UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-11316
OMEGA HEALTHCARE
INVESTORS, INC.
(Exact name of Registrant as specified in its charter)
Maryland 38-3041398
(State of Incorporation) (I.R.S. Employer Identification No.)
900 Victors Way, Suite 350, Ann Arbor, MI 48108
(Address of principal executive offices)
(734) 887-0200
(Telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of September 30, 2000
Common Stock, $.10 par value 20,025,201
(Class) (Number of shares)
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
FORM 10-Q
September 30, 2000
INDEX
PART I Financial Information Page No.
------ --------------------- --------
Item 1. Condensed Consolidated Financial Statements:
Balance Sheets
September 30, 2000 (unaudited)
and December 31, 1999 ....................................... 2
Statements of Operations (unaudited)
Three-month and Nine-month periods ended
September 30, 2000 and 1999 ................................. 3
Statements of Cash Flows (unaudited)
Nine-month periods ended
September 30, 2000 and 1999 ................................. 4
Notes to Condensed Consolidated Financial Statements
September 30, 2000 (unaudited) .............................. 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ............... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk ...... 24
PART II Other Information
------- -----------------
Item 2. Changes in Securities and Use of Proceeds ....................... 26
Item 4. Submission of Matters to a Vote of Security Holders ............. 26
Item 6. Exhibits and Reports on Form 8-K ................................ 27
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
(Unaudited) (See Note)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Real estate properties
Land and buildings at cost ......................................... $712,357 $754,285
Less accumulated depreciation ...................................... (84,462) (67,929)
------- -------
Real estate properties - net ............................... 627,895 686,356
Mortgage notes receivable - net .................................... 207,113 213,617
------- -------
835,008 899,973
Other investments ....................................................... 56,537 69,193
------ ------
891,545 969,166
Assets held for sale - net .............................................. 7,344 36,406
----- ------
Total Investments .................................................. 898,889 1,005,572
Cash and short-term investments ......................................... 4,276 4,091
Operating assets for owned properties ................................... 39,746 9,648
Accounts receivable ..................................................... 10,676 9,665
Other assets ............................................................ 11,102 9,755
------ -----
Total Assets ....................................................... $964,689 $1,038,731
======= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Revolving lines of credit ............................................... $191,641 $166,600
Unsecured borrowings .................................................... 229,480 310,996
Other secured borrowings ................................................ 20,157 28,768
Subordinated convertible debentures ..................................... 17,085 48,405
Accrued expenses and other liabilities .................................. 11,520 14,819
Operating liabilities for owned properties .............................. 17,771 12,062
------ ------
Total Liabilities .................................................. 487,654 581,650
Preferred Stock ......................................................... 207,500 107,500
Common stock and additional paid-in capital ............................. 439,120 449,292
Cumulative net earnings ................................................. 185,119 232,105
Cumulative dividends paid ............................................... (353,594) (331,341)
Stock option loans ...................................................... - (2,499)
Unamortized restricted stock awards ..................................... (716) (526)
Accumulated other comprehensive income (loss) ........................... (394) 2,550
----- -----
Total Shareholders' Equity ......................................... 477,035 457,081
------- -------
Total Liabilities and Shareholders' Equity ......................... $964,689 $1,038,731
======= =========
</TABLE>
Note - The balance sheet at December 31, 1999, has been derived from
audited consolidated financial statements at that date but does not
include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
See notes to condensed consolidated financial statements.
2
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues
Rental income ................................................................... $15,503 $19,723 $49,652 $56,431
Mortgage interest income ........................................................ 5,888 8,671 17,800 29,076
Other investment income - net ................................................... 534 1,937 4,277 5,650
Nursing home revenues of owned and operated assets .............................. 45,960 10,376 123,461 10,376
Miscellaneous ................................................................... 126 264 483 530
----- ----- ----- -----
68,011 40,971 195,673 102,063
Expenses
Depreciation and amortization ................................................... 5,657 6,488 17,385 17,948
Interest ........................................................................ 9,846 11,134 32,221 31,948
General and administrative ...................................................... 1,830 1,236 4,631 3,890
Legal ........................................................................... 481 123 974 166
State taxes ..................................................................... 15 109 241 395
Severance and consulting agreement costs ........................................ 4,665 - 4,665 -
Provision for uncollectible mortgages and notes receivable ...................... 12,100 - 12,100 -
Nursing home expenses of owned and operated assets .............................. 48,552 9,526 126,436 9,526
------ ----- ------- -----
83,146 28,616 198,653 63,873
------ ------ ------- ------
(Loss) earnings before gain (loss) on assets sold and impairment charges .......... (15,135) 12,355 (2,980) 38,190
Provision for impairment (See Note C) ............................................. (49,849) - (54,349) -
(Loss)/gain on assets sold - net ................................................. (109) - 10,342 -
---- ----- ------ -----
Net (loss) earnings ............................................................... (65,093) 12,355 (46,987) 38,190
Preferred stock dividends ......................................................... (5,705) (2,408) (10,520) (7,224)
------ ------ ------- ------
Net (loss) earnings available to common ...........................................($70,798) $ 9,947 ($57,507) $30,966
======== ======= ======== =======
(Loss) earnings per common share:
Basic before gain/(loss) on assets sold and impairment charges .................. ($1.04) $0.50 ($0.67) $1.56
====== ===== ====== =====
Diluted before gain/(loss) on assets sold and impairment charges ................ ($1.04) $0.50 ($0.67) $1.56
====== ===== ====== =====
Net (loss) earnings per share - basic ........................................... ($3.53) $0.50 ($2.87) $1.56
====== ===== ====== =====
Net (loss) earnings per share - diluted ......................................... ($3.53) $0.50 ($2.87) $1.56
====== ===== ====== =====
Dividends declared and paid per common share ...................................... $0.25 $0.70 $0.75 $2.10
===== ===== ===== =====
Weighted Average Shares Outstanding, Basic ........................................ 20,064 19,872 20,058 19,872
====== ====== ====== ======
Weighted Average Shares Outstanding, Diluted ...................................... 20,064 19,873 20,058 19,873
====== ====== ====== ======
Other comprehensive income (loss):
Unrealized Gain (Loss) on Omega Worldwide, Inc .................................. ($1,745) $ 36 ($2,944) $ 1,136
======= ======= ======= =======
Total comprehensive (loss) income .................................................($66,838) $12,391 ($49,931) $39,326
======== ======= ======== =======
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
OMEGA HEALTHCARE INVESTORS, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
2000 1999
---- ----
<S> <C> <C> <C> <C> <C> <C>
Operating activities
Net (loss) earnings ................................................ $(46,987) $ 38,190
Adjustment to reconcile net (loss) earnings to cash
provided by operating activities:
Depreciation and amortization .................................. 17,385 17,948
Provision for impairment loss .................................. 54,349 -
Provision for loss on notes and mortgages receivable ........... 12,100 -
Gain on assets sold and held for sale .......................... (10,342) -
Other .......................................................... 2,078 2,599
Net change in operating assets and liabilities ...................... (27,772) (4,134)
------- ------
Net cash provided by operating activities ........................... 811 54,603
Cash flows from financing activities
Proceeds of acquisition lines of credit ............................. 25,041 72,100
Payments of long-term borrowings .................................... (121,447) (1,226)
Receipts from Dividend Reinvestment Plan ............................ 430 1,878
Dividends paid ...................................................... (22,253) (49,017)
Proceeds from preferred stock offering .............................. 100,000 -
Costs of raising capital ............................................ (9,339) -
Purchase of Company common stock .................................... - (8,740)
Deferred financing costs paid ....................................... (4,976) -
Other ............................................................... - 431
------ -----
Net cash (used in) provided by financing activities ................. (32,544) 15,426
Cash flow from investing activities
Acquisition of real estate (1) ...................................... - (73,378)
Placement of mortgage loans ........................................ - (22,944)
Proceeds from sale of real estate investments - net ................. 35,793 7,829
Fundings of other investments - net ................................. (5,507) (9,846)
Collection of mortgage principal (1) ................................ 1,632 26,616
-- ----- ------
Net cash provided by (used in) investing activities ................. 31,918 (71,723)
------ -------
Increase (decrease) in cash and short-term investments .............. $ 185 $(1,694)
====== ======
</TABLE>
(1) In addition to the amounts shown, during the third quarter of 1999 the
Company acquired real estate in lieu of foreclosure of a mortgage in the
amount of $67 million.
