Healthcare Investors,
Inc., Sterling Acquisition Corp. and Delta Investors I, LLC, The Provident
Bank, Agent and Various Lenders Described Herein (Incorporated by reference
to Exhibit 10.22 to the Company's Form 10-K for the year ended December 31,
2000)
10.19 Amendment No.2 to Loan Agreement by and among Omega Healthcare Investors,
Inc., Sterling Acquisition Corp. and Delta Investors I, LLC, The Provident
Bank, Agent and Various Lenders Described Herein (Incorporated by reference
to Exhibit 10.23 to the Company's Form 10-K for the year ended December 31,
2000)
10.20 Amendment No.3 to Loan Agreement by and among Omega Healthcare Investors,
Inc., Sterling Acquisition Corp. and Delta Investors I, LLC, The Provident
Bank, Agent and Various Lenders Described Herein (Incorporated by reference
to Exhibit 10.43 to the Company's Amendment No. 2 to Form S-11 dated
January 11, 2002)
10.21 Amendment No.4 to Loan Agreement by and among Omega Healthcare Investors,
Inc., Sterling Acquisition Corp. and Delta Investors I, LLC, The Provident
Bank, Agent and Various Lenders Described Herein, dated April 1, 2002*
10.22 Settlement and Restructuring Agreement by and among Omega Healthcare
Investors, Inc. and Sterling Acquisition Corp, and Advocat, Inc.,
Diversicare Leasing Corp., Sterling Health Care Management Inc.,
Diversicare Management Services Co. and Advocat Finance, Inc. dated October
1, 2000 (Incorporated by reference to Exhibit 10.3 to the Company's Form
10-Q for the quarterly period ended September 30, 2000)
10.23 Consolidated Amended and Restated Master Lease by and among Sterling
Acquisition Corp. and Diversicare Leasing Corporation, effective October 1,
2000 and dated November 8, 2000 (Incorporated by reference to Exhibit 10.4
to the Company's Form 10-Q for the quarterly period ended September 30,
2000)
10.24 Amended and Restated Secured Promissory Note between Omega Healthcare
Investors, Inc. and Professional Health Care Management, Inc. dated as of
September 1, 2001 (Incorporated by reference to Exhibit 10.6 to the
Company's 10-Q for the quarterly period ended September 30, 2001)
10.25 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
(Incorporated by reference to Exhibit 10.7 to the Company's 10-Q for the
quarterly period ended September 30, 2001)
10.26 Form of Directors and Officers Indemnification Agreement (Incorporated by
reference to Exhibit 10.11 to the Company's Form 10-Q for the quarterly
period ended June 30, 2000)
10.27 1993 Deferred Compensation Plan, effective March 2, 1993 (Incorporated by
reference to Exhibit 10.16 to the Company's Form 10-K for the year ended
December 31, 1992)**
10.28 2000 Stock Incentive Plan (Incorporated by reference to Exhibit 10.5 to
the Company's Form 10-Q for the quarterly period ended June 30, 2000)**
10.29 Amendment to 2000 Stock Incentive Plan (Incorporated by reference to
Exhibit 10.6 to the Company's Form 10-Q for the quarterly period ended June
30, 2000)**
10.30 Employment Agreement between Omega Healthcare Investors, Inc. and C.
Taylor Pickett, dated June 12, 2001 (Incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q for the quarterly period ended June 30,
2001)**
10.31 Employment Agreement between Omega Healthcare Investors, Inc. and R. Lee
Crabill, Jr., dated July 30, 2001 (Incorporated by reference to Exhibit
10.1 to the Company's Form 10-Q for the quarterly period ended September
30, 2001)**
10.32 Employment Agreement between Omega Healthcare Investors, Inc. and Robert
O. Stephenson, dated August 30, 2001 (Incorporated by reference to Exhibit
10.2 to the Company's Form 10-Q for the quarterly period ended September
30, 2001)**
10.33 Employment Agreement between Omega Healthcare Investors, Inc. and Daniel
J. Booth, dated October 15, 2001 (Incorporated by reference to Exhibit 10.3
to the Company's Form 10-Q for the quarterly period ended September 30,
2001)**
21 Subsidiaries of the Registrant*
23 Consent of Ernst & Young LLP*
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*
- ---------
* Exhibits which are filed herewith.
** Management contract or compensatory plan, contract or arrangement.