See notes to condensed consolidated financial statements.
4
<PAGE>
Omega Healthcare Investors, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2000
Note A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
for Omega Healthcare Investors, Inc. (the "Company") have been prepared in
accordance with generally accepted accounting principles in the United States
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals and impairment provisions to adjust the
carrying value of assets) considered necessary for a fair presentation have been
included. Certain reclassifications have been made to the 1999 financial
statements for consistency with the presentation adopted for 2000. Such
reclassifications have no effect on previously reported earnings or equity.
Operating results for the three-month and nine-month periods ended September 30,
2000, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2000. For further information, refer to the financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1999.
Note B - Concentration of Risk and Related Issues
As of September 30, 2000, 92.4% of the Company's real estate
investments ($919.5 million) consist of long-term care skilled nursing
facilities, 5.0% of assisted living facilities, and 2.6% of rehabilitation
hospitals. These healthcare facilities are located in 29 states and are operated
by 26 independent healthcare operating companies.
Seven public companies operate approximately 77.8% of the Company's
investments, including Sun Healthcare Group, Inc. (26.2%), Integrated Health
Services, Inc. (17.6%, including 10.4% as the manager for Lyric Health Care
LLC), Advocat, Inc. (11.6%), Vencor Operating, Inc. (7.1%), Genesis Health
Ventures, Inc. (5.4%), Mariner Post-Acute Network (6.4%) and Alterra Healthcare
Corporation (3.4%). Vencor and Genesis manage facilities for the Company's own
account, as explained more fully in Note C. The two largest private operators
represent 3.4% and 3.1%, respectively, of investments. No other operator
represents more than 1.9% of investments. The three states in which the Company
has its highest concentration of investments are Florida (15.5%), California
(7.3%) and Illinois (7.2%).
The risks associated with investing in long-term healthcare facilities
have increased during recent years, stemming in large part from government
legislation and regulation of operators of the facilities. The Company's
5
<PAGE>
tenants/mortgagors depend on reimbursement legislation which will provide them
adequate payments for services. A significant portion of their revenue is
derived from government programs funded under Medicare and Medicaid. The
Medicare program implemented a prospective payment system for skilled nursing
facilities, which replaced cost-based reimbursements with an acuity-based
system. The immediate effect was to significantly reduce payments for services
provided. Additionally, certain state Medicaid programs have implemented similar
acuity-based systems. The reduction in payments to nursing home operators
pursuant to the Medicare and Medicaid payment changes has negatively affected
the revenues of the Company's nursing home facilities and the ability of the
operators of these facilities to service the costs associated with capital
provided by the Company. As a result, a number of the Company's operators have
filed petitions seeking reorganization under chapter 11 of the U.S. Bankruptcy
Code. The Company owns 69 facilities that were recovered from customers and are
being operated for the Company's own account. These facilities are subject to
the same risks as are faced by the Company's tenants/mortgagors. (See Note C -
Portfolio Valuation Matters).
Most of the Company's nursing home investments were designed
exclusively to provide long-term healthcare services. These facilities are
subject to detailed and complex specifications affecting their physical
characteristics, as mandated by various governmental authorities. If the
facilities cannot be operated as long-term care facilities, finding alternative
uses may be difficult. The Company's triple-net leases and mortgages require its
tenants and mortgagors to comply with regulations affecting the physical
characteristics of its facilities, and the Company regularly monitors compliance
by tenants and mortgagors with healthcare facilities' regulations. Nevertheless,
if tenants fail to perform these obligations, and the Company recovers
facilities through repossession, the Company may be required to expend capital
to comply with such regulations and maintain the value of its investments.
Many of the public nursing home companies operating the Company's
facilities have recently reported significant operating and impairment losses.
Each of Vencor Operating, Inc., Sun Healthcare Group, Inc., Mariner Post-Acute
Network, Integrated Health Services, Inc., RainTree Healthcare Corporation and
Genesis Health Ventures, Inc. has filed for protection under the Bankruptcy
Code, with the last four filing during the first half of 2000. These operators
collectively represent 52.2% of the Company's investments as of September 30,
2000. As a result of its filing, Mariner has suspended interest payments to the
Company. Additionally, Advocat, Inc. has announced a restatement of certain of
its financial statements, and other operators are experiencing financial
difficulties. Advocat temporarily suspended the payment of rents during the
first quarter of 2000, but reinstated partial payments under a standstill
agreement executed in April 2000. In November 2000, the Company reached
agreement with Advocat with respect to the restructuring of Advocat's
obligations pursuant to leases and mortgages for thirty-one facilities operated
by Advocat and owned by or mortgaged to Omega. (See Note K - Subsequent Events).
The Company has initiated discussions with all operators who are
experiencing financial difficulties, as well as state officials who regulate its
properties. It also has initiated various other actions to protect its interests
under its leases and mortgages. Given the current challenges to its customers,
the Company is actively involved with workout negotiations and bankruptcy
proceedings to preserve and protect the value of its investments. While the
earning capacity of certain properties has been reduced and the reductions may
extend to future periods, management believes that it has recorded appropriate
accounting impairment provisions based on its assessment of current
circumstances. However, upon foreclosure or lease termination, there can be no
assurance that the Company's investments in facilities would not require further
write-downs.
6
<PAGE>
Note C - Portfolio Valuation Matters
In the ordinary course of its business activities, the Company
periodically evaluates investment opportunities and extends credit to customers.
It also regularly engages in lease and loan extensions and modifications.
Additionally, the Company actively monitors and manages its investment portfolio
with the objectives of improving credit quality and increasing returns. In
connection with portfolio management, the Company engages in various collection
and foreclosure activities, and it believes management has the skills, knowledge
and experience to deal with such issues as may arise from time to time.
When the Company acquires real estate pursuant to a foreclosure or
lease termination including in a bankruptcy proceeding and does not immediately
re-lease the properties to new operators, the assets are included on the balance
sheet as "real estate properties," and the value of such assets is reported at
the lower of cost or fair value. (See "Owned and Operated Assets" below)
Additionally, when a formal plan to sell real estate is adopted, the
real estate is classified as "Assets Held For Sale," with the net carrying
amount adjusted to the lower of cost or fair value, less cost of disposal.
Based on management's current review of the Company's entire portfolio,
provisions for impairment in the value of the assets of $49.8 million and $54.3
million were recorded for the three-month and nine-month periods ended September
30, 2000, respectively. The provision for the three-month period includes $41.1
million related to foreclosure assets now operated for the Company's account,
$6.8 million for assets held for sale and $1.9 million related to a leased asset
doubtful of recovery. Additionally, during the three-month period ended
September 30, 2000 the Company recorded a $12.1 million provision for
uncollectable mortgages ($4.9 million) and notes receivable ($7.2 million)
primarily related to advances to operators of properties foreclosed and/or sold.
Real Estate Dispositions
The Company recognized a net gain on disposition of assets during the
nine months ended September 30, 2000 of $10.3 million. The net gain was
comprised of a $10.9 million gain on the sale of four facilities previously
leased to Tenet Healthsystem Philadelphia, Inc., offset by a loss of $0.6
million on the sale of a 57 bed facility in Colorado.
Assets Held For Sale
During 1998, management initiated a plan to dispose of certain
properties judged to have limited long-term potential and to redeploy the
7
<PAGE>
proceeds. Following a review of the portfolio, assets identified for sale in
1998 had a cost of $95 million, a net carrying value of $83 million and
annualized revenues of approximately $11.4 million. In 1998, the Company
recorded a provision for impairment of $6.8 million to adjust the carrying value
of those assets judged to be impaired to their fair value, less cost of
disposal. During 1998, the Company completed sales of two groups of assets,
yielding sales proceeds of $42.0 million. Gains realized in 1998 from the
dispositions approximated $2.8 million. During 1999, the Company completed asset
sales yielding net proceeds of $18.2 million, realizing losses of $10.5 million.
In addition, management initiated a plan in the 1999 fourth quarter for
additional asset sales to be completed in 2000. The additional assets identified
as assets held for sale had a cost of $33.8 million, a net carrying value of
$28.6 million and annualized revenue of approximately $3.4 million. As a result
of this review, the Company recorded a provision for impairment in 1999 of $19.5
million to adjust the carrying value of assets held for sale to their fair
value, less cost of disposal.
During the first quarter of 2000, the Company recorded a $4.5 million
provision for impairment on assets held for sale. In the third quarter of 2000,
$24.3 million of assets held for sale were reclassified to owned and operated
assets as the timing and strategy for sale, or alternatively, re-leasing, are
being revised as a result of changing market conditions. For the three months
ended September 30, 2000 an additional provision for impairment on assets held
for sale of $6.8 million was recognized such that as of September 30, 2000, the
carrying value of assets held for sale totals $7.3 million (net of impairment
reserves of $7.8 million). During the nine-month period ended September 30,
2000, the Company realized disposition proceeds of $1.1 million. No assets were
disposed of during the three-month period ended September 30, 2000. The Company
intends to sell the remaining facilities as soon as practicable. However, a
number of other companies are actively marketing portfolios of similar assets
and, in light of the existing conditions in the long-term care industry
generally, it has become more difficult to sell such properties and for
potential buyers to obtain financing for such acquisitions. Thus, there can be
no assurance if or when such sales will be completed or whether such sales will
be completed on terms that allow the Company to realize the fair value of the
assets.
Owned and Operated Assets
The Company owns 69 facilities that were recovered from customers and
are operated for the Company's own account. These facilities have 5,346 beds or
assisted living units and are located in seven states. The investment in this
real estate as of September 30, 2000 consists of the following:
The Company acquired 12 nursing homes located in Massachusetts and
Connecticut on July 14, 1999 in lieu of foreclosure from Frontier Group. Eleven
of these nursing homes, with 1,182 licensed beds, are included in owned and
operated assets (the remaining nursing home is included in assets held for
sale). Genesis Health Ventures, Inc. currently manages them for the Company's
account.
The Company assumed operation of 18 facilities formerly leased to
RainTree Healthcare Corporation ("RainTree") on February 29, 2000, when RainTree
filed for bankruptcy, and, in connection with the bankruptcy proceeding, the
8
<PAGE>
Company bid $3.1 million for the leasehold interests in 12 other RainTree
facilities, all of which are now operated for the account of the Company under a
management agreement with Vencor Operating, Inc.
The Company assumed operation of 22 facilities with 880 beds formerly
leased to Extendacare of Indiana, Inc. on October 4, 1999. The Company also
assumed operation of six facilities with 428 beds formerly operated by RainTree
and Emerald Healthcare, Inc. in 1999. Atrium Living Centers, Inc. currently
manages these facilities for the Company's account.
The Company intends to operate these owned and operated assets for its
own account until such time as these facilities' operations are stabilized and
are re-leasable or saleable at lease rates or sale prices that maximize the
value of these assets to the Company. Due to the deterioration in market
conditions affecting the long term care industry, the Company is unable to
estimate when such re-leasing and sales objectives might be achieved and now
intends to operate such facilities for an extended period. As a result, these
facilities and their respective operations are presented on a consolidated basis
in the Company's financial statements.
The revenues, expenses, assets and liabilities included in the
Company's condensed consolidated financial statements which relate to such owned
and operated assets are as follows:
Unaudited
(In Thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues (1)
Medicaid .................... $ 29,176 $ 6,302 $ 75,535 $ 6,302
Medicare .................... 8,646 1,980 21,896 1,980
Private & Other ............. 8,138 2,094 26,030 2,094
----- ----- ------ -----
Total Revenues .............. 45,960 10,376 123,461 10,376
Expenses (2)
Administration .............. 13,171 1,335 30,613 1,335
Property and Related ........ 3,084 667 7,955 667
Patient Care Expenses ....... 28,782 7,061 78,885 7,061
------ ----- ------ -----
Total Expenses .............. 45,037 9,063 117,453 9,063
Contribution Margin ......... 923 1,313 6,008 1,313
Management Fees ............. 2,337 463 6,235 463
Rent ........................ 1,178 - 2,748 -
----- ----- ----- -----
EBITDA ...................... $ (2,592) $ 850 $ (2,975) $ 850
======= ===== ======== =====
(1) Nursing home revenues from these owned and operated assets are recognized as
services are provided.
(2) Includes $1.1 million for the three-month period ended September 30, 2000
which represents a correction of an estimate made in the first six months of
2000.
9
<PAGE>
Unaudited
(In Thousands)
September 30, December 31,
2000 1999
---- ----
ASSETS
Cash .................................. $ 3,788 $ (14)
Accounts Receivable-Net ............... 26,674 9,588
Other Current Assets .................. 13,071 60
------ --
Total Current Assets .................. 43,533 9,634
Land and buildings .................... 131,687 69,090
Less Accumulated Depreciation ......... (16,528) (815)
------- ----
Land and buildings - net .............. 115,159 68,275
------- ------
TOTAL ASSETS .......................... $ 158,692 $ 77,909
========= ========
LIABILITIES
Accounts Payable ...................... $ 9,383 $ 3,962
Other Current Liabilities ............. 8,388 8,100
----- -----
Total Current Liabilities ............. 17,771 12,062
------ ------
TOTAL LIABILITIES ..................... $ 17,771 $ 12,062
======== ========
Notes and Mortgages Receivable
During the three-month period ended September 30, 2000 the Company recorded a
charge of $12.1 million for a provision for loss on mortgages ($4.9 million) and
notes receivable ($7.2 million). Income on notes and mortgages which are
impaired will be recognized as cash is received.
Note D - Preferred Stock
Dividends
During the nine-month periods ended September 30, 2000 and September 30,
1999, the Company paid dividends of $4.0 million and $3.2 million, respectively,
on its 9.25% Series A Cumulative Preferred Stock and 8.625% Series B Cumulative
Preferred Stock. Dividends on the preferred stock are payable quarterly.
Dividends on the new Series C Preferred Stock are also payable quarterly,
beginning in the fourth quarter of 2000, however, effective as of November 15,
2000, Explorer Holdings, L.P., the holder of all of the outstanding shares of
Series C Preferred Stock, agreed to defer until April 2, 2001, the accrued
dividend of $4,666,667 payable on November 15, 2000 with respect to the Series C
Preferred Stock. See Item 2 - Changes in Securities and Use of Proceeds and Note
K - Subsequent Events.
10
<PAGE>
Series C Preferred Stock
In order to meet certain of the Company's maturing indebtedness,
finance operations and fund future investments, the Company issued $100.0
million of Series C Preferred Stock (the "Equity Investment") to a private
equity investor, with up to an additional $100.0 million investment available
for future liquidity needs or growth opportunities under certain conditions. See
"Equity Investment" below. The Company used a portion of the proceeds from the
Equity Investment to repay $81 million of maturing debt on July 17, 2000 and
believes that the remaining proceeds together with the proceeds of certain asset
dispositions and cash flow from operations will provide the Company sufficient
liquidity to meet its debt maturity in February 2001 and working capital needs
as well as enabling the Company to take advantage of potential growth
opportunities.
Equity Investment
-----------------
On May 11, 2000, the Company announced the execution of definitive
documentation with Explorer Holdings, L.P. ("Explorer"), a private equity
investor, pursuant to which the Company agreed to issue and sell up to $200.0
million of its capital stock to Explorer (the "Equity Investment"). On July 17,
2000, 1.0 million shares of a new series of convertible preferred stock ("Series
C Preferred") were issued for an aggregate purchase price of $100.0 million. The
descriptions of the transaction documents set forth herein do not purport to be
complete and are qualified in their entirety by the forms of such documents
filed as exhibits to the Company's Form 10-Q dated June 30, 2000.
Terms of Series C Preferred: The shares of Series C Preferred were
-----------------------------
issued and sold for $100.00 per share and 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 conversion price is subject to possible future adjustment in
accordance with customary antidilution provisions, including, in certain
circumstances, the issuance of Common Stock at an effective price less than the
then fair market value of the Common Stock. The Series C Preferred ranks on a
parity with the Company's outstanding shares of Series A and Series B preferred
stock as to priority with respect to dividends and upon liquidation. The shares
of Series C Preferred will receive dividends at the greater of 10% per annum or
the dividend payable on shares of Common Stock, with the Series C Preferred
participating on an "as converted" basis. Dividends on Series C Preferred accrue
from the date of issuance and, for dividend periods ending prior to February 1,
2001, may be paid at the option of the Company in cash or additional shares of
Series C Preferred. Thereafter, dividends must be paid in cash. The Series C
Preferred will vote (on an "as converted" basis) together with the Common Stock
on all matters submitted to stockholders. However, without the consent of the
Company's Board of Directors, no holder of Series C Preferred may vote or
convert shares of Series C Preferred if the effect thereof would be to cause
such holder to beneficially own more than 49.9% of the Company's Voting
Securities. If dividends on the Series C Preferred are in arrears for four
quarters, the holders of the Series C Preferred, voting separately as a class
(and together with the holder of Series A and Series B Preferred if and when
dividends on such series are in arrears for six or more quarters and special
class voting rights are in effect with respect to the Series A and Series B
Preferred), will be entitled to elect directors who, together with the other
directors designated by the holders of Series C Preferred, would constitute a
majority of the Company's Board of Directors.
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Investment Agreement: The general terms of the Equity Investment are
set forth in the Investment Agreement. In addition to setting forth the terms on
which Explorer has acquired the initial $100.0 million of Series C Preferred,
the Investment Agreement also contains provisions pursuant to which Explorer
will make available, upon satisfaction of certain conditions, up to $50.0
million to be used to pay indebtedness maturing on or before February 1, 2001
(the "Liquidity Commitment"). Any amounts drawn under the Liquidity Commitment
will be evidenced by the issuance of additional shares of Series C Preferred at
a conversion price equal to the lower of $6.25 or the then fair market value of
the Company's Common Stock.
Any amounts of the Liquidity Commitment not utilized by the Company are
available to the Company through July 1, 2001, upon satisfaction of certain
conditions, to fund growth (the "Growth Equity Commitment"). Draws under the
Growth Equity Commitment will be evidenced by Common Stock issued at the then
fair market value less a discount agreed to by Explorer and the Company
representing the customary discount applied in rights offerings to an issuer's
existing security holders, or, if not agreed, 6%. Draws under the Growth Equity
Commitment will reduce the amounts available under the Liquidity Commitment.
Following the drawing in full of the Growth Equity Commitment or upon expiration
of the initial Growth Equity Commitment, Explorer will have the option to
provide up to an additional $50.0 million to fund growth for an additional
twelve month period (the "Increased Growth Equity Commitment"). Draws under the
Increased Growth Equity Commitment will be subject to the same conditions as
applied to the Growth Equity Commitment and the Common Stock so issued will be
priced in the same manner described above.
If Explorer exercises its option to fund the Increased Growth Equity
Commitment, the Company will have the option to engage in a Rights Offering to
all common stockholders other than Explorer and its affiliates. In the Rights
Offering, stockholders will be entitled to acquire their proportionate share of
the Common Stock issued in connection with the Growth Equity Commitment at the
same price paid by Explorer. Proceeds received from the Rights Offering will be
used to repurchase Common Stock issued to Explorer under the Growth Equity
Commitment.
Upon the first to occur of the drawing in full of the Increased Growth
Equity Commitment or the expiration of the Increased Growth Equity Commitment,
the Company again will have the option to engage in a second Rights Offering.
Stockholders (other than Explorer and its affiliates) will be entitled to
acquire their proportionate share of the Common Stock issued in connection with
the Increased Growth Equity Commitment at the same price paid by Explorer.
Proceeds received in connection with the second Rights Offering will be used to
repurchase Common Stock issued to Explorer under the Increased Growth Equity
Commitment.
Stockholders Agreement: In connection with the Equity Investment, the
----------------------
Company entered into a Stockholders Agreement with Explorer pursuant to which
Explorer is entitled to designate up to four members of the Company's Board of
Directors depending on the percentage of either Series C Preferred or total
Voting Securities acquired from time to time by Explorer pursuant to the
Investment Agreement. The director designation rights will terminate upon the
first to occur of the tenth anniversary of the Stockholders Agreement or when
Explorer beneficially owns less than 5% of the total Voting Securities of the
Company.
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In addition, Explorer has agreed not to transfer any shares of Series C
Preferred (or the Common Stock issuable upon conversion of the Series C
Preferred) without approval of the Company's Board of Directors until the first
anniversary of Explorer's initial investment. Thereafter, Explorer may transfer
shares in accordance with certain exemptions from the registration requirements
imposed by the Securities Act of 1933, as amended, or upon exercise of certain
registration rights granted to Explorer by the Company and set forth in a
Registration Rights Agreement (a "Public Sale"). After July 1, 2001, Explorer
may transfer its voting securities to a Qualified Institutional Buyer ("QIB") if
either (i) the total amount of voting securities does not exceed 9.9% of the
Company's total voting securities or (ii) the QIB transferee becomes a party to
the standstill agreement contained in the Stockholders Agreement. Any transfer
of Voting Securities by Explorer or its affiliates to a third party (other than
in connection with a Public Sale) is subject to a right of first offer that can
be exercised by the Company or any other purchaser that the Company may
designate. These transfer restrictions will terminate on the fifth anniversary
of Explorer's initial investment.
Pursuant to the standstill provisions in the Stockholders Agreement,
Explorer has agreed that until the fifth anniversary of the consummation of
Explorer's initial investment, it will not acquire, without the prior approval
of the Company's Board of Directors, beneficial ownership of any Voting
Securities (other than pursuant to the Liquidity Commitment, the Growth Equity
Commitment and the Increased Growth Equity Commitment and additional
acquisitions of up to 5% of the Company's voting securities). If Explorer or its
affiliates beneficially own voting securities representing more than 49.9% of
the total voting power of the Company, the terms of the Series C Preferred and
the Stockholders Agreement provide that no holder of Series C Preferred shall be
entitled to vote any shares of Series C Preferred that would result in such
holder, together with its affiliates, voting in excess of 49.9% of the then
outstanding voting power of the Company. In addition, shares of Series C
Preferred cannot be converted to the extent that such conversion would cause the
converting stockholder to beneficially own in excess of 49.9% of the then
outstanding voting power of the Company.
The Company has amended its Stockholders' Right Plan to exempt Explorer
and any of its transferees that become parties to the standstill as Acquiring
Persons under such plan. Subsequent acquisitions of voting securities by a
transferee of more than 9.9% of voting securities from Explorer are limited to
not more than 2% of the total amount of outstanding voting securities in any 12
month period.
Miscellaneous: The Company has agreed to indemnify Explorer, its affiliates
-------------
and the individuals that will serve as directors of the Company against any
losses and expenses that may be incurred as a result of the assertion of certain
claims, provided that the conduct of the indemnified parties meets certain
required standards. In addition, the Company has agreed to pay Explorer an
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advisory fee if Explorer provides assistance to the Company in connection with
evaluating growth opportunities or other financing matters. The amount of the
advisory fee will be mutually determined by the Company and Explorer at the time
the services are rendered based upon the nature and extent of the services
provided. The Company will also reimburse Explorer for Explorer's out-of-pocket
expenses, up to a maximum of $2.5 million, incurred in connection with the
Equity Investment. To date, the Company has reimbursed Explorer for
approximately $964,000 of such expenses.
Note E - Earnings Per Share
Basic earnings per share is computed based on the weighted average
number of common shares outstanding during the respective periods. Diluted
earnings per share reflect the dilutive effect, if any, of stock options and,
beginning in the third quarter of 2000, the assumed conversion of the Series C
Preferred Stock. The conversion of the Company's 1996 convertible debentures is
anti-dilutive and therefore not assumed.
Note F - Omega Worldwide, Inc.
As of September 30, 2000 the Company holds a $5,071,500 investment in
Omega Worldwide, Inc. ("Worldwide"), represented by 1,163,000 shares of common
stock and 260,000 shares of preferred stock. The Company has guaranteed
repayment of borrowings pursuant to a revolving credit facility in exchange for
a 1% annual fee and a facility fee of 25 basis points. The Company has been
advised that at September 30, 2000 borrowings of $4,850,000 are outstanding
under Worldwide's revolving credit facility. Worldwide's credit agreement has
been modified and calls for quarterly repayments of $2 million until the full
amount is repaid in June 2001. Under this agreement, no further borrowings may
be made by Worldwide under its revolving credit facility. The Company is
required to provide collateral in the amount of $8.8 million related to the
guarantee of Worldwide's obligations. Upon repayment by Worldwide of the
remaining outstanding balance under its revolving credit facility, the subject
collateral will be released in connection with the termination of the Company's
guarantee.
Additionally, the Company had a Services Agreement with Worldwide that
provided for the allocation of indirect costs incurred by the Company to
Worldwide. The allocation of indirect costs has been based on the relationship
of assets under the Company's management to the combined total of those assets
and assets under Worldwide's management. Indirect costs allocated to Worldwide
for the three-month and nine-month periods ending September 30, 2000 were
($19,000) and $370,000, respectively, compared with $186,000 and $580,000 for
the same periods in 1999. The Services Agreement has expired and currently is
being renegotiated. Based on a reduction in shared management resources, any
charges to Worldwide under a new agreement would be significantly reduced.
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Note G - Litigation
On June 20, 2000, the Company and its chief executive officer, chief
financial officer and chief operating officer were named as defendants in
certain litigation brought by Ronald M. Dickerman, in his individual capacity,
in the United States District Court for the Southern District of New York. In
the complaint, Mr. Dickerman contends that the Company and the named executive
officers violated Section 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder. Mr. Dickerman subsequently amended the
complaint to assert his claims on behalf of an unnamed class of plaintiffs. The
Company has reported the litigation to its directors and officers liability
insurer. The Company believes that the litigation is without merit and intends
to defend vigorously. On July 28, 2000, Benjamin LeBorys commenced a class
action lawsuit making similar allegations against the Company and certain of its
officers and directors in the United States District Court for the Southern
District of New York. The plaintiffs have filed a motion to name Mr. LeBorys as
lead plaintiff. The court has not yet ruled on the motion.
On June 21, 2000, the Company was named as a defendant in certain
litigation brought against it by Madison/OHI Liquidity Investors, LLC
("Madison"), a customer that claims that the Company has breached or
anticipatorily breached a commercial contract. Mr. Dickerman is a partner of
Madison and is a guarantor of Madison's obligations to the Company. The Company
contends that Madison is in default under the contract in question; accordingly,
the Company believes that the litigation is meritless. The Company intends to
defend this action vigorously and pursue whatever rights and remedies against
Madison and the guarantors as it determines to be appropriate.
No provision has been made in the financial statements for the matters
discussed above.
Note H - Borrowing Arrangements
On July 17, 2000 the Company replaced its $200 million unsecured
revolving credit facility with a new $175 million secured revolving credit
facility that expires in December 2002. Borrowings under the facility bear
interest at 2.5% to 3.25% over LIBOR, based on the Company's leverage ratio.
On August 16, 2000, the Company replaced its $50 million secured
revolving credit facility with The Provident Bank with a new $75 million secured
revolving credit facility that expires in March, 2002 as to $10 million and
June, 2005 as to $65 million. Borrowings under the facility bear interest at
2.5% to 3.25% over LIBOR, based on the Company's leverage ratio.
A portion of the proceeds from the issuance of Series C was used to repay
$81 million of the Company's 10% and 7.4% Senior Notes in accordance with terms
of the Notes.
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During August 2000, the Company purchased and retired $31.3 million of
its 8.5% Subordinated Convertible Debentures due February 1, 2000. At September
30, 2000, $17.1 million of these convertible debentures remain outstanding.
The Company has an interest rate cap for $100 million of its variable
rate debt, capping LIBOR at 7.50% through March 15, 2001. The 30-day LIBOR rate
on September 29, 2000 was approximately 6.62%.
Note I - Severance and Consulting Agreements
The Company recognized a $4.7 million charge for severance and
consulting payments in the third quarter of 2000. The charges are comprised
mainly of severance and consulting payments to the Company's former Chief
Executive Officer and former Chief Financial Officer.
Note J - Effect of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, which is required to be adopted in years beginning after June 15, 2000.
Because of the Company's minimal use of derivatives, management does not
anticipate that the adoption of the new Statement will have a significant effect
on earnings or the financial position of the Company.
Note K - Subsequent Events
On October 17, 2000, the Board of Directors declared its regular quarterly
dividends of $.578 per share, $.539 per share and $.25 per conversion share,
respectively, to be paid on November 15, 2000 to Series A, Series B and Series C
Cumulative Preferred shareholders of record on October 31, 2000. The Board of
Directors also declared a common stock dividend of $.25 per share payable on
November 15, 2000 to common shareholders of record on October 31, 2000.
Effective as of November 15, 2000, Explorer Holdings agreed to defer until April
2, 2001, payment of the $4,666,667 dividend then due with respect to the October
31, 2000 dividend period for the Series C Preferred Stock. As part of the
dividend deferral agreement, Explorer Holdings has also waived the provisions of
the Articles Supplementary to provide that the deferral of such dividend will
not prevent the Company from paying in full the regular quarterly dividend on
the outstanding Series A and Series B Preferred Stock or the Common Stock for
the dividend period ended October 31, 2000 or for subsequent dividend periods.
In consideration of the deferral and waiver as discussed above, the Company will
pay Explorer Holdings a waiver fee equal to 10% per annum on the amount of the
accrued and unpaid dividend from November 15, 2000 until the date of payment of
such dividend. On April 2, 2001, the Company will have the option to either pay
the deferred dividend amount - in cash or in additional shares of Series C
Preferred Stock in accordance with the terms of the Articles Supplementary.
In November 2000 the Company reached agreement with Advocat, Inc. with
respect to the restructuring of Advocat's obligations pursuant to leases and
mortgages for thirty-one facilities operated by Advocat and owned by or
mortgaged to the Company. Pursuant to the restructuring agreement, the existing
leases from the Company will be consolidated, amended and restated, effective as
of October 1, 2000. The initial annual rent under the 10-year lease will be
$10,875,000. In addition, Advocat paid the Company $3 million to bring current
substantially all of its obligations with respect to the master lease and
mortgage loan documents and will commit to make capital improvements at the
leased facilities in an amount not less than $1 million over the next 18 months.
Advocat also has issued to the Company convertible preferred stock
representing, on a fully diluted basis, 9.9% of the outstanding shares of
Advocat, and an unsecured subordinated note in the amount of $1.7 million that
matures September 30, 2007. The preferred stock is convertible at $4.6705 per
share. Dividends accrue at the rate of 7% per annum and will be payable
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quarterly. No dividends will be paid, however, until the later of October 1,
2002 or the end of the fiscal quarter following Advocat's payment of certain
indebtedness to its primary lender.
[INSERT LANGUAGE REGARDING SERIES C DIVIDENDS]
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations.
"Safe Harbor" Statement Under the United States Private Securities
Litigation Reform Act of 1995. Statements contained in this document that are
not based on historical fact are "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements include statements regarding the Company's future development
activities, the future condition and expansion of the Company's markets, the
sale of certain assets that have been identified for disposition, the operation
of certain assets recovered by the Company in foreclosure and bankruptcy
proceedings for the Company's account, dividend policy, the Company's ability to
meet its liquidity requirements and the Company's growth strategies, as well as
other statements which may be identified by the use of forward-looking
terminology such as "may," "will," "expect," "estimate," "anticipate," or
similar terms, variations of those terms or the negative of those terms. These
forward-looking statements involve risks and uncertainties that could cause
actual results to differ from projected results. Some of the factors that could
cause actual results to differ materially include: the financial strength of the
Company's facilities as it affects the operators' continuing ability to meet
their obligations to the Company under the terms of the Company's agreements
with such operators; the Company's ability to complete the contemplated asset
sales and, if completed, the ability to do so on terms contemplated as favorable
to the Company; changes in the reimbursement levels under the Medicare and
Medicaid programs; operators' continued eligibility to participate in the
Medicare and Medicaid programs; changes in reimbursement by other third party
payors; occupancy levels at the Company's facilities; the limited availability
and cost of capital to fund or carry healthcare investments; the strength and
financial resources of the Company's competitors; the Company's ability to make
additional real estate investments at attractive yields; changes in tax laws and
regulations affecting real estate investment trusts; and the risks identified in
Item 1, Note C above.
Following is a discussion of the consolidated results of operations,
financial position and liquidity and capital resources of the Company, which
should be read in conjunction with the condensed consolidated financial
statements and accompanying notes. See also, Item 1, Note B, regarding
Concentration of Risk and Related Issues and Note C, regarding portfolio
valuation matters above.
Results of Operations
Revenues for the three-month and nine-month periods ending September
30, 2000 totaled $68.0 million and $195.7 million, an increase of $27.0 million
and $93.6 million, respectively, over the periods ended September 30, 1999. The
increase in 2000 revenue is due in large part to an increase of approximately
$35.6 million and $113.1 million, respectively, from nursing home revenues for
owned and operated assets as a result of foreclosures occurring subsequent to
the third quarter of 1999, and $2.4 million in additional revenue from 1999
investments for the nine-month period and $0.4 million and $1.4 million for the
three-month and nine-month periods, respectively, relating to contractual
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increases in rents and mortgage interest that became effective in 2000 as
defined under the related agreements. These increases are offset by $2.4 million
and $8.8 million from reductions in lease revenue and mortgage interest revenue
due to foreclosure and bankruptcy, $3.0 million and $7.4 million from reduced
investments caused by 1999 and 2000 asset sales and the prepayment of mortgages,
and a $1.5 million and $4.5 million reduction in revenues relating to the
anticipated resolution of restructuring certain of the Company's leases and
mortgages. As of September 30, 2000, gross real estate investments, excluding
owned and operated assets, of $787.5 million have an average annualized yield of
approximately 11.6%. Other investment income includes losses of $1.9 million for
the three-month and nine-month periods ended September 30, 2000 due to
suspension of operations and closing of two facilities during the period.
Expenses for the three-month and nine-month periods ended September 30,
2000 totaled $83.1 million and $198.7 million, an increase of $54.5 million and
$134.8 million, respectively, over expenses for 1999. The increase in 2000
expenses is due primarily to an increase in expenses of $39.0 million and $116.9
million for the three-month and nine-month periods ending September 30, 2000,
attributable to the increase in the number of nursing homes operated for the
Company's account.
The provision for depreciation and amortization for the three-month and
nine-month periods ended September 30, 2000 totaled $5.7 million and $17.4
million, respectively, decreasing $0.8 million and $0.6 million, respectively,
over the same periods in 1999. The decrease for the nine-month period primarily
consists of $1.7 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 $1.8 million additional depreciation expense from properties
previously classified as mortgages and new 1999 investments placed in service in
June of 1999.
Interest expense for the three-month and nine-month periods ended
September 30, 2000 was $9.8 million and $32.2 million, respectively, compared
with $11.1 million and $31.9 million, respectively, for the same periods in
1999. The decrease of $1.3 million in the three-month period ended September
2000 is primarily due to lower average borrowings during the quarter compared to
the same period in the prior year. The increase of $0.3 million in the
nine-month period ended September 30, 2000 is primarily due to higher average
borrowing rates on the Company's revolving credit lines as compared to the same
period in the prior year, partially offset by lower average borrowings.
General and administrative expenses for the three-month and nine-month
periods ended September 30, 2000 totaled $1.8 million and $4.6 million,
respectively, versus $1.2 million and $3.9 million for the same periods in 1999.
These expenses for the three-month and nine-month periods were approximately
2.5% and 2.3% of revenues, respectively, as compared to 3.0% and 3.8%,
respectively, for the 1999 periods. The decrease in 2000 is due to inclusion of
nursing home revenues on owned and operated assets. Excluding these revenues,
general and administrative expenses were 8.1% and 6.4% of revenues for the
three-month and nine-month periods in 2000, respectively and 4.0% and 4.2% for
the same periods in 1999. The increase is due in part to the creation of a new
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department in 2000 to manage the owned and operated assets, non-cash
compensation expense relating to the issuance of Dividend Equivalent Rights in
conjunction with certain management options granted, and increased consulting
costs.
Legal expenses for the three-month and nine-month periods ended
September 30, 2000 totaled $0.5 million and $1.0 million, respectively, as
compared to $0.1 million and $0.2 million for the same periods in 1999. The
increase is largely attributable to the bankruptcy filings and financial
difficulties of the Company's operators, as well as costs related to recent
litigation in which the Company was named as defendant. (See Note G -
Litigation).
Nursing home expenses for owned and operated increased $39.0 million
and $116.9 million for the three-month and nine-month periods ended September
30, 2000, respectively, as compared to the same periods in the prior year as a
result of foreclosures occurring subsequent to the third quarter of 1999. These
expenses include $1.1 million for the three-month period ended September 30,
2000 which represent a correction of an estimate made during the first six
months of 2000.
The Company recognized a net gain on disposition of assets during the
nine-months ended September 30, 2000 of $10.3 million. The net gain was composed
of an $10.9 million gain on sale of four facilities previously leased to Tenet
Healthsystem Philadelphia, Inc., offset by a loss of $0.6 million on the sale of
a 57 bed facility in Colorado.
During the first quarter of 2000, the Company recorded a $4.5 million
provision for impairment on assets held for sale. Based on management's current
review of the Company's entire portfolio, an additional provision for impairment
in the value of the assets of $49.8 million was recorded for the three-month
period ended September 30, 2000. The provision for the three-month period
includes $41.1 million related to foreclosure assets now operated for the
Company's account, $6.8 million for assets held for sale and $1.9 million
related to a leased asset doubtful of recovery. Additionally, during the
three-month period ended September 30, 2000 the Company recorded a $12.1 million
provision for uncollectable mortgages ($4.9 million) and notes receivable ($7.2
million) primarily related to advances to operators of properties subsequently
foreclosed and/or sold.
The Company recognized a $4.7 million charge for severance payments in
the third quarter of 2000. The charges are comprised mainly of severance and
consulting payments to the Company's former Chief Executive Officer and former
Chief Financial Officer.
Net (losses) earnings available to common were a loss of $70.8 million
and a loss of $57.5 million for the three-month and nine-month periods ended
September 30, 2000, respectively, decreasing approximately $80.7 million and
$88.5 million from the 1999 periods. This decrease is largely the result of the
factors described above.
Funds from (used in) Operations ("FFO") totaled ($15,182,000) and
$3,885,000 for the three-month and nine-month periods ending September 30, 2000,
representing a decrease of approximately $31,198,000 and $63,597,000
respectively, over the same periods in 1999 due to factors mentioned above. FFO
is net earnings available to common shareholders, excluding any gains or losses
from debt restructuring and the effects of asset dispositions, plus depreciation
and amortization associated with real estate investments. Excluding the
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provision for uncollectable mortgages and notes receivable and severance and
consulting agreement costs, FFO totaled $1,583,000 and $20,650,000 for the
three-month and nine-month periods ended September 30, 2000, respectively,
representing a decrease of approximately $14,433,000 and $46,832,000
respectively over the same periods in 1999. Properties recovered by the Company
required funding of $0.4 million and $27.9 million for working capital during
the three-month and nine-month periods ending September 30, 2000, respectively.
No provision for Federal income taxes has been made since the Company
intends to continue to qualify as a real estate investment trust under the
provisions of Sections 856 through 860 of the Internal Revenue Code of 1986, as
amended. Accordingly, the Company will not be subject to Federal income taxes on
amounts distributed to shareholders, provided it distributes at least 95% of its
real estate investment trust taxable income and meets certain other conditions.
Profits from operations of recovered properties are subject to federal tax of up
to 35%, and the Company intends to hold and operate recovered properties only
for so long as is necessary in management's opinion to stabilize the subject
properties to facilitate the re-leasing or sale at lease rates or sale prices
that maximize the value of these assets to the Company.
Liquidity and Capital Resources
Overview
--------
At September 30, 2000, the Company had total assets of $965 million,
shareholders' equity of $477 million, and long-term debt of $267 million,
representing approximately 28% of total capitalization. Long-term debt excludes
funds borrowed under its acquisition credit agreements. The Company had $192.0
million drawn on its revolving credit facilities at September 30, 2000.
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During the quarter ended September 30, 2000, the Company repurchased
$31.3 million of its convertible debentures maturing in February 2001. At
September 30, 2000, $17.1 million of these convertible debentures remain
outstanding.
Dividend Policy
The Company distributes a large portion of its cash available from
operations. The Company has historically made distributions on common stock of
approximately 80% of FFO. Cash dividends paid totaled $0.75 per common share for
the nine-month period ending September 30, 2000, compared with $2.10 per common
share for the same period in 1999. The dividend payout ratio, i.e., the ratio of
per share amounts for dividends paid to the per share amounts of funds from
operations, was approximately 72.8% for the nine-month period ending September
30, 2000 (excluding non-cash charges) compared with 81.1% for the same period in
1999.
On October 17, 2000, the Board of Directors declared its regular quarterly
dividends of $.578 per share and $.539 per share, respectively, paid on November
15, 2000 to Series A and Series B Cumulative Preferred shareholders of record on
October 31, 2000 and declared a quarterly dividend of $.25 per conversion share
on the series C preferred stock. The Board of Directors also declared a common
stock dividend of $.25 per share payable on November 15, 2000 to common
shareholders of record on October 31, 2000.
The shares of Series C Preferred 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 participating on an "as converted" basis). Dividends on
Series C Preferred accrue from the date of issuance and, for any dividend period
ending prior to February 1, 2001, may be paid in cash or additional shares of
Series C Preferred, as determined by the Company. Thereafter, all dividends must
be paid in cash. (See Note D - Preferred Stock).
Effective as of November 15, 2000, Explorer Holdings agreed to defer until
April 2, 2001, payment of the $4,666,667 dividend then due with respect to the
October 31, 2000 dividend period for the Series C Preferred Stock. As part of
the dividend deferral agreement, Explorer Holdings has also waived the
provisions of the Articles Supplementary to provide that the deferral of such
dividend will not prevent the Company from paying in full the regular quarterly
dividend on the outstanding Series A and Series B Preferred Stock or the Common
Stock for the dividend period ended October 31, 2000 or for subsequent dividend
periods. In consideration of the deferral and waiver as discussed above, the
Company will pay Explorer Holdings a waiver fee equal to 10% per annum on the
amount of the accrued and unpaid dividend from November 15, 2000 until the date
of payment of such dividend. On April 2, 2001, the Company will have the option
to either pay the deferred dividend amount - in cash or in additional shares of
Series C Preferred Stock in accordance with the terms of the Articles
Supplementary.
Credit Facilities
Depending on the availability and cost of external capital and the
ability to deploy such capital at favorable spreads, the Company anticipates
making additional investments in healthcare facilities. New investments
generally are funded from temporary borrowings under the Company's acquisition
credit line agreements. Interest cost incurred by the Company on borrowings
under the revolving credit line facilities will vary depending upon fluctuations
in prime and/or LIBOR rates. On July 17, 2000, the Company replaced its $200.0
million unsecured revolving credit facility with a new $175.0 million secured
revolving credit facility that expires in December 2002. Borrowings under the
new facility will bear interest at 3.25% over LIBOR until March 31, 2001 and at
2.5% to 3.25% over LIBOR thereafter, based on the Company's leverage ratio.
On August 16, 2000, the Company replaced its $50 million loan agreement
with The Provident Bank with a $75 million secured revolving credit facility.
Borrowings under the facility will bear interest at 2.5% to 3.25% over LIBOR,
based on the Company's leverage ratio.
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The Company has an interest rate cap for $100 million of its variable rate
debt, capping LIBOR at 7.50% through March 15, 2001. The 30-day LIBOR rate on
September 29, 2000 was approximately 6.62%.
The Company historically has replaced funds drawn on the revolving credit
facilities through fixed-rate long-term borrowings, the placement of convertible
debentures, or the issuance of additional shares of common and/or preferred
stock. Industry turmoil and continuing adverse economic conditions affecting the
long-term care industry have caused the terms on which the Company can obtain
additional borrowings to become unfavorable. The Company may be required to
dispose of properties at times when it may be unable to maximize its recovery on
such investments. In recent periods, the Company's ability to execute this asset
disposition strategy has been severely limited by conditions in the credit and
capital markets and the long-term care industry. The Company may also draw upon
Explorer's Liquidity Commitment to repay indebtedness maturing on or before
February 2, 2001 as described in Note D - Preferred Stock.
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Item 3 - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks, including the potential
loss arising from adverse changes in interest rates. The Company does not enter
into derivatives or other financial instruments for trading or speculative
purposes. The Company seeks to mitigate the effects of fluctuations in interest
rates by matching the term of new investments with new long-term fixed rate
borrowing to the extent possible.
The market value of the Company's long-term fixed rate borrowings and
mortgages are subject to interest rate risk. Generally, the market value of
fixed rate financial instruments will decrease as interest rates rise and
increase as interest rates fall. The estimated fair value of the Company's total
long-term borrowings at September 30, 2000 was $233 million. A 1% increase in
interest rates would result in a decrease in fair value of long-term borrowings
by approximately $5.8 million.
The Company is subject to risks associated with debt financing,
including the risk that existing indebtedness may not be refinanced or that the
terms of such refinancing may not be as favorable as the terms of current
indebtedness. If the Company were unable to refinance its indebtedness on
acceptable terms, it might be forced to dispose of properties on disadvantageous
terms, which might result in losses to the Company and adversely affect the cash
available for distribution to shareholders. If interest rates or other factors
at the time of the refinancing result in higher interest rates upon refinancing,
the Company's interest expense would increase, which might affect the Company's
ability to make distributions on its Common Stock.
The majority of the Company's borrowings were completed pursuant to
indentures that limit the amount of total indebtedness and the amount of secured
indebtedness the Company may incur. Accordingly, if the Company is unable to
raise additional equity or borrow money because of these limitations, the
Company's ability to acquire additional properties may be limited. If the
Company is unable to acquire additional properties, its ability to increase the
distributions with respect to common shares will be limited to management's
ability to increase funds from operations, and thereby cash available for
distribution, from the existing properties in the Company's portfolio.
Potential Risks from Bankruptcies
Generally, the Company's lease arrangements with a single operator who
operates more than one of the Company's facilities is pursuant to a single
master lease (a "Master Lease" or collectively, the "Master Leases"). Although
each lease or Master Lease provides that the Company may terminate the Master
Lease upon the bankruptcy or insolvency of the tenant, the Bankruptcy Reform Act
of 1978 ("Bankruptcy Code") provides that a trustee in a bankruptcy or
reorganization proceeding under the Bankruptcy Code (or debtor-in-possession in
a reorganization under the Bankruptcy Code) has the power and the option to
assume or reject the unexpired lease obligations of a debtor-lessee. If the
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unexpired lease is assumed on behalf of the debtor-lessee, all the rental
obligations thereunder generally would be entitled to a priority over other
unsecured claims. However, the court also has the power to modify a lease if a
debtor-lessee in reorganization were required to perform certain provisions of a
lease that the court determined to be unduly burdensome. It is not possible to
determine at this time whether or not any lease or Master Lease contains any
such provisions. If a lease is rejected, the lessor has a general unsecured
claim limited to any unpaid rent already due plus an amount equal to the rent
reserved under the lease, without acceleration, for the greater of one year or
15% of the remaining term of such lease, not to exceed three years. If any lease
is rejected, the Company retains ownership of the real estate, but may lose the
benefit of any participation interest or conversion right.
Generally, with respect to the Company's mortgage loans, the imposition
of an automatic stay under the Bankruptcy Code precludes lenders from exercising
foreclosure or other remedies against the debtor. A mortgagee also is treated
differently from a landlord in three key respects. First, the mortgage loan is
not subject to assumption or rejection because it is not an executory contract
or a lease. Second, the mortgagee's loan may be divided into (1) a secured loan
for the portion of the mortgage debt that does not exceed the value of the
property and (2) a general unsecured loan for the portion of the mortgage debt
that exceeds the value of the property. A secured creditor such as the Company
is entitled to the recovery of interest and costs only if and to the extent that
the value of the collateral exceeds the amount owed. If the value of the
collateral is less than the debt, a lender such as the Company would not receive
or be entitled to any interest for the time period between the filing of the
case and confirmation. If the value of the collateral does exceed the debt,
interest and allowed costs may not be paid during the bankruptcy proceeding, but
accrue until confirmation of a plan or reorganization or some other time as the
court orders. Finally, while a lease generally would either be rejected or
assumed with all of its benefits and burdens intact, the terms of a mortgage,
including the rate of interest and timing of principal payments, may be modified
if the debtor is able to effect a "cramdown" under the Bankruptcy Code.
The receipt of liquidation proceeds or the replacement of an operator
that has defaulted on its lease or loan could be delayed by the approval process
of any federal, state or local agency necessary for the transfer of the property
or the replacement of the operator licensed to manage the facility. In addition,
certain significant expenditures associated with real estate investment (such as
real estate taxes and maintenance costs) are generally not reduced when
circumstances cause a reduction in income from the investment. In order to
protect its investments, the Company may take possession of a property or even
become licensed as an operator, which might expose the Company to successorship
liability to government programs or require indemnity of subsequent operators to
whom it might transfer the operating rights and licenses. Additionally, changes
in federal and state regulatory environments could cause an increase in the
costs of operating such investments, including the cost of professional
liability insurance coverage. Should such events occur, the Company's income and
cash flows from operations would be adversely affected.
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PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
On July 17, 2000, the Company issued 1,000,000 shares of Series C
Preferred of the Company to Explorer for $100 million pursuant to the Investment
Agreement. The shares of Series C Preferred are governed by the Articles
Supplementary for Series C Convertible Preferred Stock (the "Articles
Supplementary") filed with the State Department of Assessments and Taxation of
Maryland on July 14, 2000, and the shares of Series C Preferred are presently
convertible into 16,000,000 shares of Common Stock of the Company. The
stockholders of the Company approved the transaction on July 14, 2000. The
shares of Series C Preferred were issued without registration under the
Securities Act of 1933, as amended (the "Securities Act"), in reliance upon the
private placement exemption provided by Section 4(2) of the Securities Act. (See
Note D - Preferred Stock-Equity Investment.)
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Special Meeting of Shareholders was held on
July 14, 2000.
(b) Stockholders were requested to vote on the approval of the issuance of
shares of the Company's Series C Preferred and Common Stock pursuant to
an investment agreement with Explorer Holdings, L.P. and also to
approve the Company's 2000 Stock Incentive Plan.
(c) The results of the vote were as follows:
Manner of Issuance of 2000 Stock
Vote Cast Shares Incentive Plan
--------- ------ --------------
For 11,574,327 9,971,567
Withheld 0 0
Against 661,517 2,166,092
Abstentions and broker 139,913 238,098
nonvotes
(d) Not applicable.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - The following Exhibits are filed herewith:
Exhibit Description
------- -----------
10.1 Amended and Restated Advisory Agreement between
Omega Healthcare Investors, Inc. and The Hampstead
Group, L.L.C., dated October 4, 2000
10.2 Loan Agreement by and among Omega Healthcare
Investors, Inc., Sterling Acquisition Corp. and
Delta Investors I, LLC, The Provident Bank, Agent
and Various Lenders Describe Herein, dated August
16, 2000
10.3 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
10.4 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
27 Financial Data Schedule
(b) Reports on Form 8-K
The following reports on Form 8-K were filed since
June 30, 2000:
Form 8-K dated July 12, 2000: Report with the following
exhibits:
Press release issued by Omega Healthcare Investors, Inc.
on July 12, 2000
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
OMEGA HEALTHCARE INVESTORS, INC.
Registrant
Date: November 20, 2000 By: /s/ Thomas W. Erickson
------------------------
Thomas W. Erickson
Interim Chief Executive Officer
Date: November 20, 2000 By: /s/ Richard M.FitzPatrick
-------------------------------
Richard M. FitzPatrick
Acting Chief Financial Officer
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